S-1/A

As filed with the Securities and Exchange Commission on October 31, 2006

Registration No. 333-133302

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Amendment No. 4

to

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

KBR, Inc.

(Exact name of registrant as specified in its charter)

Delaware	1600	20-4536774
(State or other jurisdiction of incorporation or organization)	(Primary Standard Industrial Classification Code Number)	(I.R.S. Employer Identification No.)

601 Jefferson Street Suite 3400 Houston, Texas 77002 (713) 753-3011	Cedric W. Burgher Senior Vice President and Chief Financial Officer 601 Jefferson Street Suite 3400 Houston, Texas 77002 (713) 753-3011
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)	(Name, address, including zip code, and telephone number, including area code, of agent for service)

Copies to:

Darrell W. Taylor Baker Botts L.L.P. 910 Louisiana Street Houston, Texas 77002-4995 (713) 229-1234 Andrew M. Baker Baker Botts L.L.P. 2001 Ross Avenue Dallas, Texas 75201-2980 (214) 953-6500 John B. Tehan
Simpson Thacher & Bartlett LLP
425 Lexington Avenue
New York, New York 10017-3954
(212) 455-2000

Approximate date of commencement of proposed sale to the public:  As soon as practicable after the registration statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended, check the following box.  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

SUBJECT TO COMPLETION, DATED OCTOBER 31, 2006

27,840,000 Shares

KBR, Inc.

Common Stock

We are selling 27,840,000 shares of common stock.

Prior to this offering, there has been no public market for our common stock. The initial public offering price of the common stock is expected to be between $15.00 and $17.00 per share. Our common stock has been approved for listing on the New York Stock Exchange under the symbol “KBR.”

The underwriters have an option to purchase a maximum of 4,176,000 additional shares to cover over-allotments of shares.

Investing in our common stock involves risks. See “ Risk Factors” beginning on page 10.

	Price to Public	Underwriting Discounts and Commissions	Proceeds to KBR, Inc.
Per Share	$	$	$
Total	$	$	$

Delivery of the shares of common stock will be made on or about                     , 2006.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

Joint Book-Running Managers

Credit Suisse Goldman, Sachs & Co. UBS Investment Bank

Senior Co-Managers

Citigroup	HSBC	Lehman Brothers
Merrill Lynch & Co.	Scotia Capital	Wachovia Securities

Co-Managers

D.A. Davidson & Co. Pickering Energy Partners Simmons & Company International        

The date of this prospectus is                     , 2006.

Photos (from top left to bottom right): U.S. Army LogCAP III dining facility—Kuwait; Segas LNG EPC-CS project—Egypt; U.K. Ministry of Defence Royal Navy nuclear submarine; MLNG Tiga EPC-CS LNG project—Malaysia (top); Sasol Superflex Petrochemical EPC-CS project —South Africa (bottom); BP Thunderhorse semi-submersible offshore platform—Gulf of Mexico; BP Sonatrach In Salah Gas Development EPC-CS project—Algeria; U.S. Army Balkans support base facility—Croatia.

TABLE OF CONTENTS

	Page
PROSPECTUS SUMMARY	1
RISK FACTORS	10
CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING STATEMENTS	36
USE OF PROCEEDS	38
DIVIDEND POLICY	38
CAPITALIZATION	39
DILUTION	40
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS	42
SELECTED CONSOLIDATED FINANCIAL DATA	49
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	50
BUSINESS	79
MANAGEMENT	107
SOLE STOCKHOLDER	123
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS	124

	Page
OUR RELATIONSHIP WITH HALLIBURTON	126
CERTAIN FEDERAL TAX MATTERS RELATED TO OUR SEPARATION FROM HALLIBURTON	140
DESCRIPTION OF CAPITAL STOCK	142
SHARES ELIGIBLE FOR FUTURE SALE	149
MATERIAL UNITED STATES FEDERAL TAX CONSIDERATIONS FOR NON-U.S. HOLDERS	151
UNDERWRITING	155
SELLING RESTRICTIONS	158
NOTICE TO CANADIAN RESIDENTS	161
LEGAL MATTERS	163
EXPERTS	163
WHERE YOU CAN FIND MORE INFORMATION	163
INDEX TO FINANCIAL STATEMENTS	F-1
APPENDIX A: GLOSSARY OF TERMS	A-1

You should rely only on the information contained in this document, any free writing prospectus prepared by or on behalf of us or information to which we have referred you. We have not authorized anyone to provide you with information that is different. This document may only be used where it is legal to sell these securities. The information in this document may only be accurate on the date of this document.

Dealer Prospectus Delivery Obligation

Until                     , 2006 (25 days after the commencement of the offering), all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to unsold allotments or subscriptions.

i

PROSPECTUS SUMMARY

This summary highlights selected information contained elsewhere in this prospectus. This summary is not complete and may not contain all of the information that is important to you or that you should consider before investing in our common stock. You should read carefully the entire prospectus, including the risk factors, financial data and financial statements included herein, before making a decision about whether to invest in our common stock. References in this prospectus to “KBR” mean KBR, Inc., references to the terms “we,” “us” or other similar terms mean KBR and its subsidiaries, and references to “Halliburton” mean Halliburton Company and its subsidiaries (excluding us), unless the context indicates otherwise. A glossary of other terms used in this prospectus can be found in Appendix A hereto.

Our Company

We are a leading global engineering, construction and services company supporting the energy, petrochemicals, government services and civil infrastructure sectors. We are the largest U.S.-based international contractor according to Engineering News-Record based on fiscal 2005 construction revenue from projects outside a company’s home country. Engineering News-Record also ranks us as the fourth largest U.S.-based contractor overall based on fiscal 2005 construction revenue. We are a leader in many of the growing end-markets that we serve, particularly gas monetization, having designed and constructed, alone or with joint venture partners, more than half of the world’s operating liquefied natural gas (LNG) production capacity over the past 30 years. In addition, we are one of the ten largest government defense contractors worldwide according to a Defense News ranking based on fiscal 2005 revenue and, accordingly, we believe we are the world’s largest government defense services provider. We offer our wide range of services through two business segments, Energy and Chemicals (E&C) and Government and Infrastructure (G&I).

Our E&C segment provides a wide range of engineering, procurement, construction, facility commissioning and start-up (EPC-CS) services, as well as program and project management, consulting and technology services for energy and petrochemical projects. We provide these services to a diverse customer base, including international and national oil and gas companies, independent refiners, petrochemical producers, and fertilizer producers. Our expertise includes onshore oil and gas production facilities, offshore oil and gas production facilities (which we refer to collectively as our offshore projects), pipelines, LNG and gas-to-liquids (GTL) gas monetization facilities (which we refer to collectively as our gas monetization projects), refineries, petrochemical plants and synthesis gas (Syngas). We are currently benefiting from increased capital expenditures by our petroleum and petrochemicals customer base and expect demand for our services to continue to increase with the growth in world energy consumption.

Our G&I segment provides program and project management, contingency logistics, operations and maintenance, construction management, engineering, and other services to military and civilian branches of domestic and foreign governments and private customers worldwide. We deliver on-demand support services across the full military mission cycle from contingency logistics and field support to operations and maintenance on military bases. A significant portion of our G&I segment’s current operations relate to the support of United States government operations in the Middle East, which we refer to as our Middle East operations. We are also the majority owner of Devonport Management Limited (DML), which owns and operates Western Europe’s largest naval dockyard complex. Our DML shipyard operations are primarily engaged in refueling nuclear submarines and performing maintenance on surface vessels for the U.K. Ministry of Defence as well as limited commercial projects. Our G&I segment operates in diverse sectors of the civil infrastructure market, including transportation, waste and water treatment, and facilities maintenance. We expect the heightened focus on global security, military operations and major military force realignments, as well as global growth in government outsourcing, to enhance demand for our services.

1

We pursue many of our projects through joint ventures and alliances with other industry participants. For more information, please read “Business—Joint Ventures and Alliances.”

On October 27, 2006, our board of directors approved a 135,627-for-one split of our common stock. As a result of the stock split, the 1,000 shares of our common stock held by Halliburton were converted into 135,627,000 shares of our common stock. In connection with the stock split, our sole stockholder approved on October 27, 2006 an amendment and restatement of our certificate of incorporation to increase the number of authorized shares of common stock from 1,000 to 300,000,000. All share data of our company presented in this prospectus has been adjusted to reflect the stock split.

For the twelve months ended December 31, 2005, we had total revenue of $10.1 billion and income from continuing operations of $210 million, compared to total revenue of $11.9 billion and loss from continuing operations of $314 million for the twelve months ended December 31, 2004. For the nine months ended September 30, 2006, we had total revenue of $7.1 billion and income from continuing operations of $38 million compared to total revenue of $7.4 billion and income from continuing operations of $162 million for the nine months ended September 30, 2005. As of September 30, 2006, our total backlog for continuing operations was $15 billion, of which $6 billion, or 40%, was attributable to our E&C segment and $9 billion, or 60%, was attributable to our G&I segment. For more information, please read “Business—Backlog.”

Backlog

The following charts summarize our backlog for continuing operations as of September 30, 2006 (dollars in billions):

Our Competitive Strengths

We believe our competitive strengths position us to continue to capitalize upon the growth occurring in the end-markets we serve. Our key competitive strengths include:

• Industry leading global, large-scale EPC-CS experience in the upstream and downstream energy sectors.

• Oil and gas production. Since designing and constructing the world’s first offshore oil and gas production platform in 1947, we have built some of the world’s largest oil and gas production projects and expanded our upstream capabilities to include onshore production, gas processing, flowlines and pipelines, and offshore fixed platforms and semi-submersible floating production units.

• Gas monetization (LNG and GTL). We have designed and constructed, alone or with joint venture partners, more than half of the world’s operating LNG production capacity over the past 30 years

2

and have designed more LNG receiving terminals outside of Japan than any other contractor. Additionally, we are actively involved in the growing GTL market, having obtained awards for two of the three projects worldwide that were either being built or were in the front-end engineering design phase as of September 30, 2006.

• Petrochemicals. We have more than 60 years of experience building petrochemical plants and have designed, licensed process technologies for and/or constructed more than 800 petrochemical projects worldwide.

• Refining. We have designed, constructed and/or licensed technology for more than 50 greenfield refineries and over 1,000 new refining units, retrofits or upgrades. Most of the services we have provided to our customers during the past 30 years have been in retrofitting or upgrading units in existing refineries.

• Integrated EPC-CS services with a proprietary technology offering. We offer our energy and petrochemicals customers integrated EPC-CS and related services that span the facility lifecycle from project development and feasibility studies through execution, facility commissioning and start-up, and operations and maintenance. We believe our ability to offer our customers a single-source, integrated EPC-CS solution coupled with our wide range of proprietary technologies for the petrochemicals, refining and Syngas industries and experience in the commercial application of these technologies and related know-how differentiates us from our competitors.

• Comprehensive government support services capabilities. Our extensive capabilities from contingency logistics to facilities operations and maintenance to engineering and construction services allow us to serve the diverse needs of our government customers. Our global employee base and ability to quickly secure additional necessary resources provide us with the flexibility to mobilize immediately and provide responsive solutions, refined from our experience operating around the world under challenging conditions.

• Strong, long-term relationships with key customers. We maintain strong, long-term relationships with our key customers, including international and national oil and gas companies and the world’s largest defense and government outsourcers. Our often decades-long relationships with our customers enable us to understand their needs and to execute projects more quickly and efficiently.

• Global footprint and proven ability to perform in remote and difficult environments. Our oil and gas customers are increasingly making investment decisions to monetize energy reserves located in remote environments around the globe as current crude oil and natural gas prices make these investments more economically viable. The size and scale of our global operations and our expertise in executing them allow us to operate in geographies with limited on-site infrastructure where many of these reserves are located.

• E&C. We deliver EPC-CS capabilities worldwide. We believe our local presence, supported by our regionally based high-value execution centers in Monterrey, Mexico and Jakarta, Indonesia (which utilize lower cost, skilled engineers and other professionals to support projects around the world), will continue to provide us with a competitive strength and strong platform for growth.

• G&I. We are currently providing military support personnel and services to U.S. and international troops in Iraq, Afghanistan and Eastern Europe. As military operations increasingly focus on the global war on terror, we believe our ability to meet the needs of governments and militaries worldwide, at any time and on any scale, will be a critical differentiating factor for us.

• Experienced management team and workforce. Our management team and workforce includes professionals who have served at many levels of our company and possess strong industry expertise, many of whom also have extensive overseas field experience.

3

Our Business Strategy

Our strategy is to create stockholder value by leveraging our competitive strengths and focusing on the many opportunities in the growing end-markets we serve. Key features of our strategy include:

• Capitalize on leadership positions in growth markets. We intend to leverage our leading positions in the energy, petrochemicals and government services sectors to grow our market share.

• E&C. Worldwide energy consumption is expected to require $17 trillion of investment (including exploration, development, transmission and distribution) from 2004 to 2030 according to the International Energy Agency, or approximately $625 billion per year. Cambridge Energy Research Associates expects today’s LNG production volumes to triple by 2020. With our experience and track record, we believe we are well positioned to win project awards for additional gas monetization facilities, oil and gas production facilities, petrochemical plants, new and retrofit refinery projects, and pipeline projects.

• G&I. Our experience and competitive strengths in logistics, contingency support, international operations and integrated security are likely to remain in demand because of the focus of our government customers on winning the global war on terror, providing for homeland security and outsourcing “non-combatant” support services in order to direct greater resources towards combat and defense forces.

• Leverage technology portfolio for continued growth. We intend to capitalize on our E&C segment’s portfolio of process and design technologies and experience in the commercial application of these technologies to strengthen and differentiate our service offerings, enhance our competitiveness and increase our profitability. Our technological expertise and know-how reduces our reliance on lower margin, more commoditized service offerings and better positions us for EPC-CS package awards.

• Selectively pursue new projects to enhance profitability and mitigate risk. We believe our market experience combined with key skills, knowledge and data derived from prior projects enhances our risk assessment and mitigation capabilities, enabling us to more effectively evaluate, structure and execute future projects, thereby increasing our profitability and reducing our execution risk. Through our new executive-led business development oversight department, we are establishing greater discipline and stricter controls with respect to our pursuit of projects, including E&C projects that historically were frequently structured as fixed-price contracts, in order to meet our more stringent technical, financial, commercial and legal parameters for risk and return. We anticipate that the proportion of fixed-price components in the E&C portion of our portfolio may decline in the future as we focus on increasing profitability while mitigating risk.

• Maintain a balanced and diversified portfolio. We seek to maintain a balanced and diversified portfolio of projects across end-markets, services and contract types in order to increase our operating flexibility and reduce our exposure to any particular end-market.

• End-markets and services.

• Our E&C segment is heavily focused on oil and gas end-markets, but our ability to serve the full facility lifecycle as well as the differing subsectors of these end-markets reduces our reliance on any particular service or industry subsector.

• Our G&I segment continues to focus on diversifying its project portfolio as we expect the volume of our work in Iraq under our current worldwide United States Army logistics contract, known as LogCAP, will continue to decline as our customer scales back the amount of services we provide under this contract and replaces it with a new multiple service provider contract.

• Contract types. Our overall portfolio is diversified by contract type. Our contracts may be broadly categorized as either cost-reimbursable or fixed-price (sometimes referred to as lump-sum). As of

4

September 30, 2006, 37% of our backlog for continuing operations was attributable to fixed-price contracts and 63% was attributable to cost-reimbursable contracts. Historically, our E&C segment has frequently entered into fixed-price contracts. Our strategy is to continue to evaluate E&C projects on a fixed-price basis, taking into account underlying cost volatilities, scope definition, acceptable returns for the risks to be performed and our financial ability, namely letters of credit and bonding, required to execute these projects. If we are unable to successfully address these items as well as other forms of risk, we will seek to perform these projects on a cost-reimbursable basis. Our G&I segment operates primarily under cost-reimbursable contracts.

• Provide global execution on a cost-effective basis. We use our expertise in positioning our expatriate employees around the world and hiring and training a local workforce to effectively meet the needs of our global customers. To enhance these existing capabilities, we employ the latest technologies and telecommunications systems to combine our resources into a global virtual execution team. We believe the integration of our regional offices in Houston, London and Singapore, our high-value execution centers and our local resources enables us to provide more cost-effective global solutions for our customers.

Our History

We trace our history and culture to two businesses, The M.W. Kellogg Company (Kellogg) and Brown & Root, Inc. (Brown & Root). Kellogg dates back to a pipe fabrication business which was founded in New York in 1901 and has been creating technology for petroleum refining and petrochemicals processing since 1919. Brown & Root was founded in Houston, Texas in 1919 and built the world’s first offshore platform in 1947. Brown & Root was acquired by Halliburton in 1962 and Kellogg was acquired by Halliburton in 1998 through its merger with Dresser Industries.

Asbestos and Silica Settlement and Prepackaged Chapter 11 Proceeding and Completion

In December 2003, six of our subsidiaries (and two other entities that are subsidiaries of Halliburton) sought Chapter 11 protection to discharge current and future asbestos and silica personal injury claims and demands. The order confirming the Chapter 11 plan of reorganization became final and nonappealable on December 31, 2004, and the plan of reorganization became effective in January 2005. Pursuant to the plan of reorganization and the order confirming the plan, a permanent injunction has been issued enjoining the prosecution of asbestos and silica personal injury claims and demands against our subsidiaries and our affiliates.

Our Relationship With Halliburton

We are currently a wholly owned subsidiary of Halliburton. In addition to owning KBR, Halliburton is one of the world’s largest energy services companies. Upon the closing of this offering, Halliburton will own approximately 83% of our outstanding common stock, or approximately 81% if the underwriters exercise their over-allotment option in full, and we will continue to be controlled by Halliburton. For a discussion of related risks, please read “Risk Factors—Risks Related to Our Affiliation With Halliburton.”

Halliburton has advised us that it intends to dispose of our common stock that it owns following this offering as expeditiously as possible through a tax-free distribution to Halliburton’s stockholders. Halliburton has advised us that it has requested a ruling from the Internal Revenue Service that, among other things, no gain or loss will be recognized by Halliburton or its stockholders as a result of the distribution. Halliburton also intends to obtain an opinion of counsel related to the tax-free nature of the distribution. The determination of whether, and if so, when, to proceed with the distribution is entirely within the discretion of Halliburton. If Halliburton

5

does not proceed with the distribution, it could elect to dispose of our common stock in a number of different types of transactions, including additional public offerings, open market sales, sales to one or more third parties or split-off offerings to Halliburton’s stockholders that would allow for the opportunity to exchange Halliburton shares for shares of our common stock or a combination of these transactions. Except for the “lock-up” period described under “Underwriting,” Halliburton is not subject to any contractual obligation to maintain its share ownership. For more information on the potential effect of Halliburton’s disposition of our common stock by means of the anticipated distribution or otherwise, please read “Risk Factors—Risks Related to Our Affiliation With Halliburton—Transfers of our common stock by Halliburton could adversely affect your rights as a stockholder and cause our stock price to decline.”

Prior to the closing of the offering, we will enter into various agreements to complete the separation of our business from Halliburton, including, among others, a master separation agreement, transition services agreements and a tax sharing agreement. The master separation agreement will provide for, among other things, our responsibility for liabilities relating to our business and the responsibility of Halliburton for liabilities unrelated to our business. The agreements between us and Halliburton will also govern our various interim and ongoing relationships. The master separation agreement will also contain indemnification obligations and ongoing commitments of us and Halliburton. The tax sharing agreement provides for certain U.S. income tax allocations of liabilities and other agreements between us and Halliburton. Under the transition services agreements, Halliburton will continue to provide various interim corporate support services to us, and we will continue to provide various interim corporate support services to Halliburton. The terms of our separation from Halliburton, the related agreements and other transactions with Halliburton were determined by Halliburton, and thus may be less favorable to us than the terms we could have obtained from an unaffiliated third party. These agreements will continue in accordance with their terms after any distribution by Halliburton of our common stock to its stockholders. For a description of these agreements and the other agreements that we will enter into with Halliburton, please read “Our Relationship With Halliburton.”

Risk Factors

You should carefully consider the matters described under “Risk Factors.” These risks could materially and adversely impact our business, financial condition, operating results and cash flow, which could cause the trading price of our common stock to decline and could result in a partial or total loss of your investment.

Principal Executive Offices and Internet Address

KBR was incorporated in Delaware in March 2006 as an indirect wholly owned subsidiary of Halliburton. At or before the closing of this offering, KBR will own the entities that currently conduct the business described in this prospectus. For convenience, we describe our business in this prospectus as if KBR had been the owner of these entities prior to this offering.

Our principal executive offices are located at 601 Jefferson Street, Suite 3400, Houston, Texas 77002, and our telephone number is (713) 753-3011. Our corporate website address is http://www.kbr.com. The information contained in or accessible from our corporate website is not part of this prospectus.

6

The Offering

Common stock offered 27,840,000 shares

Common stock to be outstanding after the offering 163,467,000 shares

Common stock to be held by Halliburton after the offering 135,627,000 shares

Use of proceeds We estimate that the net proceeds to us from the sale of our common stock in this offering will be approximately $416 million, after deducting underwriter discounts and commissions and our estimated offering expenses. We intend to use the net proceeds from this offering to repay indebtedness we owe to subsidiaries of Halliburton under subordinated intercompany notes. At September 30, 2006, this indebtedness totaled $774 million in aggregate principal amount and we repaid $324 million in aggregate principal amount of this indebtedness in October 2006.

Over-allotment option We have granted the underwriters a 30-day option to purchase a maximum of 4,176,000 additional shares of our common stock at the initial public offering price to cover over-allotments.

Dividend policy We do not intend to declare or pay dividends on our common stock in the foreseeable future.

New York Stock Exchange symbol for our common stock KBR

Except as otherwise indicated, the number of shares of our common stock to be outstanding after the offering as presented in this prospectus:

• assumes the underwriters do not exercise their over-allotment option; and

• excludes the 10,000,000 shares to be reserved for issuance under our 2006 stock and incentive plan, including the shares issuable upon the vesting of the stock option, restricted stock and restricted stock unit awards expected to be granted following the closing of this offering as described under “Management—KBR, Inc. 2006 Stock and Incentive Plan.”

7

Summary Consolidated Financial Data

The following table shows summary consolidated financial data of KBR Holdings, LLC and its subsidiaries for the periods and as of the dates indicated. Other than our backlog for continuing operations, the data for the years ended December 31, 2003, 2004 and 2005 is derived from the audited historical financial statements of KBR Holdings, LLC and the data for the nine months ended September 30, 2005 and 2006 is derived from the unaudited historical financial statements of KBR Holdings, LLC, both of which are included elsewhere in this prospectus. In the opinion of our management, the unaudited consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and include all adjustments necessary to present fairly the information set forth therein. Interim results are not necessarily indicative of full year results. KBR Holdings, LLC and its subsidiaries currently conduct the business described in this prospectus. At or before the closing of this offering, KBR will own KBR Holdings, LLC.

Prior to October 30, 2006, the existing ownership interest of the member of KBR Holdings, LLC was represented by 100 shares. On October 30, 2006, the sole member of KBR Holdings, LLC effected a 1,356,270-for-one split of KBR Holdings, LLC’s outstanding shares. On October 27, 2006, our board of directors approved a 135,627-for-one split of KBR, Inc.’s common stock. As a result of these splits, the number of outstanding shares of KBR Holdings, LLC equals the number of outstanding shares of KBR, Inc. common stock held by Halliburton prior to this offering. Share and per share data of KBR Holdings, LLC for all periods presented herein have been adjusted to reflect the share split.

You should read the following information in conjunction with “Unaudited Pro Forma Condensed Consolidated Financial Statements,” “Selected Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and the related notes included elsewhere in this prospectus.

	Year Ended December 31,									Nine Months Ended September 30,
	2003			2004			2005			2005			2006
	(In millions, except per share amounts)
Statement of Operations Data:
Total revenue	$	8,863		$	11,906		$	10,146		$	7,422		$	7,124
Cost of services		8,849			12,171			9,716			7,102			6,932
General and administrative		82			92			85			65			73
Gain on sale of assets		(4	)		—			(110	)		(93	)		(6	)
Operating income (loss)		(64	)		(357	)		455			348			125
Interest expense and other		(41	)		(28	)		(22	)		(19	)		(38	)
Income (loss) from continuing operations before income taxes and minority interest		(105	)		(385	)		433			329			87
Benefit (provision) for income taxes		(11	)		96			(182	)		(138	)		(64	)
Minority interest in net income (loss) of consolidated subsidiaries		(26	)		(25	)		(41	)		(29	)		15
Income (loss) from continuing operations		(142	)		(314	)		210			162			38
Income from discontinued operations, net of tax provisions		9			11			30			22			87
Net income (loss)	$	(133	)	$	(303	)	$	240		$	184		$	125
Basic and diluted income (loss) per share:
—Continuing operations	$	(1.04	)	$	(2.31	)	$	1.54		$	1.19		$	0.28
—Discontinued operations		0.06			0.08			0.22			0.16			0.64
Historical basic and diluted net income (loss) per share:	$	(0.98	)	$	(2.23	)	$	1.76		$	1.35		$	0.92
Historical weighted average shares outstanding		136			136			136			136			136
Pro forma basic and diluted income per share:(1)
Continuing operations							$	1.45					$	0.38
Pro forma weighted average shares outstanding(1)								163						163

8

(1) See “Unaudited Pro Forma Condensed Consolidated Financial Statements” for the calculation of pro forma basic and diluted income per share and pro forma weighted average shares outstanding.

	Year Ended December 31,									Nine Months Ended September 30,
	2003			2004			2005			2005			2006
	(In millions)
Other Financial Data:
Capital expenditures	$	63		$	74		$	76		$	50		$	50
Depreciation and amortization expense		51			52			56			44			32
Total cash flow provided by (used in) operating activities		(899	)		(61	)		527			140			919
Total cash flow provided by (used in) investing activities		(59	)		(85	)		20			71			233
Total cash flow provided by (used in) financing activities		453			(83	)		(375	)		(90	)		(545	)

	At December 31,						At September 30,
	2003		2004		2005		2006
	(In millions)
Balance Sheet Data:
Cash and equivalents	$	439	$	234	$	394	$	1,022
Net working capital(1)		882		765		944		1,154
Property, plant and equipment, net		431		467		444		481
Total assets		5,532		5,487		5,182		5,742
Total debt (including payable and notes payable to related party)		1,242		1,248		808		799
Member’s equity(2)		944		812		1,256		1,453

(1) Net working capital represents current assets less current liabilities.

(2) Represents the equity in KBR Holdings, LLC. At or before the closing of this offering, KBR will own KBR Holdings, LLC.

	At December 31,						At September 30,
	2003		2004		2005		2006
	(In millions)
Other Data:
Backlog for continuing operations	$	8,646	$	7,092	$	10,589	$	14,994

9

RISK FACTORS

You should carefully consider each of the following risks and all of the information set forth in this prospectus before deciding to invest in our common stock. If any of the following risks and uncertainties develops into actual events, our business, financial condition, results of operations or cash flow could be materially adversely affected. In that case, the trading price of our common stock could decline and you may lose all or part of your investment.

Risks Related to Our Customers and Contracts

Our G&I segment is directly affected by spending and capital expenditures by our customers and our ability to contract with our customers.

Our G&I segment is directly affected by spending and capital expenditures by our customers and our ability to contract with our customers. For example:

• A decrease in the magnitude of work we perform for the United States government in Iraq under our LogCAP III contract and for the U.K. Ministry of Defence (MoD) through our DML joint venture or other decreases in governmental spending and outsourcing for military and logistical support of the type that we provide could have a material adverse effect on our business, results of operations and cash flow. For example, the current level of government services being provided in the Middle East will not likely continue for an extended period of time, and the current rate of spending has decreased substantially compared to 2005 and 2004. Our government services revenue related to Iraq under our LogCAP III and other contracts totaled $3.6 billion in the nine months ended September 30, 2006, $5.4 billion in 2005, $7.1 billion in 2004 and $3.5 billion in 2003. We expect the volume of work under our LogCAP III contract to continue to decline as our customer scales back the amount of services we provide under this contract, and we expect to complete all open task orders under our LogCAP III contract during 2007. The U.S. Department of Defense (DoD) has also announced that it will solicit competitive bids for a new multiple service provider LogCAP IV contract to replace the current LogCAP III contract, under which we are the sole provider. We expect the volume of our work under the MoD contract with our DML joint venture to refit and refuel the MoD’s nuclear submarine fleet to decline in 2009 and 2010 as we complete this round of refueling of the current fleet. The MoD also has the right at any time to assume control of the dockyard operated by DML if the MoD deems it to be in the essential security interests of the United Kingdom. Please read “Business—Joint Ventures and Alliances.”

• The loss of the United States government as a customer would, and the loss of the MoD as a customer could, have a material adverse effect on our business, results of operations and cash flow. The loss of the United States government as a customer, or a significant reduction in our work for it, would have a material adverse effect on our business, results of operations and cash flow. Revenue from United States government agencies represented 65% of our revenue in 2005 and 67% in 2004. The MoD is also a substantial customer, the loss of which could have a material adverse effect on our business, results of operations and cash flow.

• Potential consequences arising out of investigations into United States Foreign Corrupt Practices Act (FCPA) matters and antitrust matters could include suspension or debarment by the DoD or another federal, state or local government agency or by the MoD of us and our affiliates from our ability to contract with such parties, which could have a material adverse effect on our business, results of operations and cash flow. Please read “—Risks Relating to Investigations.”

• An increase in the magnitude of governmental spending and outsourcing for military and logistical support could materially and adversely affect our liquidity needs as a result of additional or continued working capital requirements to support this work. A rapid increase in the magnitude of work required under our government contracts, similar to what occurred in mid and late 2003 when military operations in Iraq ramped up quickly, could adversely affect our liquidity. Please read “—Other Risks Related to Our Business—We experience increased working capital requirements from time to time associated with

10

our business, and such an increased demand for working capital could adversely affect our liquidity needs.”

• A decrease in capital spending for infrastructure and other projects of the type that we undertake could have a material adverse effect on our business, results of operations and cash flow.

Our E&C segment depends on demand and capital spending by oil and natural gas companies for our services, which is directly affected by trends in oil and gas prices and other factors affecting our customers.

Demand for many of the services of our E&C segment depends on capital spending by oil and natural gas companies, including national and international oil companies, which is directly affected by trends in oil and natural gas prices. Capital expenditures for refining and distribution facilities by large oil and gas companies have a significant impact on the activity levels of our businesses. Demand for LNG facilities for which we provide construction services would decrease in the event of a sustained reduction in crude oil prices. Perceptions of longer-term lower oil and natural gas prices by oil and gas companies can similarly reduce or defer major expenditures given the long-term nature of many large-scale projects. Prices for oil and natural gas are subject to large fluctuations in response to relatively minor changes in the supply of and demand for oil and natural gas, market uncertainty, and a variety of other factors that are beyond our control. Factors affecting the prices of oil and natural gas include:

• worldwide political, military, and economic conditions;

• the cost of producing and delivering oil and gas;

• the level of demand for oil and natural gas;

• governmental regulations or policies, including the policies of governments regarding the use of energy and the exploration for and production and development of their oil and natural gas reserves;

• a reduction in energy demand as a result of energy taxation or a change in consumer spending patterns;

• economic growth in China and India;

• the level of oil production by non-OPEC countries and the available excess production capacity within OPEC;

• global weather conditions and natural disasters;

• oil refining capacity;

• shifts in end-customer preferences toward fuel efficiency and the use of natural gas;

• potential acceleration of the development of alternative fuels; and

• environmental regulation, including limitations on fossil fuel consumption based on concerns about its relationship to climate change.

Historically, the markets for oil and gas have been volatile and are likely to continue to be volatile in the future.

Demand for services in our E&C segment may also be materially and adversely affected by the consolidation of our customers, which:

• could cause customers to reduce their capital spending, which in turn reduces the demand for our services; and

• could result in customer personnel changes, which in turn affects the timing of contract negotiations and settlements of claims and claim negotiations with engineering and construction customers on cost variances and change orders on major projects.

11

Our results of operations depend on the award of new contracts and the timing of the performance of these contracts.

Because a substantial portion of our revenue is generated from large-scale projects and the timing of new project awards is unpredictable, our results of operations and cash flow may be subject to significant periodic fluctuations. A substantial portion of our revenue is directly or indirectly derived from large-scale international and domestic projects. It is generally very difficult to predict whether or when we will receive such awards as these contracts frequently involve a lengthy and complex bidding and selection process which is affected by a number of factors, such as market conditions, financing arrangements, governmental approvals and environmental matters. Because a significant portion of our revenue is generated from large projects, our results of operations and cash flow can fluctuate significantly from quarter to quarter depending on the timing of our contract awards. In addition, many of these contracts are subject to financing contingencies and, as a result, we are subject to the risk that the customer will not be able to secure the necessary financing for the project.

If we are unable to provide our customers with bonds, letters of credit or other credit enhancements, we may be unable to obtain new project awards. In addition, we do not expect that Halliburton will provide payment and performance guarantees of our bonds, letters of credit and contracts entered into after this offering as it has done in the past, except to the limited extent Halliburton has agreed to do so under the terms of the master separation agreement. Customers may require us to provide credit enhancements, including bonds, letters of credit or performance or financial guarantees. In line with industry practice, we are often required to provide performance and surety bonds to customers. These bonds indemnify the customer should we fail to perform our obligations under the contract. We have minimal stand-alone bonding capacity and other credit support capacity without Halliburton and, except to the limited extent set forth in the master separation agreement, Halliburton will not be obligated to provide credit support for our new surety bonds obtained after completion of this offering. We are engaged in discussions with surety companies to obtain stand-alone bonding capacity, but we may not be successful. If a bond is required for a particular project and we are unable to obtain an appropriate bond, we cannot pursue that project. Moreover, due to events that affect the insurance and bonding markets generally, bonding may be difficult to obtain or may only be available at significant cost. Because of liquidity or other issues, we could at times be unable to provide necessary letters of credit. In addition, future projects may require us to obtain letters of credit that extend beyond the term of our current credit facility. Further, our credit facility limits the amount of new letters of credit and other debt we can incur outside of the credit facility to $250 million, which could adversely affect our ability to bid or bid competitively on future projects if the credit facility is not amended or replaced. Please read “—Other Risks Related to Our Business—We experience increased working capital requirements from time to time associated with our business, and such an increased demand for working capital could adversely affect our liquidity needs.” In the past, Halliburton has provided guarantees of most of our surety bonds and letters of credit as well as most other payment and performance guarantees under our contracts. The credit support arrangements in existence at the completion of this offering will remain in effect, but Halliburton is not expected to enter into any new credit support arrangements on our behalf after the offering, except to the limited extent Halliburton is obligated to do so under the master separation agreement. Please read “Our Relationship With Halliburton—Master Separation Agreement—Credit Support Instruments.” We will agree to indemnify Halliburton for all losses under our outstanding credit support instruments and any additional credit support instruments for which Halliburton may become obligated following this offering, and under the master separation agreement, we will agree to use our reasonable best efforts to attempt to release or replace Halliburton’s liability thereunder for which such release or replacement is reasonably available. Any inability to obtain adequate bonding and/or provide letters of credit or other customary credit enhancements and, as a result, to bid on new work could have a material adverse effect on our business prospects and future revenue.

Our customers and prospective customers will need assurances that our financial stability on a stand-alone basis is sufficient to satisfy their requirements for doing or continuing to do business with them. We do not expect that Halliburton will provide payment and performance guarantees of our bonds, letters of credit and contracts entered into after this offering as it has in the past, except to the limited extent Halliburton has agreed to do so under the terms of the master separation agreement. Our customers and prospective customers will need

12

assurances that our financial stability on a stand-alone basis is sufficient to satisfy their requirements for doing or continuing to do business with them. If our customers or prospective customers are not satisfied with our financial stability absent the support from Halliburton that we have relied on in the past, it could have a material adverse effect on our ability to bid for and obtain or retain projects, our business prospects and future revenues.

Limitations on our use of agents as part of our efforts to comply with applicable laws, including the FCPA, could put us at a competitive disadvantage in pursuing large-scale international projects. Most of our large-scale international projects are pursued and executed using one or more agents to assist in understanding customer needs, local content requirements, and vendor selection criteria and processes and in communicating information from us regarding our services and pricing. In July 2006, we adopted enhanced procedures for the retention of

12.1

agents to promote compliance with applicable laws, including with the FCPA. An agreed settlement or loss at trial relating to the FCPA matters described below under “—Risks Relating to Investigations” and “—Risks Related to Our Affiliation With Halliburton” could result in a monitor being appointed to review future practices for compliance with the FCPA, including with respect to the retention of agents. Our compliance procedures or having a monitor could result in a more limited use of agents on large-scale international projects than in the past. Accordingly, we could be at a competitive disadvantage in pursuing such projects, which could have a material adverse effect on our ability to win contracts and our future revenue and business prospects.

The DoD awards its contracts through a rigorous competitive process and our efforts to obtain future contract awards from the DoD may be unsuccessful, and the DoD has recently favored multiple award task order contracts. The DoD conducts a rigorous competitive process for awarding most contracts. In the services arena, the DoD uses multiple contracting approaches. It uses omnibus contract vehicles, such as LogCAP, for work that is done on a contingency, or as-needed basis. In more predictable “sustainment” environments, contracts may include both fixed-price and cost-reimbursable elements. The DoD has also recently favored multiple award task order contracts, in which several contractors are selected as eligible bidders for future work. Such processes require successful contractors to continually anticipate customer requirements and develop rapid-response bid and proposal teams as well as have supplier relationships and delivery systems in place to react to emerging needs. We will face rigorous competition for any additional contract awards from the DoD, and we may be required to qualify or continue to qualify under the various multiple award task order contract criteria. The DoD has announced that the new LogCAP IV contract, which will replace the current LogCAP III contract under which we are the sole provider, will be a multiple award task order contract. It may be more difficult for us to win future awards from the DoD, and we may have other contractors sharing in any DoD awards that we win.

The uncertainty of the timing of future contract awards may inhibit our ability to recover our labor costs. The uncertainty of our contract award timing can also present difficulties in matching workforce size with contract needs. In some cases, we maintain and bear the cost of a ready workforce that is larger than called for under existing contracts in anticipation of future workforce needs for expected contract awards. If an expected contract award is delayed or not received, we may not be able to recover our labor costs, which could have a material adverse effect on us.

A significant portion of our projects is on a fixed-price basis, subjecting us to the risks associated with cost over-runs, operating cost inflation and potential claims for liquidated damages.

Our long-term contracts to provide services are either on a cost-reimbursable basis or on a fixed-price basis. At September 30, 2006, 37% of our backlog for continuing operations was attributable to fixed-price contracts and 63% was attributable to cost-reimbursable contracts. Our failure to accurately estimate the resources and time required for a fixed-price project or our failure to complete our contractual obligations within the time frame and costs committed could have a material adverse effect on our business, results of operations and financial condition. In connection with projects covered by fixed-price contracts, we bear the risk of cost over-runs, operating cost inflation, labor availability and productivity, and supplier and subcontractor pricing and performance. Under both our fixed-price contracts and our cost-reimbursable contracts, we generally rely on third parties for many support services, and we could be subject to liability for engineering or systems failures. Risks under our contracts include:

• Our engineering, procurement and construction projects may encounter difficulties in the design or engineering phases, related to the procurement of supplies, and due to schedule changes, equipment performance failures, and other factors that may result in additional costs to us, reductions in revenue, claims or disputes. Our engineering, procurement and construction projects generally involve complex design and engineering, significant procurement of equipment and supplies, and extensive construction management. Many of these projects involve design and engineering, procurement and construction phases that may occur over extended time periods, often in excess of two years. We may encounter difficulties in the design or engineering, equipment and supply delivery, schedule changes, and other factors, some of which are beyond our control, that impact our ability to complete a project in

13

accordance with the original delivery schedule. In some cases, the equipment we purchase for a project does not perform as expected, and these performance failures may result in delays in completion of the project or additional costs to us or the customer to complete the project and, in some cases, may require us to obtain alternate equipment at additional cost.

For example, in the second quarter of 2006, at the time of our “first check estimate”, we identified a $148 million charge, before income taxes and minority interest, related to our consolidated 50%-owned GTL project in Escravos, Nigeria. A first check estimate is a detailed process to reschedule and recost a project through its completion and occurs once sufficient engineering work has been completed allowing for a detailed cost re-estimate based on actual engineering drawings. This charge was primarily attributable to increases in the overall estimated cost to complete the project. The project has experienced delays relating to civil unrest and security on the Escravos River, near the project site, and further delays have resulted from scope changes and engineering and construction modifications. Our Yemen LNG project is our only major current fixed-price engineering, procurement and construction (EPC) project that has not completed its first check estimate, which is scheduled for completion in November 2006. The risks of increase in estimated costs is higher prior to the time a project reaches its first check estimate.

• We may not be able to obtain compensation for additional work or expenses incurred as a result of customer change orders or our customers providing deficient design or engineering information or equipment or materials. Some of our contracts may require that our customers provide us with design or engineering information or with equipment or materials to be used on the project. In some cases, the customer may provide us with deficient design or engineering information or equipment or materials or may provide the information or equipment or materials to us later than required by the project schedule. The customer may also determine, after commencement of the project, to change various elements of the project. Our project contracts generally require the customer to compensate us for additional work or expenses incurred due to customer requested change orders or failure of the customer to provide us with specified design or engineering information or equipment or materials. Under these circumstances, we generally negotiate with the customer with respect to the amount of additional time required to make these changes and the compensation to be paid to us. We are subject to the risk that we are unable to obtain, through negotiation, arbitration, litigation or otherwise, adequate amounts to compensate us for the additional work or expenses incurred by us due to customer-requested change orders or failure by the customer to timely provide required items. A failure to obtain adequate compensation for these matters could require us to record an adjustment to amounts of revenue and gross profit that were recognized in prior periods. Any such adjustments, if substantial, could have a material adverse effect on our results of operations and financial condition.

• We may be required to pay liquidated damages upon our failure to meet schedule or performance requirements of our contracts. In certain circumstances, we guarantee facility completion by a scheduled acceptance date or achievement of certain acceptance and performance testing levels. Failure to meet any such schedule or performance requirements could result in additional costs, and the amount of such additional costs could exceed projected profit margins for the project. These additional costs include liquidated damages paid under contractual penalty provisions, which can be substantial and can accrue on a daily basis. In addition, our actual costs could exceed our projections. Performance problems for existing and future contracts could cause actual results of operations to differ materially from those anticipated by us and could cause us to suffer damage to our reputation within our industry and our customer base.

For example, in June 2000, we entered into a contract to develop the Barracuda and Caratinga crude oilfields located off the coast of Brazil. This project has been performed significantly behind the original schedule, and we have experienced significant losses, including liquidated damages, related to this project. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Environment and Recent Developments—Barracuda-Caratinga and Belanak projects.”

14

• Difficulties in engaging third party subcontractors, equipment manufacturers or materials suppliers or failures by third party subcontractors, equipment manufacturers or materials suppliers to perform could result in project delays and cause us to incur additional costs. We generally rely on third party subcontractors as well as third party equipment manufacturers and materials suppliers to assist us with the completion of our contracts. Recently, we have experienced extended delivery cycles and increasing prices for various subcontracted services, equipment and materials. To the extent that we cannot engage subcontractors or acquire equipment or materials, our ability to complete a project in a timely fashion or at a profit may be impaired. If the amount we are required to pay for services, equipment and materials exceeds the amount we have estimated in bidding for fixed-price work, we could experience losses in the performance of these contracts. Any delay by subcontractors to complete their portion of the project, any failure by a subcontractor to satisfactorily complete its portion of the project, and other factors beyond our control may result in delays in the project or may cause us to incur additional costs, or both. These delays and additional costs may be substantial, and we may not be able to recover these costs from our customer or may be required to compensate the customer for these delays. In such event, we may not be able to recover these additional costs from the responsible vendor, subcontractor or other third party. In addition, if a subcontractor or a manufacturer is unable to deliver its services, equipment or materials according to the negotiated terms and timetable for any reason, including the deterioration of its financial condition, we may be delayed in completing the project and/or be required to purchase the services, equipment or materials from another source at a higher price. This may reduce the profit or award fee to be realized or result in a loss on a project for which the services, equipment or materials were needed.

• Our projects expose us to potential professional liability, product liability, warranty, performance and other claims that may exceed our available insurance coverage. We engineer, construct and perform services in large industrial facilities in which accidents or system failures can be disastrous. Any catastrophic occurrences in excess of insurance limits at locations engineered or constructed by us or where our services are performed could result in significant professional liability, product liability, warranty and other claims against us. The failure of any systems or facilities that we engineer or construct could result in warranty claims against us for significant replacement or reworking costs. In addition, once our construction is complete, we may face claims with respect to the performance of these facilities.

We failed to follow existing internal control policies and procedures for estimating project cost changes in the early stages of our Escravos project, which we have identified as a material weakness in our financial controls, and we cannot yet conclude that the control deficiency has been fully remediated.

In the second quarter of 2006, we identified a $148 million charge, before income taxes and minority interest, related to our consolidated 50%-owned GTL project in Escravos, Nigeria. This charge was primarily attributable to increases in the overall estimated cost to complete the project. The project has experienced delays relating to civil unrest and security on the Escravos River, near the project site, and further delays have resulted from scope changes and engineering and construction modifications. As a result of our failure in the first 12 months of the Escravos project to follow existing internal control policies and procedures for estimating project cost changes, which we have identified as a material weakness in our financial controls, we determined in the second quarter of 2006 that a portion of these costs were not identified and properly recorded in an earlier period. We have restated our previously recorded results for the quarter ended March 31, 2006 to reflect $9 million of this $148 million charge, before income taxes and minority interests, applicable to this period. During the second quarter of 2006, we performed an additional review of our other significant fixed-price projects, which provided us with assurance that the deficiency was isolated to the Escravos project. We also believe the detailed cost and schedule re-estimate we prepared in the second quarter of 2006, in connection with our first check estimate, mitigated the risk of any material errors on the Escravos project as of September 30, 2006. We are implementing several control changes, including the requirement that E&C segment management perform more thorough reviews of project estimates to help prevent or detect a similar occurrence in the future. We will not be able to

15

conclude that the control deficiency related to the Escravos project has been completely remediated until we can reassess the Escravos project controls and the other control changes we are implementing. The reassessment is planned to take place before the end of 2006.

Our government contracts work is regularly reviewed and audited by our customer and government auditors, and these reviews can lead to withholding or delay of payments to us, non-receipt of award fees and other remedies against us.

Given the demands of working in Iraq and elsewhere for the United States government, we expect that from time to time we will have disagreements or experience performance issues with the various government customers for which we work. If performance issues arise under any of our government contracts, the government retains the right to pursue remedies, which could include threatened termination or termination under any affected contract. If any contract were so terminated, we may not receive award fees under the affected contract, and our ability to secure future contracts could be adversely affected, although we would receive payment for amounts owed for our allowable costs under cost-reimbursable contracts. Other remedies that our government customers may seek for any improper activities or performance issues include sanctions such as forfeiture of profits, suspension of payments, fines and suspensions or debarment from doing business with the government. Further, the negative publicity that could arise from disagreements with our customers or sanctions as a result thereof could have an adverse effect on our reputation in the industry, reduce our ability to compete for new contracts, and may also have a material adverse effect on our business, financial condition, results of operations and cash flow.

The DCAA reviews our government contracts operations and can recommend withholding payment for costs that have been incurred. Because of the scrutiny involving our government contracts operations, issues raised by the DCAA may be more difficult to resolve. Our operations under United States government contracts are regularly reviewed and audited by the Defense Contract Audit Agency (DCAA) and other governmental agencies. When issues are found during the governmental agency audit process, these issues are typically discussed and reviewed with us. The DCAA then issues an audit report with its recommendations to our customer’s contracting officer. In the case of management systems and other contract administrative issues, the contracting officer is generally with the Defense Contract Management Agency (DCMA). If our customer or a government auditor finds that we improperly charged any costs to a contract, these costs are not reimbursable or, if already reimbursed, the costs must be refunded to the customer. The DCAA is continuously performing audits of costs incurred for the foregoing and other services provided by us under our government contracts. During these audits, there are likely to be questions raised by the DCAA about the reasonableness or allowability of certain costs or the quality or quantity of supporting documentation. The DCAA might recommend withholding some portion of the questioned costs while the issues are being resolved with our customer. For example, in June 2005, the DCAA recommended withholding certain costs associated with providing containerized housing for soldiers and supporting civilian personnel in Iraq. The DCAA recommended that the costs be withheld pending receipt of additional explanation or documentation to support the subcontract costs and $55 million has been withheld as of September 30, 2006, of which $17 million has been withheld from our subcontractors. In addition, the DCAA has raised questions regarding $95 million of costs related to dining facilities in Iraq. Because of the scrutiny involving our government contracts operations, issues raised by the DCAA may be more difficult to resolve.

If the DCMA were to conclude that our accounting system was not adequate for U.S. government cost reimbursement contracts, our ability to be awarded new contracts would be materially and adversely affected. Our accounting system is currently approved by the DCMA’s contracting officer for cost reimbursement contracts. We have received two draft reports from the DCAA on our accounting system, which raised various issues and questions. We have responded to the points raised by the DCAA, but this review remains open. Once the DCAA finalizes the report, it will be submitted to the DCMA, who will make a determination of the adequacy of our accounting systems for government contracting. If the DCMA were to conclude that our accounting system was not adequate for U.S. government cost reimbursement contracts, our ability to be awarded new contracts would be materially and adversely affected. In addition, negative publicity regarding alleged

16

accounting system inadequacies or findings arising out of DCAA and DCMA reviews may adversely affect our ability to attract and obtain other government and commercial contracts.

If we were determined to have liability as a result of investigations into our work in Iraq or the Balkans, it could have a material adverse effect on our results of operations and cash flow. We understand that the United States Department of Justice (DOJ), an Assistant United States Attorney based in Illinois, and others are investigating procurement matters we have reported relating to our government contract work in Iraq. If criminal wrongdoing were found, criminal penalties could range up to the greater of $500,000 in fines per count for a corporation or twice the gross pecuniary gain or loss. We also understand that current and former employees of KBR have received subpoenas and have given or may give grand jury testimony related to some of these matters.

We have had inquiries in the past by the DCAA and the civil fraud division of the DOJ into possible overcharges for work performed during 1996 through 2000 under a contract in the Balkans, for which inquiry has not yet been completed by the DOJ. Based on an internal investigation, we credited our customer $2 million during 2000 and 2001 related to our work in the Balkans as a result of billings for which support was not readily available. We believe that the preliminary DOJ inquiry relates to potential overcharges in connection with a part of the Balkans contract under which approximately $100 million in work was done.

If we were determined to have liability as a result of any of these investigations, it could have a material adverse effect on our results of operations and cash flow.

We are involved in a dispute with Petrobras with respect to responsibility for the failure of subsea flow-line bolts on the Barracuda-Caratinga project.

In June 2000, we entered into a contract with Barracuda & Caratinga Leasing Company B.V., the project owner, to develop the Barracuda and Caratinga crude oilfields, which are located off the coast of Brazil. The construction manager and project owner’s representative is Petrobras, the Brazilian national oil company. The project consists of two converted supertankers, Barracuda and Caratinga, which will be used as floating production, storage, and offloading units, commonly referred to as FPSOs.

At Petrobras’ direction, we have replaced certain bolts located on the subsea flow-lines that have failed through mid-November 2005, and we understand that additional bolts have failed thereafter, which have been replaced by Petrobras. These failed bolts were identified by Petrobras when it conducted inspections of the bolts. The original design specification for the bolts was issued by Petrobras, and as such, we believe the cost resulting from any replacement is not our responsibility. Petrobras has indicated, however, that they do not agree with our conclusion. We have notified Petrobras that this matter is in dispute. We believe several possible solutions may exist, including replacement of the bolts. Estimates indicate that costs of these various solutions range up to $140 million. Should Petrobras instruct us to replace the subsea bolts, the prime contract terms and conditions regarding change orders require that Petrobras make progress payments of our reasonable costs incurred. Petrobras could, however, perform any replacement of the bolts and seek reimbursement from us. On March 9, 2006, Petrobras notified us that they have submitted this matter to arbitration claiming $220 million plus interest for the cost of monitoring and replacing the defective bolts and, in addition, all of the costs and expenses of the arbitration including the cost of attorneys fees. We disagree with Petrobras’ claim, since the bolts met Petrobras’ design specifications, and we do not believe there is any basis for the amount claimed by Petrobras. We intend to vigorously defend this matter and pursue recovery of the costs we have incurred to date through the arbitration process. Consequences of this matter could have a material adverse effect on our results of operations, financial condition and cash flow.

We are actively engaged in claims negotiations with some of our customers, and a failure to successfully resolve our unapproved claims may materially and adversely impact our results of operations.

We report revenue from contracts to provide construction, engineering, design or similar services under the percentage-of-completion method of accounting. The recording of profits and losses on long-term contracts

17

requires an estimate of the total profit or loss over the life of each contract. When calculating the amount of total profit or loss, we include unapproved claims as revenue when the collection is deemed probable based upon the four criteria for recognizing unapproved claims under the American Institute of Certified Public Accountants Statement of Position 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts.” Including probable unapproved claims in this calculation increases the operating income (or reduces the operating loss) that would otherwise be recorded without consideration of the probable unapproved claims.

We are actively engaged in claims negotiations with some of our customers, and the success of claims negotiations has a direct impact on the profit or loss recorded for any related long-term contract. Unsuccessful claims negotiations could result in decreases in estimated contract profits or additional contract losses. As of September 30, 2006, our probable unapproved claims, including those from unconsolidated related companies, related to seven contracts, most of which are complete or substantially complete. A significant portion of our probable unapproved claims as of September 30, 2006 arose from three completed projects for Petroleos Mexicanos (PEMEX) ($148 million related to our consolidated entities and $45 million related to our unconsolidated related companies) that are currently subject to arbitration proceedings. In addition, we have “Other assets” of $64 million for previously approved services that are unpaid by PEMEX and have been included in these arbitration proceedings. The arbitration proceedings are expected to extend through 2007. Unfavorable outcomes for us in these arbitration proceedings could have a material adverse effect on our results of operations. In addition, even if the outcomes of these proceedings are favorable to us, there can be no assurance that we will ultimately be able to collect the amounts owed by PEMEX. In addition, as of September 30, 2006, we had $44 million of probable unapproved claims relating to our LogCAP III contract. Please read Note 5 and Note 13 to the consolidated financial statements of KBR Holdings, LLC included elsewhere in this prospectus.

Risks Relating to Investigations

The SEC and the DOJ are investigating the actions of agents in foreign projects in light of the requirements of the United States Foreign Corrupt Practices Act, and the results of these investigations could have a material adverse effect on our business, prospects, results of operations, financial condition and cash flow.

The SEC is conducting a formal investigation into whether improper payments were made to government officials in Nigeria through the use of agents or subcontractors in connection with the construction and subsequent expansion by TSKJ, a joint venture in which one of our subsidiaries (a successor to The M.W. Kellogg Company) had a 25% interest at September 30, 2006, of a multibillion dollar natural gas liquefaction complex and related facilities at Bonny Island in Rivers State, Nigeria. The DOJ is also conducting a related criminal investigation. The SEC has also issued subpoenas seeking information, which we are furnishing, regarding current and former agents used in connection with multiple projects, including current and prior projects, over the past 20 years located both in and outside of Nigeria in which we, The M.W. Kellogg Company, M.W. Kellogg Limited or their or our joint ventures are or were participants. The SEC and the DOJ have been reviewing these matters in light of the requirements of the FCPA. Please read “Business—Legal Proceedings—FCPA Investigations” for more information.

Halliburton has been investigating these matters and has been cooperating with the SEC and the DOJ investigations and with other investigations into the Bonny Island project in France, Nigeria and Switzerland. We are also aware that the Serious Frauds Office in the United Kingdom is conducting an investigation relating to the activities of TSKJ. As a result of these investigations, information has been uncovered suggesting that, commencing at least 10 years ago, members of TSKJ planned payments to Nigerian officials. We have reason to believe, based on the ongoing investigations, that payments may have been made by agents of TSKJ to Nigerian officials. In addition, information recently uncovered suggests that, prior to 1998, plans may have been made by employees of The M.W. Kellogg Company to make payments to government officials in connection with the pursuit of a number of other projects in countries outside of Nigeria. Certain of these employees are current employees or a consultant of ours. As a result, the consultant may be placed on suspension, and Halliburton’s pending investigation will include a

18

review of the actions of these employees. Additionally, in 2006, Halliburton suspended the services of an agent that, until such suspension, had served on projects outside of Nigeria, and Halliburton is actively reviewing compliance of an additional agent used in connection with a separate Nigerian project.

If violations of the FCPA were found, a person or entity found in violation could be subject to fines, civil penalties of up to $500,000 per violation, equitable remedies, including disgorgement (if applicable) generally of profits, including prejudgment interest on such profits, causally connected to the violation, and injunctive relief. Criminal penalties could range up to the greater of $2 million per violation or twice the gross pecuniary gain or loss from the violation, which could be substantially greater than $2 million per violation. It is possible that both the SEC and the DOJ could assert that there have been multiple violations, which could lead to multiple fines. The amount of any fines or monetary penalties which could be assessed would depend on, among other factors, the findings regarding the amount, timing, nature and scope of any improper payments, whether any such payments were authorized by or made with knowledge of us or our affiliates, the amount of gross pecuniary gain or loss involved, and the level of cooperation provided to the government authorities during the investigations. Agreed dispositions of these types of violations also frequently result in an acknowledgement of wrongdoing by the entity and the appointment of a monitor on terms negotiated with the SEC and the DOJ to review and monitor current and future business practices, including the retention of agents, with the goal of assuring compliance with the FCPA. Other potential consequences could be significant and include suspension or debarment of our ability to contract with governmental agencies of the United States and of foreign countries.

The investigations by the SEC and DOJ and foreign governmental authorities are continuing. We do not expect these investigations to be concluded prior to conclusion of this offering or in the immediate future. The various governmental authorities could conclude that violations of the FCPA or applicable analogous foreign laws have occurred with respect to the Bonny Island project and other projects in or outside of Nigeria. In such circumstances, the resolution or disposition of these matters, even after taking into account the indemnity from Halliburton with respect to any liabilities for fines or other monetary penalties or direct monetary damages, including disgorgement, that may be assessed against us or our greater than 50%-owned subsidiaries by the U.S or certain foreign govermental authorities, could have a material adverse effect on our business, prospects, results of operations, financial condition and cash flow. Please read “—Risks Related to Our Affiliation With Halliburton—Halliburton’s indemnity for Foreign Corrupt Practices Act matters does not apply to all potential losses, Halliburton’s actions may not be in our stockholders’ best interests and we may take or fail to take actions that could result in our indemnification from Halliburton with respect to Foreign Corrupt Practices Act matters no longer being available.”

Information has been uncovered suggesting that former employees may have engaged in coordinated bidding with one or more competitors on certain foreign construction projects.

In connection with the investigation into payments relating to the Bonny Island project in Nigeria, information has been uncovered suggesting that former employees may have engaged in coordinated bidding with one or more competitors on certain foreign construction projects and that such coordination possibly began as early as the mid-1980s.

On the basis of this information, Halliburton and the DOJ have broadened their investigations to determine the nature and extent of any improper bidding practices, whether such conduct violated United States antitrust laws, and whether former employees may have received payments in connection with bidding practices on some foreign projects.

If violations of applicable United States antitrust laws occurred, the range of possible penalties includes criminal fines, which could range up to the greater of $10 million in fines per count for a corporation, or twice the gross pecuniary gain or loss, and treble civil damages in favor of any persons financially injured by such violations. Criminal prosecutions under applicable laws of relevant foreign jurisdictions and civil claims by, or relationship issues with customers, are also possible.

19

Halliburton’s indemnity does not apply to liabilities, if any, for fines, other monetary penalties or other potential losses arising out of violations of United States antitrust laws.

Potential consequences arising out of the investigations into FCPA matters and antitrust matters could include suspension or debarment of our ability to contract with the United States, state or local governments, U.S. government agencies or the MoD, third party claims, loss of business, adverse financial impact, damage to reputation and adverse consequences on financing for current or future projects.

Potential consequences of a criminal indictment arising out of any of these investigations could include suspension of our ability to contract with the United States, state or local governments, U.S. government agencies or the MoD in the United Kingdom. If a criminal or civil violation were found, we and our affiliates could be debarred from future contracts or new orders under current contracts to provide services to any such parties. During 2005, we and our affiliates had revenue of $6.6 billion from our government contracts work with agencies of the United States or state or local governments. In addition, we may be excluded from bidding on MoD contracts in the United Kingdom if we are convicted of a corruption offense or if the MoD determines that our actions constituted grave misconduct. During 2005, we and our affiliates had revenue of $909 million from our government contracts work with the MoD. Suspension or debarment from the government contracts business would have a material adverse effect on our business, results of operations and cash flow.

These investigations could also result in (1) third party claims against us, which may include claims for special, indirect, derivative or consequential damages, (2) damage to our business or reputation, (3) loss of, or adverse effect on, cash flow, assets, goodwill, results of operations, business, prospects, profits or business value, (4) adverse consequences on our ability to obtain or continue financing for current or future projects and/or (5) claims by directors, officers, employees, affiliates, advisors, attorneys, agents, debt holders or other interest holders or constituents of us or our subsidiaries. In this connection, we understand that the government of Nigeria gave notice in 2004 to the French magistrate of a civil claim as an injured party in that proceeding. In addition, our compliance procedures or having a monitor required or agreed to be appointed at our cost as part of the disposition of the investigations could result in a more limited use of agents on large-scale international projects than in the past and put us at a competitive disadvantage in pursuing such projects. Continuing negative publicity arising out of these investigations could also result in our inability to bid successfully for governmental contracts and adversely affect our prospects in the commercial marketplace. If we incur costs or losses as a result of these matters, we may not have the liquidity or funds to address those losses, in which case such losses could have a material adverse effect on our business, prospects, results of operations, financial condition and cash flow.

Our indemnification from Halliburton for FCPA Matters may not be enforceable as a result of being against governmental policy.

Our indemnification from Halliburton relating to FCPA Matters (as defined under “—Risks Related to Our Affiliation With Halliburton”) may not be enforceable as a result of being against governmental policy. Under the indemnity with Halliburton, our share of any liabilities for fines or other monetary penalties or direct monetary damages, including disgorgement, as a result of U.S. or certain foreign governmental claims or assessments relating to FCPA Matters would be funded by Halliburton and would not be borne by us and our public stockholders. If we are assessed by or agree with U.S. or certain foreign governments or governmental agencies to pay any such fines, monetary penalties or direct monetary damages, including disgorgement, and Halliburton’s indemnity cannot be enforced or is unavailable because of governmental requirements of a settlement, we may not have the liquidity or funds to pay those penalties or damages, which would have a material adverse effect on our business, prospects, results of operations, financial condition and cash flow. Please read “Our Relationship With Halliburton—Master Separation Agreement—Indemnification—FCPA Indemnification” and “—Enforceability of Halliburton FCPA Indemnification.”

20

Other Risks Related to Our Business

We experience increased working capital requirements from time to time associated with our business, and such an increased demand for working capital could adversely affect our ability to meet our liquidity needs.

Our operations could require us to utilize large sums of working capital, sometimes on short notice and sometimes without the ability to completely recover the expenditures on a timely basis or at all. Circumstances or events which could create large cash outflows include, among others, losses resulting from fixed-price contracts; contract initiation costs, contract completion cost or delays in receipt of payments under our contracts; environmental liabilities; litigation costs; adverse political conditions; foreign exchange risks; and professional and product liability claims. If we encounter significant working capital requirements or cash outflows as a result of these or other factors, we may not have sufficient liquidity or the credit capacity to meet all of our cash needs.

Insufficient liquidity could have important consequences to us. For example, we could:

• have more difficulty in providing sufficient working capital under contracts such as LogCAP that may require a substantial and immediate ramp up in operations without immediate reimbursement; and

• have less success in obtaining new work if our sureties or our lenders were to limit our ability to provide new performance bonds or letters of credit for our projects.

All or any of the following liquidity matters, working capital demands or limitations under our credit facility could place us at a competitive disadvantage compared with competitors with more liquidity and could have a material adverse effect on our business, prospects, results of operations, financial condition and cash flow.

Demobilization from Iraq could require funding of substantial working capital expenses without timely reimbursement. Demobilization of the United States military or our personnel from Iraq would require us to utilize large sums of working capital to move personnel and equipment from Iraq. If the DoD does not immediately approve funding for such a demobilization, we could be required to fund the related working capital expenses without reimbursement on a timely basis.

After the offering, we will not be able to rely on Halliburton to meet our liquidity needs or provide future credit support for required bonds, letters of credit, performance guarantees and other credit enhancement instruments, except to the limited extent Halliburton has agreed to do so under the terms of the master separation agreement. In the past, we have relied upon Halliburton to fund our working capital demands and assist us in meeting our liquidity needs, thereby providing us with a reliable source of cash, liquidity and credit support enhancements even in unusual or unexpected circumstances. After the offering, we will not be able to rely on Halliburton to meet future needs, except to the extent of credit support instruments outstanding at the completion of this offering and to the limited extent Halliburton has agreed to provide additional guarantees, indemnification and reimbursement commitments for our benefit in connection with letters of credit, surety bonds and performance guarantees related to certain of our existing project contracts as described in the master separation agreement. Please read “Our Relationship With Halliburton—Master Separation Agreement—Credit Support Instruments.” We are currently engaged in discussions with surety companies to obtain stand-alone bonding capacity without Halliburton or other credit support. Our efforts to obtain this stand-alone bonding capacity may not be successful. We can provide no assurance that we will have sufficient working capital or surety support to allow us to secure large-scale contracts or satisfy contract performance specifications.

Our revolving credit facility imposes restrictions that limit our operating flexibility and may result in additional expenses, and this credit facility will not be available if financial covenants are not met or if any person or two or more persons acting in concert, other than Halliburton or our Company, acquire directly or indirectly beneficial ownership representing 25% or more of the combined voting power of all outstanding equity interests ordinarily entitled to vote in the election of directors of the borrower under the credit facility. Under our existing revolving credit facility, and potentially under any future credit facilities, we will:

• have less operating flexibility due to restrictions which could be imposed by our creditors, including restrictions on incurring additional debt, creating liens on our properties and paying dividends; and

21

• be required to incur increased lending fees, costs and interest rates and, if future borrowings were to occur, to dedicate a substantial portion of cash flow from operations to the repayment of debt and the interest associated with that debt.

In December 2005, we entered into a five-year, unsecured revolving credit facility that provides up to $850 million of borrowings and letters of credit. This facility serves to assist us in providing working capital and letters of credit for our projects. The revolving credit facility contains a number of covenants restricting, among other things, incurrence of additional indebtedness and liens, sales of our assets, the amount of investments we can make, dividends, and payments to Halliburton under intercompany notes. We are also subject to certain financial covenants, including maintenance of ratios with respect to consolidated debt to total consolidated capitalization, leverage and fixed charge coverage. If we fail to meet the covenants or an event of default occurs, we would not have available the liquidity that the facility provides. Please read “—It is an event of default under our $850 million revolving credit facility if a person other than Halliburton or our Company directly or indirectly acquires 25% or more of the ordinary voting equity interests of the borrower under the credit facility.”

We conduct a large portion of our engineering and construction operations through joint ventures. As a result, we may have limited control over decisions and controls of joint venture projects and have returns that are not proportional to the risks and resources we contribute.

We conduct a large portion of our engineering and construction operations through joint ventures, where control may be shared with unaffiliated third parties. As with any joint venture arrangement, differences in views among the joint venture participants may result in delayed decisions or in failures to agree on major issues. We also cannot control the actions of our joint venture partners, including any nonperformance, default, or bankruptcy of our joint venture partners, and we typically have joint and several liability with our joint venture partners under these joint venture arrangements. These factors could potentially materially and adversely affect the business and operations of a joint venture and, in turn, our business and operations.

Operating through joint ventures in which we are minority holders results in us having limited control over many decisions made with respect to projects and internal controls relating to projects. These joint ventures may not be subject to the same requirements regarding internal controls and internal control reporting that we follow. As a result, internal control issues may arise, which could have a material adverse effect on our financial condition and results of operation. When entering into joint ventures, in order to establish or preserve relationships with our joint venture partners, we may agree to risks and contributions of resources that are proportionately greater than the returns we could receive, which could reduce our income and returns on these investments compared to what we would have received if the risks and resources we contributed were always proportionate to our returns.

Pursuant to the terms of our gas alliance agreement with JGC Corporation of Japan, if and when the distribution of our common stock by Halliburton to its stockholders occurs, the alliance may be terminated by either party. Please read “Business—Joint Ventures and Alliances.”

We make equity investments in privately financed projects on which we have sustained losses and could sustain additional losses.

We have participated in a number of privately financed projects that enable our government customers to finance large-scale projects, such as railroads, and major military equipment purchases. These projects typically include entering into non-recourse financing, the design and construction of facilities, and the provision of operation and maintenance services for an agreed to period after the facilities have been completed. We may incur contractually reimbursable costs and typically make an equity investment prior to an entity achieving operational status or completing its full project financing. If a project is unable to obtain financing, we could incur losses including our contractual receivables and our equity investment. After completion of these projects, our equity investments can be at risk, depending on the operation of the project, which may not be under our control. As a result, we could sustain a loss on our equity investment in these projects. Current equity

22

investments of this type include the Alice Springs-Darwin railroad in Australia and the Allenby & Connaught project in the United Kingdom.

With respect to the Alice Springs-Darwin railroad project, we own a 36.7% interest in a joint venture that is the holder of a 50-year concession contract with the Australian government to operate and maintain the railway. We account for this investment using the equity method of accounting in our G&I segment. Construction on the railway was completed in late 2003, and operations commenced in early 2004. In the first quarter of 2006, we recorded a $26 million impairment charge. In addition, in the first nine months of 2006, we recorded $11 million in losses related to our investment and made $10 million in advances to the joint venture. This joint venture has sustained losses since the railway commenced operations in early 2004 and at June 30, 2006, was projected to violate the joint venture’s loan covenants. These loans are non-recourse to us. We received revised financial forecasts from the joint venture during the first quarter of 2006, which took into account decreases, as compared to prior forecasts, in anticipated freight volume related to delays in mining of minerals, as well as a slowdown in the planned expansion of the Port of Darwin and ultimately contributed to the impairment charge recorded in the first quarter of 2006. At that time, the joint venture engaged investment bankers in an effort to raise additional capital for the venture. At the end of the second quarter of 2006, our valuation of our investment took into consideration the bids tendered at that time by interested parties to accomplish this recapitalization, and no further impairment was evident. However, the efforts to raise additional capital ceased during the third quarter because all previous bids were subsequently rejected or withdrawn. The board of the joint venture is currently attempting to restructure debt payment terms and raise additional subordinated financing. In October 2006, the joint venture violated its loan covenants by failing to make an interest and principal payment. In light of the loan covenant default and the joint venture’s need for additional equity or subordinated financing, we recorded a $32 million impairment charge in the third quarter of 2006. We will receive no tax benefit as this impairment charge is not deductible for Australian tax purposes. At September 30, 2006, our investment in this joint venture was $10 million and we had $0 of additional funding commitments. In addition, the senior lenders have agreed to waive the financial covenant violations through November 15, 2006 to allow the shareholders time to arrange additional subordinated financing estimated at $12 million. We have offered to fund approximately $6 million provided that other shareholders commit to funding $6 million in the aggregate, and the senior lenders agree to certain concessions including a principal payment holiday for 27 months and a reduction in the debt service reserve required by the existing indenture. Even if this additional investment is made and the senior lenders grant the concessions, a further impairment of our investment may be required. We believe that without a restructuring of the joint venture’s debt and an additional commitment for financing, we will record an additional impairment charge of $10 million, representing a full impairment of our remaining investment at some point in the future.

We have an investment in a development corporation that has an indirect interest in the new Egypt Basic Industries Corporation (EBIC) ammonia plant project located in Egypt. We are performing the EPC work for the project and providing operations and maintenance services for the facility. In August 2006, the lenders providing the construction financing notified EBIC that it was in default of the terms of its debt agreement, which effectively prevents the project from making additional borrowings until such time as certain security interests in the ammonia plant assets related to the export facilities can be perfected. Indebtedness under the debt agreement is non-recourse to us. At this time, we are continuing to work on the project, and we understand that discussions with the lenders regarding the security interests are ongoing. No event of default has occurred pursuant to our EPC contract as we have been paid all amounts due from EBIC. We believe EBIC may potentially cure the default by perfecting the lenders’ security interests in the port assets. In addition, EBIC may be required to construct its export facilities at a location farther from the plant than was originally planned. Any solution resulting in additional costs could require EBIC to raise additional financing, some of which could be from us and the other current stakeholders. If the default under the debt agreement is not cured, the project may not have sufficient financing to continue, which could result in an impairment of our investment and a termination of our EPC contract with EBIC, which could result in a reduction of our profits or a recognition of a loss.

23

Recent accounting pronouncements adopted by the FASB regarding the accounting for defined benefit pension plans and other post-retirement plans will materially and negatively affect certain quantitative disclosures in our financial statements.

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R).” SFAS No. 158 requires an employer to, among other things, recognize on its balance sheet the funded status (measured as the difference between the fair value of plan assets and the projected benefit obligation) of pension and other postretirement benefit plans, recognize through comprehensive income certain changes in the funded status of a defined benefit and postretirement plan in the year in which the changes occur through comprehensive income. The requirement to recognize the funded status of a benefit plan and the additional disclosure requirements are effective for fiscal years ending after December 15, 2006. We will adopt these SFAS No. 158 requirements for our fiscal year ending December 31, 2006.

We are currently assessing the quantitative impact to our financial statements, which we believe will be material. For example, using the information disclosed as of December 31, 2005, total assets as of December 31, 2005 would have been approximately $73 million lower, total liabilities would have been approximately $136 million higher, minority interest would have been approximately $74 million lower, and member’s equity and accumulated other comprehensive loss would have been $135 million lower. Because our pension and other postretirement benefit plans are dependant on future events and circumstances and current actuarial assumptions, the impact at the time of adoption of SFAS No. 158 will differ from these amounts.

If Halliburton distributes our stock to its stockholders and such disposition is determined to be financially detrimental to our United Kingdom pension plans in meeting their funding liabilities, it may be necessary for us to purchase annuities to secure the pension plan benefits or fund some or all of the deficits either in a lump sum or over an agreed period.

Under regulations applicable to pension plans maintained for the benefit of our employees in the United Kingdom, a disposition of our common stock by Halliburton to its stockholders following this offering could constitute an event for which it would be advisable to obtain clearance from the Pension Regulator in the United Kingdom if it were determined to be a change of control that is financially detrimental to the ability of a United Kingdom pension plan to meet its funding liabilities. In such event, should we fail to obtain clearance, the Pensions Regulator could issue a contribution notice, which could impose liability on an employer of an amount equal to the cost of securing all of the pension plan beneficiaries’ benefits by the purchase of annuities. As an alternative to obtaining clearance from the Pension Regulator, we could agree with the trustee of some or all of the pension plans to provide additional security to the plans satisfactory to such trustees, which would not provide the same certainty as obtaining clearance, but may reduce the risk of receiving a contribution notice from the Pensions Regulator. While no determination has been made at this time as to the action, if any, that would be taken, if clearance were sought from the Pensions Regulator or an agreement was negotiated with the trustees for the United Kingdom pension plans, it may be necessary to fund some or all of the deficits under the United Kingdom pension plans, either in a lump sum or over an agreed period. Because the funding status of our United Kingdom pension plans are dependent on future events and circumstances and actuarial assumptions, we cannot estimate the range of exposure at this time.

Intense competition in the engineering and construction industry could reduce our market share and profits.

We serve markets that are highly competitive and in which a large number of multinational companies compete. These highly competitive markets require substantial resources and capital investment in equipment, technology and skilled personnel. Our projects are frequently awarded through a competitive bidding process, which is standard in our industry. We are constantly competing for project awards based on pricing and the breadth and technological sophistication of our services. Any increase in competition or reduction in our competitive capabilities could have a significant adverse impact on the margins we generate from our projects or our ability to retain market share.

24

If we are unable to attract and retain a sufficient number of affordable trained engineers and other skilled workers, our ability to pursue projects may be adversely affected and our costs may increase.

Many of the markets in which we operate are currently growing. Our rate of growth will be confined by resource limitations as competitors and customers compete for increasingly scarce resources. We believe that our success depends upon our ability to attract, develop and retain a sufficient number of affordable trained engineers and other skilled workers that can execute our services in remote locations under difficult working conditions. The demand for trained engineers and other skilled workers is currently high. If we are unable to attract and retain a sufficient number of skilled personnel, our ability to pursue projects may be adversely affected and the costs of performing our existing and future projects may increase, which may adversely impact our margins.

If we are unable to enforce our intellectual property rights or if our intellectual property rights become obsolete, our competitive position could be adversely impacted.

We utilize a variety of intellectual property rights in our services. We view our portfolio of process and design technologies as one of our competitive strengths and we use it as part of our efforts to differentiate our service offerings. We may not be able to successfully preserve these intellectual property rights in the future and these rights could be invalidated, circumvented, or challenged. In addition, the laws of some foreign countries in which our services may be sold do not protect intellectual property rights to the same extent as the laws of the United States. Because we license technologies from third parties, there is a risk that our relationships with licensors may terminate or expire or may be interrupted or harmed. In some, but not all cases, we may be able to obtain the necessary intellectual property rights from alternative sources. If we are unable to protect and maintain our intellectual property rights, or if there are any successful intellectual property challenges or infringement proceedings against us, our ability to differentiate our service offerings could be reduced. In addition, if our intellectual property rights or work processes become obsolete, we may not be able to differentiate our service offerings, and some of our competitors may be able to offer more attractive services to our customers. As a result, our business and revenue could be materially and adversely affected.

It is an event of default under our $850 million revolving credit facility if a person other than Halliburton directly or indirectly acquires 25% or more of the ordinary voting equity interests of the borrower under the credit facility.

Under our $850 million revolving credit facility, it is an event of default if any person or two or more persons acting in concert, other than Halliburton or our Company, directly or indirectly acquire 25% or more of the combined voting power of all outstanding equity interests ordinarily entitled to vote in the election of directors of KBR Holdings, LLC, the borrower under the credit facility. In the event of a default, the banks under the facility could declare all amounts due and payable, cease to provide additional advances and require cash collateralization for all outstanding letters of credit. If we were unable to obtain a waiver from the banks or negotiate an amendment or a replacement credit facility prior to an event of default, it could have a material adverse effect on our liquidity, financial condition and cash flow.

Our business could be materially and adversely affected by problems encountered in the installation or operation of a new SAP financial system to replace our current systems.

We are in the process of installing a new SAP financial system to replace our current systems. Among other things, the new SAP system is intended to assist us in qualifying or continuing to qualify our estimating, purchasing and accounting system under requirements of the DoD and the DCAA. If we are unable to install the new SAP system in a timely manner or if we encounter problems in its installation or operation, we may not be able to obtain approval of our systems by the DoD and the DCAA, which could delay our ability to receive payments from our customer and could have a material adverse effect on our results of operations in our G&I segment.

25

Risks Related to Geopolitical and International Operations and Events

International and political events may adversely affect our operations.

A significant portion of our revenue is derived from our non-United States operations, which exposes us to risks inherent in doing business in each of the countries in which we transact business. The occurrence of any of the risks described below could have a material adverse effect on our results of operations and financial condition.

Our operations in countries other than the United States accounted for approximately 87% of our consolidated revenue during 2005 and 90% of our consolidated revenue during 2004. Based on the location of services provided, 50% of our consolidated revenue in 2005 and 45% in 2004 was from our operations in Iraq, primarily related to our work for the United States government. Also, 8% of our consolidated revenue during 2005 was from the United Kingdom. Operations in countries other than the United States are subject to various risks peculiar to each country. With respect to any particular country, these risks may include:

• expropriation and nationalization of our assets in that country;

25.1

• political and economic instability;

• civil unrest, acts of terrorism, force majeure, war, or other armed conflict;

• natural disasters, including those related to earthquakes and flooding;

• inflation;

• currency fluctuations, devaluations, and conversion restrictions;

• confiscatory taxation or other adverse tax policies;

• governmental activities that limit or disrupt markets, restrict payments, or limit the movement of funds;

• governmental activities that may result in the deprivation of contract rights; and

• governmental activities that may result in the inability to obtain or retain licenses required for operation.

Due to the unsettled political conditions in many oil-producing countries and countries in which we provide governmental logistical support, our revenue and profits are subject to the adverse consequences of war, the effects of terrorism, civil unrest, strikes, currency controls, and governmental actions. Countries where we operate that have significant amounts of political risk include: Afghanistan, Algeria, Indonesia, Iraq, Nigeria, Russia, and Yemen. In addition, military action or continued unrest in the Middle East could impact the supply and pricing for oil and gas, disrupt our operations in the region and elsewhere, and increase our costs for security worldwide.

We work in international locations where there are high security risks, which could result in harm to our employees and contractors or substantial costs.

Some of our services are performed in high-risk locations, such as Iraq and Afghanistan, where the country or location is suffering from political, social or economic issues, or war or civil unrest. In those locations where we have employees or operations, we may incur substantial costs to maintain the safety of our personnel. Despite these precautions, the safety of our personnel in these locations may continue to be at risk, and we have in the past and may in the future suffer the loss of employees and contractors.

We are subject to significant foreign exchange and currency risks that could adversely affect our operations and our ability to reinvest earnings from operations, and our ability to limit our foreign exchange risk through hedging transactions may be limited.

A sizable portion of our consolidated revenue and consolidated operating expenses are in foreign currencies. As a result, we are subject to significant risks, including:

• foreign exchange risks resulting from changes in foreign exchange rates and the implementation of exchange controls; and

• limitations on our ability to reinvest earnings from operations in one country to fund the capital needs of our operations in other countries.

In particular, we conduct business in countries that have non-traded or “soft” currencies which, because of their restricted or limited trading markets, may be difficult to exchange for “hard” currencies. The national governments in some of these countries are often able to establish the exchange rates for the local currency. As a result, it may not be possible for us to engage in hedging transactions to mitigate the risks associated with fluctuations of the particular currency. We are often required to pay all or a portion of our costs associated with a project in the local soft currency. As a result, we generally attempt to negotiate contract terms with our customer, who is often affiliated with the local government, to provide that we are paid in the local currency in amounts that match our local expenses. If we are unable to match our costs with matching revenue in the local currency, we would be exposed to the risk of an adverse change in currency exchange rates.

26

Where possible, we selectively use hedging transactions to limit our exposure to risks from doing business in foreign currencies. Our ability to hedge is limited because pricing of hedging instruments, where they exist, is often volatile and not necessarily efficient.

In addition, the value of the derivative instruments could be impacted by:

• adverse movements in foreign exchange rates;

• interest rates;

• commodity prices; or

• the value and time period of the derivative being different than the exposures or cash flow being hedged.

Risks Related to Our Affiliation With Halliburton

Halliburton’s indemnity for Foreign Corrupt Practices Act matters does not apply to all potential losses, Halliburton’s actions may not be in our stockholders’ best interests and we may take or fail to take actions that could result in our indemnification from Halliburton with respect to Foreign Corrupt Practices Act matters no longer being available.

Under the terms of the master separation agreement, Halliburton will indemnify us for, and any of our greater than 50%-owned subsidiaries for our share of, fines or other monetary penalties or direct monetary damages, including disgorgement, as a result of claims made or assessed by a governmental authority of the United States, the United Kingdom, France, Nigeria, Switzerland or Algeria or a settlement thereof relating to FCPA Matters, which could involve Halliburton and us through The M. W. Kellogg Company, M. W. Kellogg Limited or their or our joint ventures in projects both in and outside of Nigeria, including the Bonny Island, Nigeria project. Halliburton’s indemnity will not apply to any other losses, claims, liabilities or damages assessed against us as a result of or relating to FCPA Matters or to any fines or other monetary penalties or direct monetary damages, including disgorgement, assessed by governmental authorities in jurisdictions other than the United States, the United Kingdom, France, Nigeria, Switzerland or Algeria, or a settlement thereof, or assessed against entities such as TSKJ or Brown & Root–Condor Spa, in which we do not have an interest greater than 50%. For purposes of the indemnity, “FCPA Matters” include claims relating to alleged or actual violations occurring prior to the date of the master separation agreement of the FCPA or particular, analogous applicable statutes, laws, regulations and rules of U.S. and foreign governments and governmental bodies identified in the master separation agreement in connection with the Bonny Island project in Nigeria and in connection with any other project, whether located inside or outside of Nigeria, including without limitation the use of agents in connection with such projects, identified by a governmental authority of the United States, the United Kingdom, France, Nigeria, Switzerland or Algeria in connection with the current investigations in those jurisdictions. Please read “—Risks Relating to Investigations—The SEC and the DOJ are investigating the actions of agents in foreign projects in light of the requirements of the United States Foreign Corrupt Practices Act, and the results of these investigations could have a material adverse effect on our business, prospects, results of operations, financial condition and cash flow” and “—Our indemnification from Halliburton for FCPA Matters may not be enforceable as a result of being against governmental policy,” and “Our Relationship With Halliburton—Master Separation Agreement—Indemnification—FCPA Indemnification” and “—Enforceability of Halliburton FCPA Indemnification.”

Either before or after a settlement or disposition of FCPA Matters, we could incur losses as a result of or relating to FCPA Matters for which Halliburton’s indemnity will not apply, and we may not have the liquidity or funds to address those losses, in which case such losses could have a material adverse effect on our business, prospects, results of operations, financial condition and cash flow.

In consideration of Halliburton’s agreement to indemnify us for certain FCPA Matters, we have agreed that Halliburton will at all times, in its sole discretion, have and maintain control over the investigation, defense and/

27

or settlement of FCPA Matters until such time, if any, that we exercise our right to assume control of the

investigation, defense and/or settlement of FCPA Matters. We have also agreed, at Halliburton’s expense, to assist with Halliburton’s full cooperation with any governmental authority in Halliburton’s investigation of FCPA Matters and its investigation, defense and/or settlement of any claim made by a governmental authority or court relating to FCPA Matters, in each case even if we assume control of FCPA Matters.

Subject to the exercise of our right to assume control of the investigation, defense and/or settlement of FCPA Matters, Halliburton will have broad discretion to investigate and defend FCPA Matters. After this offering and Halliburton’s anticipated disposition of our common stock that it owns following this offering, we expect that Halliburton will take actions that are in the best interests of its stockholders, which may not be in our or our stockholders’ best interests, particularly in light of the potential differing interests that Halliburton and we may have with respect to the matters currently under investigation and their defense and/or settlement. In addition, the manner in which Halliburton controls the investigation, defense and/or settlement of FCPA Matters and our ongoing obligation to cooperate with Halliburton in its investigation, defense and/or settlement thereof could adversely affect us and our ability to defend or settle FCPA or other claims against us, or result in other adverse consequences to us or our business that would not be subject to Halliburton’s indemnification. We may take control over the investigation, defense and/or settlement of FCPA Matters or we may refuse to agree to a settlement of FCPA Matters negotiated by Halliburton. Notwithstanding our decision, if any, to assume control or refuse to agree to a settlement of FCPA Matters, we will have a continuing obligation to assist in Halliburton’s full cooperation with any government or governmental agency, which may reduce any benefit of our taking control over the investigation of FCPA Matters or refusing to agree to a settlement. If we take control over the investigation, defense and/or settlement of FCPA Matters, refuse a settlement of FCPA Matters negotiated by Halliburton, enter into a settlement of FCPA Matters without Halliburton’s consent, materially breach our obligation to cooperate with respect to Halliburton’s investigation, defense and/or settlement of FCPA Matters or materially breach our obligation to consistently implement and maintain, for five years following our separation from Halliburton, currently adopted business practices and standards relating to the use of foreign agents, Halliburton may terminate the indemnity, which could have a material adverse effect on our financial condition, results of operations and cash flow.

Halliburton’s indemnity for matters relating to the Barracuda-Caratinga project only applies to the replacement of certain subsea bolts, and Halliburton’s actions may not be in our stockholders’ best interests.

Under the terms of the master separation agreement, Halliburton will indemnify us and any of our greater than 50%-owned subsidiaries as of the date of the master separation agreement for out-of-pocket cash costs and expenses, or cash settlements or cash arbitration awards in lieu thereof, we incur as a result of the replacement of certain subsea flow-line bolts installed in connection with the Barracuda-Caratinga project, which we refer to as “B-C Matters.” Please read “Risks Related to Our Customers and Contracts—We are involved in a dispute with Petrobras with respect to responsibility for the failure of subsea flow-line bolts on the Barracuda-Caratinga Project.”

Halliburton’s indemnity will not apply to any other losses, claims, liabilities or damages against us relating to B-C Matters. Please read “Our Relationship With Halliburton—Master Separation Agreement— Indemnification—Barracuda-Caratinga Indemnification.” If, either before or after a settlement or disposition of B-C Matters, we incur losses relating to the Barracuda-Caratinga project for which Halliburton’s indemnity will not apply, we may not have the liquidity or funds to address those losses, in which case such losses could have a material adverse effect on our business, prospects, results of operations, financial condition and cash flow.

At our cost, we will control the defense, counterclaim and/or settlement with respect to B-C Matters, but Halliburton will have discretion to determine whether to agree to any settlement or other resolution of B-C Matters. We expect Halliburton will take actions that are in the best interests of its stockholders, which may or may not be in our or our stockholders’ best interests. Halliburton has the right to assume control over the defense, counterclaim and/or settlement of B-C Matters at any time. If Halliburton assumes control over the defense,

28

counterclaim and/or settlement of B-C Matters, or refuses a settlement proposed by us, it could result in material and adverse consequences to us or our business that would not be subject to Halliburton’s indemnification. In addition, if Halliburton assumes control over the defense, counterclaim and/or settlement of B-C Matters, and we refuse a settlement proposed by Halliburton, Halliburton may terminate the indemnity. Also, if we materially breach our obligation to cooperate with Halliburton or we enter into a settlement of B-C Matters without Halliburton’s consent, Halliburton may terminate the indemnity.

Transfers of our common stock by Halliburton could adversely affect your rights as a stockholder and cause our stock price to decline.

After completion of this offering and the waiver or expiration of the “lock-up” period described under “Underwriting,” Halliburton will be permitted to transfer all or part of the shares of our common stock that it owns, without allowing you to participate or realize a premium for your shares of common stock, or distribute its shares to its stockholders. Sales or distributions by Halliburton of substantial amounts of our common stock in the public market or to its stockholders could adversely affect prevailing market prices for our common stock. Additionally, a sale of a controlling interest to a third party may adversely affect the market price of our common stock and our business and results of operations. For example, the change in control may result in a change of management decisions and business policy. Halliburton has advised us that it intends to dispose of our common stock that it owns following this offering as expeditiously as possible through a tax-free distribution to Halliburton’s stockholders. For additional information regarding Halliburton’s current plans with respect to our common stock that it will continue to own after the closing of this offering, please read “Sole Stockholder” and “Our Relationship With Halliburton.”

Halliburton is generally not prohibited from selling a controlling interest in us to a third party. Because we will not be subject to Section 203 of the General Corporation Law of the State of Delaware, until immediately after the time that no person or group beneficially owns, directly or indirectly, a majority of our outstanding

voting stock, Halliburton, as a controlling stockholder, may find it easier to sell its controlling interest to a third party. Please read “Description of Capital Stock—Delaware Business Combination Statute” for a description of Section 203 and the potential positive and negative consequences, depending on the circumstances, of not being subject to it.

We will be controlled by Halliburton as long as it owns a majority of our outstanding voting stock, and you will be unable to affect the outcome of stockholder voting during that time.

Upon completion of this offering, Halliburton will own 83% of our outstanding common stock, or 81% if the underwriters’ over-allotment option is exercised in full. As long as Halliburton owns, directly or indirectly, a majority of our outstanding voting stock, Halliburton will be able to exert significant control over us, including

29

the ability to elect or remove and replace our entire board of directors and take other actions without calling a special meeting. The concentration of ownership may also make some transactions, including mergers or other changes in control, more difficult or impossible without the support of Halliburton and Halliburton’s interests may conflict with your interests as a stockholder. Investors in this offering, by themselves, will not be able to affect the outcome of any stockholder vote. As a result, Halliburton, subject to any fiduciary duty owed to our minority stockholders under Delaware law, will be able to control matters affecting us, including:

• the composition of our board of directors and, through it, any determination with respect to our business direction and policies, including the appointment and removal of officers;

• the determination of incentive compensation, which may affect our ability to retain key employees;

• the allocation of business opportunities between Halliburton and us;

• any determinations with respect to mergers or other business combinations;

• our acquisition or disposition of assets;

• our financing decisions and our capital raising activities;

• the payment of dividends on our common stock;

• conduct in regulatory and legal proceedings;

• amendments to our certificate of incorporation or bylaws; and

• determinations with respect to our tax returns.

In addition, the master separation agreement we will enter into with Halliburton also contains several provisions regarding our corporate governance that apply for so long as Halliburton owns specified percentages of our common stock. For example, Halliburton will have, among other rights, contractual rights relating to representation on our board of directors and board committees and, for so long as Halliburton beneficially owns 80% of our outstanding voting stock, a subscription right to purchase our securities. In addition, as long as Halliburton beneficially owns at least a majority of our outstanding voting stock, Halliburton’s board of directors will review and approve all of our projects that have a value in excess of $250 million. Moreover, Halliburton may transfer all or any portion of its contractual corporate governance rights to a transferee from Halliburton which holds at least 15% of our outstanding voting stock. Your interests as our stockholders, and the interests of Halliburton or its transferee, may differ. For a description of these provisions, please read “Our Relationship With Halliburton—Master Separation Agreement—Corporate Governance.”

In addition, Halliburton may enter into credit agreements, indentures or other contracts that commit it to limit our activities and the activities of Halliburton’s other subsidiaries. Halliburton’s representatives on our board or board committees could direct our business so as not to breach any of these agreements.

We will be a “controlled company” under the rules of the New York Stock Exchange and, as a result, we will qualify for, and intend to rely on, exemptions from some of the corporate governance requirements of the New York Stock Exchange. Accordingly, our stockholders will not have as many corporate governance protections as stockholders of some other publicly traded companies.

After this offering, Halliburton will continue to own more than 80% of our outstanding common stock and we will be considered a “controlled company” under the corporate governance rules of the New York Stock Exchange. As a controlled company, we are eligible for exemptions from some of the requirements of these rules, including the requirements (i) that a majority of our board of directors consists of independent directors, (ii) that we have a nominating and governance committee and a compensation committee, and that each such committee be composed entirely of independent directors and governed by a written charter addressing the committee’s purpose and responsibilities and (iii) for annual performance evaluations of the nominating and governance committee and the compensation committee. We intend to utilize some or all of these exemptions for

30

so long as Halliburton or any other person or entity continues to own a majority of our outstanding voting securities. Accordingly, our stockholders will not have as many corporate governance protections as stockholders of some other publicly traded companies. For a description of Halliburton’s plans to dispose of our common stock that it owns following this offering, please read “Sole Stockholder.”

Our interests may conflict with those of Halliburton with respect to business relationships, and because of Halliburton’s controlling ownership, we may not be able to resolve these conflicts on terms commensurate with those possible in arms-length transactions.

Our interests may conflict with those of Halliburton in a number of areas relating to our past and ongoing relationships, including:

• the settlement of issues relating to matters for which we have indemnified Halliburton or for which Halliburton has indemnified us (please read “Our Relationship With Halliburton—Master Separation Agreement—Indemnification—General Indemnification and Mutual Release” and “—Tax Sharing Agreement”);

• the timing and manner of any sales or distributions by Halliburton of all or any portion of its ownership interest in us;

• agreements with Halliburton and its affiliates relating to transition services that may be material to our business;

• the solicitation and hiring of employees from each other;

• business opportunities that may be presented to Halliburton and to our officers and directors associated with Halliburton; and

• our dividend policy.

We may not be able to resolve any potential conflicts with Halliburton, and even if we do, the resolution may be less favorable than if we were dealing with an unaffiliated party. Our certificate of incorporation provides that Halliburton has no duty to refrain from engaging in activities or lines of business similar to ours and that Halliburton and its officers, directors and employees will not be liable to us or our stockholders for failing to present specified corporate opportunities to us. Please read “Description of Capital Stock—Transactions and Corporate Opportunities.”

The terms of our separation from Halliburton, the related agreements and other transactions with Halliburton were determined by Halliburton and thus may be less favorable to us than the terms we could have obtained from an unaffiliated third party.

Transactions and agreements entered into between us and Halliburton on or before the closing of this offering present conflicts between our interests and those of Halliburton. These transactions and agreements include agreements related to the separation of our business from Halliburton that will provide for, among other things, our responsibility for liabilities related to our business and the responsibility of Halliburton for liabilities unrelated to our business, our respective rights, responsibilities and obligations with respect to taxes and tax benefits, and the terms of our various interim and ongoing relationships, as described under “Our Relationship With Halliburton.”

Pursuant to our master separation agreement, we will agree to indemnify Halliburton for, among other matters, all past, present and future liabilities related to our business and operations. We have also agreed to indemnify Halliburton for liabilities under various credit support instruments relating to our businesses and for liabilities under litigation matters related to our business. Halliburton will also agree to indemnify us for, among other things, liabilities unrelated to our business, for certain other agreed matters relating to the FCPA investigations and the Barracuda-Caratinga project and for litigation matters related to Halliburton’s business.

31

These various indemnification obligations are described in further detail under “Our Relationship With Halliburton—Master Separation Agreement—Indemnification—General Indemnification and Mutual Release.” Such liabilities include unknown liabilities which could be significant.

Because the terms of our separation from Halliburton and these related transactions and agreements were determined by Halliburton, their terms may be less favorable to us than the terms we could have obtained from an unaffiliated third party. In addition, while Halliburton controls us, it could cause us to amend these agreements on terms that may be less favorable to us than the current terms of the agreements. We may not be able to resolve any potential conflict, and even if we do, the resolution may be less favorable than if we were dealing with an unaffiliated party. Please read “Our Relationship With Halliburton.” We and Halliburton may enter into other material agreements in the future.

Our directors and executive officers have potential conflicts of interest.

We expect that, following this offering, most of our directors will also be executive officers of Halliburton. These directors owe fiduciary duties to our stockholders, which may conflict with their roles as executive officers of Halliburton. As a result, in connection with any transaction or other relationship involving both companies, these directors may recuse themselves and would therefore not participate in any board action relating to these transactions or relationships.

Many of our executive officers and directors own Halliburton shares or options to purchase Halliburton shares, which may be of greater value than their ownership of our common stock. Ownership of Halliburton shares by our directors and executive officers could create, or appear to create, potential conflicts of interest when directors and executive officers are faced with decisions that could have different implications for Halliburton than they do for us.

If Halliburton distributes our stock to its stockholders and the distribution fails to qualify as a tax-free transaction because of actions we take or because of a change of control of our company, we will be required to indemnify Halliburton for any resulting taxes, and this potential obligation to indemnify Halliburton may prevent or delay a change of control of our company if Halliburton distributes our common stock to its stockholders.

If Halliburton distributes our stock to its stockholders, we and Halliburton will be required to comply with representations that are made to Halliburton’s tax counsel in connection with the tax opinion that we expect to be issued to Halliburton regarding the tax-free nature of the distribution of our stock by Halliburton to Halliburton stockholders and with representations that are made to the Internal Revenue Service in connection with the private letter ruling that Halliburton has requested. Further, we have agreed not to enter into transactions for two years after the distribution date that would result in a more than immaterial possibility of a change of control of our company pursuant to a plan unless a ruling is obtained from the Internal Revenue Service or an opinion is obtained from a nationally recognized law firm that the transaction will not affect the tax-free nature of the distribution. For these purposes, certain transactions are deemed to create a more than immaterial possibility of a change of control of our company pursuant to a plan, and thus require such a ruling or opinion, including, without limitation, the merger of KBR with or into any other corporation, stock issuances (regardless of size) other than in connection with KBR employee incentive plans, or the redemption or repurchase of any of our capital stock (other than in connection with future employee benefit plans or pursuant to a future market purchase program involving 5% or less of our publicly traded stock). If we take any action which results in the distribution becoming a taxable transaction, we will be required to indemnify Halliburton for any and all taxes incurred by Halliburton or any of its affiliates, on an after-tax basis, resulting from such actions. The amounts of any indemnification payments would be substantial and would have a material adverse effect on our financial condition.

32

Depending on the facts and circumstances, if Halliburton distributes our stock to its stockholders, the distribution may be taxable to Halliburton if we undergo a 50% or greater change in stock ownership within two years after any distribution. Under the tax sharing agreement we will enter into with Halliburton, Halliburton is entitled to reimbursement of any tax costs incurred by Halliburton as a result of a change in control of our company after any distribution. Halliburton would be entitled to such reimbursement even in the absence of any specific action by us, and even if actions of Halliburton (or any of its officers, directors or authorized representatives) contributed to a change in control of our company. These costs may be so great that they delay or prevent a strategic acquisition, a change in control of our company or an attractive business opportunity. Actions by a third party after any distribution causing a 50% or greater change in our stock ownership could also cause the distribution by Halliburton to be taxable and require reimbursement by us.

We do not have a history of operating as a stand-alone company, we may encounter difficulties in making the changes necessary to operate as a stand-alone company, and we may incur greater costs as a stand-alone company that may adversely affect our results.

Halliburton currently assists us in performing various corporate functions, including the following:

• information technology and communications;

• human resource services such as payroll and benefit plan administration;

• legal;

• tax;

• accounting;

• office space and office support;

• risk management;

• treasury and corporate finance; and

• investor services, investor relations and corporate communications.

Following our separation from Halliburton, Halliburton will have no obligation to provide these functions to us other than the interim services that will be provided by Halliburton under a transition services agreement which is described in “Our Relationship With Halliburton—Transition Services Agreements.” Also, after the termination of this agreement, we may not be able to replace the transition services in a timely manner or on terms and conditions, including costs, as favorable as those we receive from Halliburton.

Additionally, we will incur costs in connection with our separation and operation as a separate publicly-traded company. In the first year of our separation from Halliburton, we anticipate incurring approximately $13 million annually of additional cost of services and approximately $23 million annually of additional general and administrative expense associated with being a separate publicly traded company. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Executive Summary.”

Halliburton has advised us that it intends to dispose of our common stock that it owns following this offering as expeditiously as possible through a tax-free distribution to Halliburton’s stockholders. For additional information regarding Halliburton’s current plans with respect to our common stock that it will own after the closing of this offering, please read “Sole Stockholder” and “Our Relationship With Halliburton.”

33

Risks Related to this Offering, the Securities Markets and Ownership of Our Common Stock

Purchasers in this offering will experience immediate and substantial dilution in pro forma net tangible book value per share.

Dilution per share represents the difference between the initial public offering price and the pro forma net tangible book value per share immediately after the offering of our common stock. Purchasers of our common stock in this offering will experience immediate dilution of $6.44 in net tangible book value per share as of September 30, 2006, based on an assumed offering price of $16.00 per share, the mid-point of the price range set forth on the cover page of this prospectus, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. A $1.00 increase (decrease) in the assumed initial public offering price of $16.00 per share would increase (decrease) our pro forma net tangible book value after giving effect to this offering by $26.2 million, the pro forma net tangible book value per share after giving effect to this offering by $0.16 per share and the dilution in net tangible book value per share to new investors in this offering by $(0.16) per share assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

Further, if we issue additional equity securities to raise additional capital, your ownership interest in our company may be diluted and the value of your investment may be reduced.

The initial public offering price of our common stock may not be indicative of the market price of our common stock after this offering.

Prior to this offering, Halliburton held all of our outstanding common stock, and therefore, there has been no public market for our common stock. An active market for our common stock may not develop or be sustained after this offering. The initial public offering price of our common stock will be determined by negotiations between Halliburton, us and representatives of the underwriters, based on numerous factors that we discuss under “Underwriting.” This price may not be indicative of the market price at which our common stock will trade after this offering.

We have no plans to pay dividends on our common stock, and you may not receive funds without selling your common stock.

We do not intend to declare or pay dividends on our common stock in the foreseeable future. Instead, we generally intend to invest any future earnings in our business. Subject to Delaware law, our board of directors will determine the payment of future dividends on our common stock, if any, and the amount of any dividends in light of any applicable contractual restrictions limiting our ability to pay dividends, our earnings and cash flow, our capital requirements, our financial condition, and other factors our board of directors deems relevant. Our $850 million revolving credit facility also restricts our ability to pay dividends. Accordingly, you may have to sell some or all of your common stock in order to generate cash flow from your investment. You may not receive a gain on your investment when you sell our common stock and may lose the entire amount of your investment.

The price of our common stock may be volatile.

The market price of our common stock could be subject to significant fluctuations after this offering and may decline below the initial public offering price. You may not be able to resell your shares at or above the initial public offering price. Among the factors that could affect our stock price are:

• our operating and financial performance and prospects;

• quarterly variations in the rate of growth of our financial indicators, such as earnings per share, net income and revenue;

• the outcome of the FCPA and other investigations;

34

• publication of research reports by analysts;

• speculation in the press or investment community;

• strategic actions by us or our competitors, such as acquisitions, restructurings or innovations;

• sales of our common stock by Halliburton and other stockholders;

• actions by institutional investors or by Halliburton;

• fluctuations in oil and natural gas prices;

• departure of key personnel;

• general market conditions;

• U.S. and international political, economic, legal and regulatory factors unrelated to our performance; and

• the other risks described in this “Risk Factors” section.

The stock markets in general have experienced extreme volatility that has at times been unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our common stock.

Provisions in our charter documents and Delaware law may inhibit a takeover or impact operational control of our company following the time Halliburton ceases to beneficially own a majority of our outstanding voting stock, which could adversely affect the value of our common stock.

Our certificate of incorporation and bylaws, as well as Delaware corporate law, contain provisions that could delay or prevent a change of control or changes in our management that a stockholder might consider favorable. These provisions include, among others, a staggered board of directors, prohibiting stockholder action by written consent, advance notice for raising business or making nominations at meetings of stockholders and the issuance of preferred stock with rights that may be senior to those of our common stock without stockholder approval. Many of these provisions become effective at the time Halliburton ceases to beneficially own a majority of our outstanding voting stock. Halliburton has advised us that it intends to dispose of our common stock that it owns following this offering as expeditiously as possible through a tax-free distribution to Halliburton’s stockholders. For additional information regarding Halliburton’s current plans with respect to our common stock that it will own after the closing of this offering, please read “Sole Stockholder” and “Our Relationship With Halliburton.” These provisions would apply even if a takeover offer may be considered beneficial by some of our stockholders. If a change of control or change in management is delayed or prevented, the market price of our common stock could decline.

35

CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING STATEMENTS

Certain of the statements contained in this prospectus are forward-looking statements. All statements other than statements of historical fact are, or may be deemed to be, forward-looking statements. Forward-looking statements include information concerning our possible or assumed future financial performance and results of operations, including statements about the following subjects:

• our strategy, including the expansion and growth of our operations and maintenance of a balanced overall project portfolio;

• the level of demand for our services;

• growth in global energy consumption;

• growth in global demand for natural gas and LNG;

• capital investment in gas monetization projects;

• capital investment in exploration and production projects;

• the level of our government services operations in the Middle East under our current and any future LogCAP contracts;

• our plans for diversifying the operations of our G&I segment;

• capital investment in refining projects;

• growth in global demand for fertilizers;

• the anticipated benefits to be derived from our local presence and our regionally based high-value execution centers;

• the development and commercialization of our coal gasification and CO₂ sequestration technologies;

• our ability to obtain new contract awards;

• the level of control we exercise in the decision making and internal controls of our joint venture operations;

• our ability to protect and maintain our intellectual property rights;

• international and political events affecting oil- and natural gas-producing countries and countries in which we provide governmental logistical support;

• the outcome of any investigations by governmental agencies in which we are involved;

• the level of future dividends, if any, on our common stock;

• our estimates of future contributions to our pension plans;

• our estimates of additional future expenses associated with being a separate publicly traded company;

• Halliburton’s plans to divest its remaining equity interest in us; and

• liabilities under laws and regulations protecting the environment.

We have based these statements on our assumptions and analyses in light of our experience and perception of historical trends, current conditions, expected future developments and other factors we believe are appropriate in the circumstances. Forward-looking statements by their nature involve substantial risks and uncertainties that could significantly affect expected results, and actual future results could differ materially from those described in such statements. Factors that could cause actual future results to differ materially are the risks and uncertainties described under “Risk Factors” above and the following:

• oil and natural gas prices and industry expectations about future prices;

• demand for our services;

36

• our ability to enter into and the terms of future contracts;

• the impact of laws and regulations;

• the adequacy of sources of liquidity;

• competition and market conditions;

• the availability of skilled personnel;

• operating hazards, war, terrorism and cancellation or unavailability of insurance coverage;

• the effect of litigation and contingencies; and

• difficulties encountered in pursuing our strategic plans.

Many of these factors are beyond our ability to control or predict. Any of these factors, or a combination of these factors, could materially and adversely affect our future financial condition or results of operations and the ultimate accuracy of the forward-looking statements. These forward-looking statements are not guarantees of our future performance, and our actual results and future developments may differ materially and adversely from those projected in the forward-looking statements. We caution against putting undue reliance on forward-looking statements or projecting any future results based on such statements or present or prior earnings levels. In addition, each forward-looking statement speaks only as of the date of the particular statement, and we undertake no obligation to publicly update or revise any forward-looking statement.

37

USE OF PROCEEDS

We estimate that our net proceeds from the sale of our common stock in this offering will be approximately $416 million, or $479 million if the underwriters exercise their over-allotment option in full, after deducting underwriting discounts and commissions and our estimated offering expenses. This estimate assumes a public offering price of $16.00 per share, which is the mid-point of the offering price range indicated on the cover of this prospectus. A $1.00 increase (decrease) in the assumed initial public offering price of $16.00 per share would increase (decrease) the net proceeds to us from this offering by $26.2 million, or $30.2 million if the underwriters exercise their over-allotment option in full, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and commissions and estimated offering expenses.

We intend to use the net proceeds from this offering to repay indebtedness we owe to subsidiaries of Halliburton under subordinated intercompany notes. Any remaining net proceeds will be used for general business purposes. At September 30, 2006, the aggregate principal amount owed under the subordinated intercompany notes was $774 million, and in October 2006, we repaid $324 million in aggregate principal amount of this indebtedness. If the net proceeds from this offering are not sufficient to repay the subordinated intercompany notes in full, we expect to repay the remaining amounts owed with available cash balances from sources permitted by the covenants under our revolving credit facility. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.” The subordinated intercompany notes each bear interest at an annual rate of 7.5%, were incurred in December 2005 upon the conversion of an intercompany payable owed to Halliburton into long-term notes payable, and will otherwise mature on December 31, 2010.

DIVIDEND POLICY

We do not intend to declare or pay dividends on our common stock in the foreseeable future. Instead, we generally intend to invest any future earnings in our business. Subject to Delaware law, our board of directors will determine the payment of future dividends on our common stock, if any, and the amount of any dividends in light of:

• any applicable contractual restrictions limiting our ability to pay dividends, including the restrictions in our revolving credit facility;

• our earnings and cash flow;

• our capital requirements;

• our financial condition; and

• other factors our board of directors deems relevant.

38

CAPITALIZATION

The following table shows as of September 30, 2006:

• in the historical column, the cash and equivalents and capitalization of KBR Holdings, LLC and its subsidiaries;

• in the pro forma column, the cash and equivalents and capitalization of KBR Holdings, LLC and its subsidiaries on a pro forma basis after giving effect to our repayment in October 2006 of $324 million in aggregate principal amount of the indebtedness we owe to subsidiaries of Halliburton under subordinated intercompany notes (which indebtedness totaled $774 million in aggregate principal amount at September 30, 2006); and

• in the pro forma as adjusted column, our cash and equivalents and capitalization on a pro forma basis after giving effect to (1) the contribution by a wholly owned subsidiary of Halliburton of 100% of the outstanding equity interests in KBR Holdings, LLC to KBR, (2) the sale by KBR of 27,840,000 shares of common stock in this offering at a price of $16.00 per share, which is the mid-point of the offering price range indicated on the cover page of this prospectus, after deducting underwriting discounts and commissions and our estimated offering expenses, and (3) the repayment in full of the remaining indebtedness we owe under the subordinated intercompany notes with net proceeds from this offering and, if the net proceeds from this offering are not sufficient to repay the indebtedness in full, available cash balances from sources that are permitted by the covenants under our revolving credit facility.

We derived this table from, and it should be read in conjunction with and is qualified in its entirety by reference to, the historical financial statements and the accompanying notes and the unaudited pro forma condensed consolidated financial statements included elsewhere in this prospectus. You should also read this table in conjunction with “Unaudited Pro Forma Condensed Consolidated Financial Statements,” “Selected Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

	As of September 30, 2006
	Historical			Pro Forma			Pro Forma As Adjusted
	(In millions)
Cash and equivalents(1)(2)	$	1,022		$	698		$	664
Liabilities:
Notes payable to related party	$	774		$	450		$	—
Long-term debt (including current maturities)		25			25			25
Member’s equity and accumulated other comprehensive loss/stockholders’ equity:
Member’s equity		1,542			1,542			—
Accumulated other comprehensive loss		(89	)		(89	)		(89	)
Preferred stock, $0.001 par value, 50,000,000 shares authorized, 0 shares issued and outstanding		—			—			—
Common stock, $0.001 par value, 300,000,000 shares authorized, 135,627,000 and 163,467,000 shares issued and outstanding historical and pro forma, as adjusted, respectively		—			—			—
Paid-in capital		—			—			1,958
Retained earnings		—			—			—
Total member’s equity/stockholders’ equity and accumulated other comprehensive loss(1)		1,453			1,453			1,869
Total capitalization(1)	$	2,252		$	1,928		$	1,894

(1) A $1.00 increase (decrease) in the assumed initial public offering price of $16.00 per share would increase (decrease) total pro forma as adjusted cash and equivalents, total pro forma as adjusted stockholders’ equity and total pro forma as adjusted capitalization by $26.2 million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and commissions and our estimated offering expenses.

(2) In addition to our cash and cash equivalents, at September 30, 2006, KBR had a $648 million demand note due from parent.

39

DILUTION

The pro forma net tangible book value of our common stock as of September 30, 2006 was approximately $1,142 million, or $7.01 per share. Pro forma net tangible book value per share represents our total tangible assets less our total liabilities and our minority interest and divided by the aggregate number of shares of our common stock outstanding on a pro forma basis after giving effect to the 135,627-for-one split of our common stock effected in October 2006 in connection with this offering. Dilution in net tangible book value per share represents the difference between the amount per share of our common stock that new investors pay in this offering and the pro forma net tangible book value per share of our common stock immediately after this offering.

After giving effect to the sale by us of 27,840,000 shares of common stock in this offering at an assumed initial public offering price of $16.00 per share, the mid-point of the price range set forth on the cover page of this prospectus, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us, the pro forma net tangible book value of our common stock as of September 30, 2006 would have been approximately $1,558 million, or $9.56 per share. This represents an immediate dilution in net tangible book value of $6.44 per share to new investors purchasing shares of common stock in this offering. The following table illustrates this dilution per share:

Assumed initial public offering price per share			$	16.00
Pro forma net tangible book value per share as of September 30, 2006(a)	$	7.01
Increase in pro forma net tangible book value per share attributable to new investors(b)		2.55
Pro forma net tangible book value per share after this offering				9.56
Dilution in pro forma net tangible book value per share to new investors			$	6.44

(a) Determined by dividing our pro forma net tangible book value by the number of shares of our common stock held by Halliburton after giving effect to the 135,627-for-one split of our common stock effected in October 2006 in connection with this offering.

(b) Determined by dividing our pro forma net tangible book value, after giving effect to this offering, by 163,467,000, the total number of shares of our common stock to be outstanding after this offering.

A $1.00 increase (decrease) in the assumed initial public offering price of $16.00 per share would increase (decrease) our pro forma net tangible book value after giving effect to this offering by $26.2 million, the pro forma net tangible book value per share after giving effect to this offering by $0.16 per share and the dilution in pro forma net tangible book value per share to new investors in this offering by $(0.16) per share assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

Assuming this offering had occurred on September 30, 2006, the following table summarizes the differences between the total consideration paid and the average price per share paid by our current stockholder and affiliate and the investors in this offering with respect to the number of shares of common stock purchased from us, before deducting underwriting discounts and commissions and estimated offering expenses payable by us.

	Shares Purchased			Total Consideration				Average Price Per Share
	Number	Percent		Amount		Percent
	(in millions, except per share amounts)
Current stockholder and affiliate	135,764,500	83	%	$	1,453	77	%	$	10.70
Investors in this offering	27,840,000	17			445	23			16.00
Total	163,604,500	100.0	%	$	1,898	100.0	%

40

The tables and calculations above:

• include the $2.2 million of restricted stock to be granted to our Chief Executive Officer immediately following the closing of this offering pursuant to the terms of his employment agreement (estimated to be 137,500 shares based on an assumed fair market value of our common stock of $16.00 per share, which is the mid-point of the offering price range indicated on the cover of this prospectus);

• do not include 4,176,000 shares of common stock that we will issue if the underwriters exercise their over-allotment option in full; and

• do not include the shares reserved for issuance under our 2006 stock and incentive plan, including the shares issuable upon the vesting/exercise of the awards expected to be granted shortly after the closing of this offering as described under “Management—KBR, Inc. 2006 Stock and Incentive Plan,” other than the $2.2 million of restricted stock to be granted to our Chief Executive Officer.

A $1.00 increase (decrease) in the assumed initial public offering price of $16.00 per share would increase (decrease) total consideration paid by investors in this offering, total consideration paid by all stockholders and average price per share paid by investors in this offering by $27.8 million, $27.8 million and $1, respectively, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and before deducting underwriting discounts and commissions and estimated offering expenses payable by us.

41

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The following unaudited pro forma condensed consolidated financial statements as of and for the nine months ended September 30, 2006 and for the year ended December 31, 2005 give effect to the initial public offering of our common stock and other transactions. For purposes of the unaudited pro forma condensed consolidated balance sheet we assume that the initial public offering and related transactions occurred as of September 30, 2006, and for the unaudited pro forma consolidated statements of operations for the year ended December 31, 2005 and for the nine months ended September 30, 2006 we assume that the offering and related transactions occurred on January 1, 2005. In October 2006, we repaid $324 million in aggregate principal amount of the indebtedness we owe to subsidiaries of Halliburton under subordinated intercompany notes. At September 30, 2006, the outstanding principal balance of this indebtedness was $774 million. We expect to repay in full the remaining indebtedness owed under the subordinated intercompany notes with net proceeds from this offering and, if the net proceeds from this offering are not sufficient to repay the indebtedness in full, available cash balances from other sources that are permitted by the covenants under our revolving credit facility. Please read “Use of Proceeds” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.” We have excluded from our computation of earnings per share any shares issued in this offering for which the proceeds will be used for general business purposes. These adjustments are described in the accompanying notes to the unaudited pro forma condensed consolidated financial statements.

Halliburton has advised us that it intends to dispose of our common stock that it owns following this offering as expeditiously as possible through a tax-free distribution to Halliburton’s stockholders. Halliburton has advised us that it has requested a ruling from the Internal Revenue Service that, among other things, no gain or loss will be recognized by Halliburton or its stockholders as a result of the distribution. Halliburton also intends to obtain an opinion of counsel related to the tax-free nature of the distribution. The determination of whether, and if so, when, to proceed with the distribution is entirely within the discretion of Halliburton. If Halliburton does not proceed with the distribution, it could elect to dispose of our common stock in a number of different types of transactions, including additional public offerings, open market sales, sales to one or more third parties or split-off offerings to Halliburton’s stockholders that would allow for the opportunity to exchange Halliburton shares for shares of our common stock or a combination of these transactions. Because the ultimate method and timing of the disposition of our common stock held by Halliburton is unknown, no pro forma adjustments have been made with regard to these potential transactions.

We intend to enter into transition services agreements with Halliburton immediately prior to completing this offering. While these agreements will be newly executed, the transition services covered will primarily represent those that have historically been provided to us by Halliburton and vice versa. The costs of these services have been and will continue to be charged to us based on Halliburton’s cost of providing the specific service. This also applies to services we provide to Halliburton. As the terms of the agreements would not materially change the historical amounts reflected in our financial statements, we have not given effect to these agreements in the following pro forma condensed consolidated financial statements.

The unaudited pro forma condensed consolidated financial statements and accompanying notes should be read together with the related historical consolidated financial statements and notes thereto appearing elsewhere in this prospectus. We derived the unaudited pro forma condensed consolidated financial statements by adjusting the historical consolidated financial statements of KBR Holdings, LLC and its subsidiaries. At or before the closing of this offering, KBR will own KBR Holdings, LLC. These adjustments are based on currently available information and certain estimates and assumptions and, therefore, the actual effects of the offering and related

42

transactions may differ from the effects reflected in the unaudited pro forma condensed consolidated financial statements. However, management believes that the assumptions provide a reasonable basis for presenting the significant effects of the offering and related transactions as contemplated and that the pro forma adjustments give appropriate effect to those assumptions and are properly applied in the unaudited pro forma condensed consolidated financial statements.

You should read the following information in conjunction with “Selected Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and the related notes included elsewhere in this prospectus.

43

KBR, INC.

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET

AS OF SEPTEMBER 30, 2006

(In millions)

	As of September 30, 2006 KBR Holdings, LLC Historical			(a)			As of September 30, 2006 KBR Holdings, LLC Pro Forma			(b)			(c)		(d)			As of September 30, 2006 KBR, Inc. Pro Forma As Adjusted
Cash and equivalents	$	1,022		$	(324	)	$	698		$			$	416	$	(450	)	$	664
Receivables		2,053						2,053											2,053
Other current assets		995						995											995
Total current assets		4,070			(324	)		3,746						416		(450	)		3,712
Other assets		1,672						1,672											1,672
Total Assets	$	5,742		$	(324	)	$	5,418						416	$	(450	)		5,384
Accounts payable	$	1,209					$	1,209										$	1,209
Advanced billings		1,059						1,059											1,059
Other current liabilities		648						648											648
Total current liabilities		2,916						2,916											2,916
Note payable to related party		774			(324	)		450								(450	)		—
Other liabilities		487						487											487
Total liabilities		4,177			(324	)		3,853								(450	)		3,403
Minority interest		112						112											112
Member’s equity		1,542						1,542			(1,542	)							—
Accumulated other comprehensive loss		(89	)					(89	)										(89	)
Common stock		—						—						—					—
Paid-in capital		—						—			1,542			416					1,958
Retained earnings		—						—						—					—
Total member’s/stockholders’ equity		1,453						1,453						416					1,869
Total liabilities, minority interest, and member’s/stockholders’ equity	$	5,742		$	(324	)	$	5,418		$			$	416	$	(450	)	$	5,384

See Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements.

44

KBR, INC.

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF

OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2005

(In millions, except per share amounts)

	For the year ended December 31, 2005 KBR Holdings, LLC Historical			(e)		(f)			For the year ended December 31, 2005 KBR Holdings, LLC Pro Forma			(f)			For the year ended December 31, 2005 KBR, Inc. Pro Forma As Adjusted
Revenue	$	10,146		$	12	$			$	10,158		$			$	10,158
Cost of services		9,716								9,716						9,716
General and administrative		85								85						85
Gain on sale of assets		(110	)							(110	)					(110	)
Total operating costs and expenses		9,691								9,691						9,691
Operating income		455			12					467						467
Interest expense—related party		(24	)				10			(14	)		14			—
Interest income (expense), net		(4	)							(4	)					(4	)
Foreign currency gains		7								7						7
Other		(1	)							(1	)					(1	)
Income from continuing operations before income taxes and minority interest		433			12		10			455			14			469
Benefit (provision) for income taxes		(182	)				(4	)		(186	)		(5	)		(191	)
Minority interests		(41	)							(41	)					(41	)
Income from continuing operations	$	210		$	12	$	6		$	228		$	9		$	237
Historical basic and diluted income from continuing operations per share(g)	$	1.54
Pro forma basic and diluted income from continuing operations per share(g)															$	1.45
Weighted average shares outstanding:
Basic and diluted(g)		136														163

See Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements.

45

KBR, INC.

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF

OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006

(In millions, except per share amounts)

	For the nine months ended September 30, 2006 KBR Holdings, LLC Historical			(e)		(f)			For the nine months ended September 30, 2006 KBR Holdings, LLC Pro Forma			(f)			For the nine months ended September 30, 2006 KBR, Inc. Pro Forma As Adjusted
Revenue	$	7,124		$	1	$			$	7,125		$			$	7,125
Cost of services		6,932								6,932						6,932
General and administrative		73								73						73
Gain on sale of assets		(6	)							(6	)					(6	)
Total operating costs and expenses		6,999			—					6,999						6,999
Operating income		125			1					126						126
Interest expense—related party		(35	)				15			(20	)		20			—
Interest income (expense), net		11								11						11
Foreign currency losses		(14	)							(14	)					(14	)
Other		—								—						—
Income from continuing operations before income taxes and minority interest		87			1		15			103			20			123
Benefit (provision) for income taxes		(64	)				(5	)		(69	)		(7	)		(76	)
Minority interests		15								15						15
Income from continuing operations	$	38		$	1	$	10		$	49		$	13		$	62
Historical basic and diluted income from continuing operations per share(g)	$	0.28
Pro forma basic and diluted income from continuing operations per share(g)															$	0.38
Weighted average shares outstanding:
Basic and diluted(g)		136														163

See Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements.

46

KBR, INC.

NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Income Taxes

Our income tax expense is calculated on a pro rata basis. Under this method, income tax expense is determined based on our operations and their contributions to income tax expense of the Halliburton consolidated group. A second method which is available for determining tax expense is the separate return method. Under the separate return method, our income tax expense is calculated as if we had filed tax returns for our own operations, excluding other Halliburton operations. If we had calculated income tax expense from continuing operations using the separate return method as of January 1, 2005, our income tax expense from continuing operations recorded in 2005 would have been $154 million resulting in an effective tax rate of 36%. In addition, our income from continuing operations would have been $238 million, or $1.46 per diluted share, for the year ended December 31, 2005. Income tax expense from continuing operations for the nine months ended September 30, 2006 would have been $56 million, resulting in an effective tax rate of 64% under the separate return method. In addition, our income from continuing operations would have been $46 million, or $0.28 per diluted share, for the nine months ended September 30, 2006. Similarly, if we had calculated income tax expense from discontinued operations using the separate return method as of January 1, 2005, the income tax expense recorded in 2005 would have been $11 million, resulting in an effective tax rate of 25%. In addition, our income from discontinued operations would have been $33 million, or $0.20 per diluted share, for the year ended December 31, 2005. Income tax expense from discontinued operations for the nine months ended September 30, 2006 would have been $44 million, resulting in an effective tax rate of 33% under the separate return method. In addition, our income from discontinued operations would have been $91 million, or $0.56 per diluted share, for the nine months ended September 30, 2006.

Note 2. Pro Forma Adjustments and Assumptions

Pro Forma Balance Sheet

(a) Reflects the October 2006 repayment of $324 million in aggregate principal amount of the indebtedness we owe to subsidiaries of Halliburton under subordinated intercompany notes. At September 30, 2006, the outstanding principal balance of this indebtedness was $774 million.

(b) Reflects the contribution as of September 30, 2006 by a wholly owned subsidiary of Halliburton of 100% of the outstanding equity interests in KBR Holdings, LLC to KBR, Inc. KBR, Inc.’s capital structure consists of 300,000,000 authorized shares of common stock, par value $0.001 per share, of which 135,627,000 common shares are issued and outstanding prior to the completion of this offering and 27,840,000 additional common shares will be issued pursuant to this offering (32,016,000 common shares if the underwriters exercise their over-allotment option in full). KBR, Inc.’s capital structure also consists of 50,000,000 shares of preferred stock, par value $0.001 per share, of which 0 preferred shares will be issued and outstanding prior to and upon completion of this offering.

(c) Represents the public offering of 27,840,000 million shares of common stock at an assumed initial public offering price of $16.00 per share, the mid-point range of the price range set forth on the cover page of this prospectus, resulting in net proceeds of $416 million, after paying estimated offering expenses of $3.6 million and after paying underwriting discounts and commissions, and the reclassification of $0 of offering costs incurred as of September 30, 2006 from “Other Assets” to “Paid-in Capital.” A $1.00 increase (decrease) in the assumed initial public offering price of $16.00 per share would increase (decrease) the net proceeds to us from this offering by $26.2 million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and commissions, our estimated offering expenses and the reclassification of offering costs.

(d) Reflects the repayment in full of the remaining indebtedness we owe under the subordinated intercompany notes with net proceeds from this offering and, if the net proceeds from this offering are not sufficient to repay the indebtedness in full, available cash balances from other sources that are permitted by the covenants under our revolving credit facility.

47

Pro Forma Income Statement

(e) Reflects equity in earnings from the investments in three joint ventures that own and operate vessels equipped to provide services to oil and gas platforms and rigs off the coast of Mexico that were contributed to us by Halliburton on April 1, 2006 of $1 million and $12 million for the nine months ended September 30, 2006 and the year ended December 31, 2005, respectively. The contribution was accounted for using the equity method of accounting.

(f) Reflects the elimination of all intercompany interest expense in the amounts of $35 million and $24 million for the nine months ended September 30, 2006 and for the year ended December 31, 2005, respectively, related to the repayment in full of the indebtedness owed to subsidiaries of Halliburton under subordinated intercompany notes as described in Note (a) and Note (d). The pro forma adjustment to eliminate the historical intercompany interest expense was pro rated between the “pro forma” and “pro forma as adjusted” columns for each period based on the relative repayments of intercompany indebtedness as described in Notes (a) and (d). The tax effect of the pro forma adjustments impacting income from continuing operations is calculated using a 35% effective tax rate.

(g) At or before the closing of this offering, KBR will own KBR Holdings, LLC. Consequently, the pro forma basic and diluted per share information is derived from the results of KBR Holdings, LLC and the 135,627,000 shares issued in the formation of KBR, Inc. The pro forma basic and diluted per share information includes an incremental 27,840,000 shares that we expect to be outstanding resulting from the offering (not including any over-allotment exercise). Proceeds from this offering are being used entirely to repay the intercompany notes to subsidiaries of Halliburton. Therefore, we have included the 27,840,000 shares to be issued in this offering in pro forma weighted average shares outstanding, for basic and diluted shares. Prior to the completion of this offering, there will be no outstanding options to purchase shares of our common stock or other potentially dilutive securities outstanding. In connection with the offering, certain employees will be awarded stock option grants to purchase shares of our stock, restricted stock grants, or restricted stock unit grants. However, the number of these awards has not been determined at this time.

Pro Forma Weighted Average Shares Outstanding

	Basic	Diluted
Shares issued in formation of KBR, Inc.	135,627,000	135,627,000
Shares issued in this public offering	27,840,000	27,840,000
Pro forma, as adjusted	163,467,000	163,467,000

48

SELECTED CONSOLIDATED FINANCIAL DATA

The following table shows selected consolidated financial data of KBR Holdings, LLC and its subsidiaries for the periods and as of the dates indicated. The selected financial data as of December 31, 2004 and 2005 and for the years ended December 31, 2003, 2004 and 2005 are derived from the audited financial statements of KBR Holdings, LLC included elsewhere in this prospectus. The selected financial data as of December 31, 2001, 2002 and 2003 and September 30, 2005, and for the years ended December 31, 2001 and 2002 are derived from the unaudited financial statements of KBR Holdings, LLC that are not included in this prospectus. The selected data as of September 30, 2006 and the nine months ended September 30, 2005 and 2006 are derived from the unaudited financial statements of KBR Holdings, LLC included elsewhere in this prospectus. In the opinion of our management, the unaudited consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and include all adjustments necessary to present fairly the information set forth therein. Interim results are not necessarily indicative of full year results. KBR Holdings, LLC and its subsidiaries currently conduct the business described in this prospectus. At or before the closing of this offering, KBR will own KBR Holdings, LLC.

Prior to October 30, 2006, the existing ownership interest of the member of KBR Holdings, LLC was represented by 100 shares. On October 30, 2006, the sole member of KBR Holdings, LLC effected a 1,356,270-for-one split of KBR Holdings, LLC’s outstanding shares. On October 27, 2006, our board of directors approved a 135,627-for-one split of KBR, Inc.’s common stock. As a result of these splits, the number of outstanding shares of KBR Holdings, LLC equals the number of outstanding shares of KBR, Inc. common stock held by Halliburton prior to this offering. Share and per share data of KBR Holdings, LLC for all periods presented herein have been adjusted to reflect the share split.

You should read the following information in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and the related notes included elsewhere in this prospectus.

	Years Ended December 31,															Nine Months Ended September 30,
	2001			2002			2003			2004			2005			2005			2006
	(In millions, except for per share amounts)
Statement of Operations Data:
Total revenue	$	4,795		$	5,125		$	8,863		$	11,906		$	10,146		$	7,422		$	7,124
Operating costs and expenses:
Cost of services		4,731			5,218			8,849			12,171			9,716			7,102			6,932
General and administrative		38			89			82			92			85			65			73
Gain on sale of assets		—			—			(4	)		—			(110	)		(93	)		(6	)
Operating income (loss)		26			(182	)		(64	)		(357	)		455			348			125
Interest expense and other		(3	)		1			(41	)		(28	)		(22	)		(19	)		(38	)
Income (loss) from continuing operations before income taxes and minority interest		23			(181	)		(105	)		(385	)		433			329			87
Benefit (provision) for income taxes		(18	)		98			(11	)		96			(182	)		(138	)		(64	)
Minority interest in net income of consolidated subsidiaries		(23	)		(45	)		(26	)		(25	)		(41	)		(29	)		15
Income (loss) from continuing operations		(18	)		(128	)		(142	)		(314	)		210			162			38
Income from discontinued operations, net of tax provisions		10			15			9			11			30			22			87
Cumulative effect of change in accounting principle, net		—			21			—			—			—			—			—
Net income (loss)	$	(8	)	$	(92	)	$	(133	)	$	(303	)	$	240		$	184		$	125
Basic and diluted income (loss) per share:
—Continuing operations	$	(0.13	)	$	(0.94	)	$	(1.04	)	$	(2.31	)	$	1.54		$	1.19		$	0.28
—Discontinued operations		0.07			0.11			0.06			0.08			0.22			0.16			0.64
—Cumulative effect of change in accounting principle		—			0.15			—			—			—			—			—
Historical basic and diluted net income per share	$	(0.06	)	$	(0.68	)	$	(0.98	)	$	(2.23	)	$	1.76		$	1.35		$	0.92
Historical weighted average shares outstanding		136			136			136			136			136			136			136
Other Financial Data:
Capital expenditures	$	54		$	161		$	63		$	74		$	76		$	50		$	50
Depreciation and amortization expense		56			29			51			52			56			44			32

49

	At December 31,										At September 30,
	2001		2002		2003		2004		2005		2005		2006
	(In millions)
Balance Sheet Data:
Cash and equivalents	$	353	$	858	$	439	$	234	$	394	$	353	$	1,022
Net working capital		1,019		913		882		765		944		972		1,154
Property, plant and equipment, net		299		411		431		467		444		438		481
Total assets		3,429		4,031		5,532		5,487		5,182		4,820		5,742
Total debt (including payable and notes payable to related party)		436		756		1,242		1,248		808		1,236		799
Member’s equity		1,225		1,133		944		812		1,256		944		1,453

49.1

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with “Selected Consolidated Financial Data” and the consolidated financial statements and notes thereto of KBR Holdings, LLC appearing elsewhere in this prospectus. This discussion and analysis contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under “Risk Factors” and elsewhere in this prospectus. Please read “Cautionary Statement About Forward-Looking Statements” for a discussion of the uncertainties, risks and assumptions associated with these statements. References in this discussion to “KBR” mean KBR, Inc., references to the terms “we,” “us” or other similar terms mean KBR and its subsidiaries, and references to “Halliburton” mean Halliburton Company and its subsidiaries (excluding us), unless the context indicates otherwise. KBR Holdings, LLC and its subsidiaries currently conduct the business described in this prospectus. At or before the closing of this offering, KBR will own KBR Holdings, LLC. For convenience, we describe our business in this prospectus as if KBR had been the owner prior to the completion of this offering.

Executive Summary

We are an indirect wholly owned subsidiary of Halliburton and a global engineering, construction and services company supporting the energy, petrochemicals, government services, and civil infrastructure sectors. We offer our wide range of services through our two business segments, Energy and Chemicals (E&C) and Government and Infrastructure (G&I).

Energy and Chemicals. Our E&C segment designs and constructs energy and petrochemical projects, including large, technically complex projects in remote locations around the world. Our expertise includes onshore oil and gas production facilities, offshore oil and gas production facilities (which we refer to collectively as our offshore projects), pipelines, liquefied natural gas (LNG) and gas-to-liquids (GTL) gas monetization facilities (which we refer to collectively as our gas monetization projects), refineries, petrochemical plants (such as ethylene and propylene), and synthesis gas (Syngas). We provide a wide range of engineering, procurement, construction, facility commissioning and start-up (EPC-CS) services, as well as program and project management, consulting and technology services.

Government and Infrastructure. Our G&I segment delivers on-demand support services across the full military mission cycle from contingency logistics and field support to operations and maintenance on military bases. In the civil infrastructure market, we operate in diverse sectors, including transportation, waste and water treatment, and facilities maintenance. We provide program and project management, contingency logistics, operations and maintenance, construction management, engineering, and other services to military and civilian branches of governments and private customers worldwide. A significant portion of our G&I segment’s current operations relate to the support of United States government operations in the Middle East, which we refer to as our Middle East operations. We are also the majority owner of Devonport Management Limited (DML), which owns and operates Devonport Royal Dockyard, Western Europe’s largest naval dockyard complex. Our DML shipyard operations are primarily engaged in refueling nuclear submarines and performing maintenance on surface vessels for the U.K. Ministry of Defence (MoD) as well as limited commercial projects.

Halliburton is continuing its previously announced plans to divest its interest in KBR and its subsidiaries, including KBR Holdings, LLC and all related operations. The first step in this plan is the initial public offering of KBR common stock. Upon the closing of this offering, Halliburton will continue to hold a controlling interest in KBR. We have been advised that Halliburton intends to dispose of its remaining ownership following this offering as expeditiously as possible through a tax-free distribution to Halliburton’s stockholders. Halliburton has advised us that it has requested a ruling from the Internal Revenue Service that, among other things, no gain or loss will be recognized by Halliburton or its stockholders as a result of the distribution. Halliburton also intends to obtain an opinion of counsel related to the tax-free nature of the distribution. The determination of whether,

50

and if so, when, to proceed with the distribution is entirely within the discretion of Halliburton. If Halliburton does not proceed with the distribution, it could elect to dispose of our common stock in a number of different types of transactions, including additional public offerings, open market sales, sales to one or more third parties or split-off offerings to Halliburton’s stockholders that would allow for the opportunity to exchange Halliburton shares for shares of our common stock or a combination of these transactions. Prior to the closing of this offering, we will enter into various agreements to complete the separation of our business from Halliburton, including, among others, a master separation agreement, transition services agreements and a tax sharing agreement. For a description of these agreements and the other agreements that we will enter into with Halliburton, please read “Our Relationship With Halliburton.”

We have no history of operating as a separate publicly-traded company. In the first year of our separation from Halliburton, we anticipate incurring approximately $13 million of additional cost of services and approximately $23 million of additional general and administrative expense associated with being a separate publicly traded company, including approximately $8 million of expense for stock-based compensation. These public company expenses include anticipated compensation and benefit expenses of our executive management and directors (including stock-based compensation), costs associated with our long-term incentive plan, expenses associated with the preparation of annual and quarterly reports, proxy statements and other filings with the SEC, independent auditor fees, investor relations activities, registrar and transfer agent fees, incremental director and officer liability insurance costs and higher insurance costs due to the unavailability of Halliburton’s umbrella insurance coverage. We expect to incur additional one-time system costs of approximately $10 million to replace certain human resources and payroll-related IT systems we currently share with Halliburton and are not included in the scope of our current SAP implementation process.

Our management intends to continue its efforts in reviewing potential cost savings to make our business more efficient (see “Business Environment and Recent Developments—Restructuring”). These reviews could result in reductions in general and administrative and other overhead costs. In order to implement 2007 cost savings, we may need to record related restructuring charges, some of which could occur as early as the fourth quarter of 2006.

We expect to make grants of stock options, restricted stock and restricted stock units to our executive officers and a number of our employees shortly after the completion of this offering as described under “Management—KBR, Inc. 2006 Stock and Incentive Plan.” We also expect to make annual grants of restricted stock units to our outside directors as described under “Management—Board Structure and Compensation of Directors.” Any amounts recorded related to stock-based compensation would include the fair value of estimated awards of stock options, restricted stock and/or restricted stock units to our outside directors, executive officers and other employees that we anticipate granting after the offering. The estimated fair value of these grants will be determined using the Black-Scholes pricing model in accordance with Financial Accounting Standards Board Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (SFAS 123(R)).

Business Environment and Recent Developments

Although we provide a wide range of services, our business in both our E&C segment and our G&I segment is heavily focused on major projects. At any given time, a relatively few number of projects and joint ventures represent a substantial part of our operations. Our projects are generally long term in nature and are impacted by factors including local economic cycles, introduction of new governmental regulation, and governmental outsourcing of services. Demand for our services depends primarily on our customers’ capital expenditures and budgets for construction and defense services. We are currently benefiting from increased capital expenditures by our petroleum and petrochemical customers driven by high crude oil and natural gas prices and general global economic expansion. Additionally, we expect the heightened focus on global security and major military force realignments, as well as a global expansion in government outsourcing, to increase demand for our services.

E&C Segment. Our E&C segment designs and constructs energy and petrochemical projects throughout the world, including LNG and GTL facilities, refineries, petrochemical plants, offshore oil and gas production

51

platforms, and Syngas facilities. In order to meet growing energy demands, oil and gas companies are increasing their exploration, production, and transportation spending to increase production capacity and supply. Production companies are investing in development projects that may not have been economically viable when oil and gas price levels were lower than they are today. Our experience in providing engineering, design and construction services in the oil and gas industry positions us to benefit from the growth expected across the various oil and gas sectors. We are particularly well positioned to capitalize on the anticipated near-term growth in LNG/GTL infrastructure as illustrated by the projects discussed below.

In March 2005, we were awarded, through a 50%-owned joint venture, a fixed-price gas monetization contract valued at approximately $2.0 billion at the project’s inception for the engineering, procurement, construction and commissioning of the Tangguh LNG facility in Indonesia. In April 2005, we were awarded, through a 50%-owned joint venture, a fixed-price engineering, procurement and construction (EPC) contract valued at approximately $1.8 billion at the project’s inception for a GTL facility in Escravos, Nigeria. In April 2005, we were awarded, through a joint venture, a front-end engineering design contract encompassing offshore and onshore operations to monetize significant gas resources from fields located offshore of Angola. In July 2005, we were awarded, through a joint venture, a cost-reimbursable front-end engineering design contract and an option for a cost-reimbursable engineering, procurement and construction management (EPCm) contract for the greater Gorgon Downstream LNG project in Western Australia. In August 2005, we renewed an alliance with one of our joint venture partners in order to build upon its strength and work together to pursue and execute the engineering and construction of LNG and GTL projects around the world. In September 2005, this joint venture was awarded a cost-reimbursible contract to provide front-end engineering and design work for a GTL project in Qatar as described further below. In September 2005, we were awarded, through a 33%-owned joint venture, a fixed-price contract valued at approximately $2.4 billion at the project’s inception to provide engineering, procurement, construction, pre-commissioning, commissioning, start-up, and operations services for Yemen’s first LNG plant.

We have an investment in a development corporation that has an indirect interest in the new Egypt Basic Industries Corporation (EBIC) ammonia plant project located in Egypt. We are performing the EPC work for the project and operations and maintenance services for the facility. We own 60% of this development corporation and consolidate it for financial reporting purposes within our E&C segment. The development corporation owns a 25% ownership interest in a company that consolidates the ammonia plant, which is considered a variable interest entity. The development corporation accounts for its investment in the company using the equity method of accounting. The variable interest entity is funded through debt and equity. We are not the primary beneficiary of the variable interest entity. As of September 30, 2006, the variable interest entity had total assets of $297 million and total liabilities of $149 million. Our maximum exposure to loss on our equity investments at September 30, 2006 is limited to our investment of $15 million and our commitment to fund an additional $3 million of stand-by equity. In August 2006, the lenders providing the construction financing notified EBIC that it was in default of the terms of its debt agreement, which effectively prevents the project from making additional borrowings until such time as certain security interests in the ammonia plant assets related to the export facilities can be perfected. Indebtedness under the debt agreement is non-recourse to us. At this time, we are continuing to work on the project, and we understand that discussions with the lenders regarding the security interests are ongoing. No event of default has occurred pursuant to our EPC contract as we have been paid all amounts due from EBIC. We believe EBIC may potentially cure the default by perfecting the lenders’ security interest in the port assets. In addition, EBIC may be required to construct its export facilities at a location farther from the plant than was originally planned. This would require an increase to the overall project cost and a change order, which we estimate at $5 million. In addition, we have been instructed by EBIC to cease work on one location of the project on which the ammonia storage tanks were originally planned to be constructed and have been instructed to perform soil testing at an alternative site in the vicinity of the original site. We understand this potential relocation of the ammonia storage site is in connection with the security interest described above. In addition to the schedule delays, we estimate that the cost of moving to the alternate ammonia storage site would result in additional EPC costs of up to $6 million, and we would have entitlement to a change order to recover our costs. Any solution resulting in additional costs could require EBIC to raise additional financing, some of which could be from us and the other current stakeholders. If the default under the debt agreement is not cured, the project

52

may not have sufficient financing to continue, which could result in an impairment of our investment and a termination of our EPC contract with EBIC, which could result in a reduction of our profits or a recognition of a loss.

52.1

In the second quarter of 2006, we identified a $148 million charge, before income taxes and minority interest, related to our consolidated 50%-owned GTL project in Escravos, Nigeria. This charge was primarily attributable to increases in the overall estimated cost to complete the project. The project, which was awarded in April 2005, was approximately 38% complete as of September 30, 2006 and has experienced delays relating to civil unrest and security on the Escravos River, near the project site. Further delays have resulted from scope changes and engineering and construction modifications. In October 2006, we reached agreement with our customer to fund approximately $206 million of the $269 million in unapproved change orders outstanding at September 30, 2006. In addition, portions of the remaining work now have a lower risk profile, particularly with respect to security and logistics. However, we are obligated to fund our portion of additional construction losses, if any.

In May 2006, we completed the sale of the Production Services group, which was part of our E&C segment. In connection with the sale, we received net proceeds of $265 million and recorded a pre-tax gain of $120 million, net of post-closing adjustments, in the second quarter of 2006. The results of operations of the Production Services group for the current and prior periods have been reported as discontinued operations.

In July 2006, we were awarded, through a 50%-owned joint venture, a contract with Qatar Shell GTL Limited to provide project management and cost-reimbursable EPCm services for the Pearl GTL project in Ras Laffan, Qatar in addition to the front-end engineering and design work we were awarded in 2005. The project, which is expected to be completed by 2011, consists of offshore upstream gas production facilities and an onshore GTL plant that is expected to produce 140,000 barrels per day of GTL products and approximately 120,000 barrels of oil equivalent of natural gas liquids per day.

Also in July 2006, we were awarded a fixed-price EPCm contract by Saudi Kayan Petrochemical Company for a 1.35 million ton per year ethelyne plant in Jubail City, Saudi Arabia.

On April 1, 2006, Halliburton contributed to us its interest in three joint ventures, which are accounted for using the equity method of accounting. These joint ventures own and operate offshore vessels equipped to provide various services, including accommodations, catering and other services to sea-based oil and gas platforms and rigs off the coast of Mexico. At March 31, 2006, the contributed interest in the three joint ventures had a book value of $26 million.

G&I Segment. Our G&I segment provides support services to military and civilian branches of governments throughout the world, many of whom are increasing the use of outsourced service providers in order to focus on core functions and address budgetary constraints. G&I’s most significant contract is the worldwide U.S. Army logistics contract known as LogCAP III. We were awarded the competitively bid LogCAP III contract in December 2001 from the Army Materiel Command to provide worldwide United States Army logistics services. The initial term of the contract was one year, with nine one-year renewal options. We are currently in the fifth year of the contract.

In August 2006, we were awarded a $3.5 billion task order under our LogCAP III contract for additional work through 2007. Despite this award, we expect the volume of work under LogCAP III to decline as our customer scales back the amount of services we provide under this contract. In August 2006, the DoD issued a request for proposals on a new competitively bid, multiple service provider LogCAP IV contract to replace the current LogCAP III contract. We are currently the sole service provider under the LogCAP III contract and in October 2006, we submitted the final portion of our bid on the LogCAP IV contract. We understand that the contract will be awarded during the fourth quarter of 2006. We expect to complete all open task orders under our LogCAP III contract during 2007. In the first nine months of 2006, Iraq-related work contributed $3.6 billion to consolidated revenue and $120 million to consolidated operating income, resulting in a 3.3% margin before corporate costs and taxes. We were awarded $113 million in LogCAP award fees during the first nine months of 2006 as a result of our performance rating. During the almost five-year period we have worked under the LogCAP III contract, we have been awarded 58 “excellent” ratings out of 70 total ratings.

53

We also expect the volume of our work under our DML joint venture’s contract to refit the MoD’s nuclear submarine fleet to decline in 2009 and 2010 as we complete this round of refueling of the current fleet. As a result, we are focused on diversifying our G&I segment’s project portfolio and capitalizing on the positive government outsourcing trends with work on other MoD projects and for the United States Air Force under the AFCAP contract. In addition, in January 2006, we were awarded a competitively bid indefinite delivery/indefinite quantity contract to support the Department of Homeland Security’s U.S. Immigration and Customs Enforcement facilities in the event of an emergency. With a maximum total value of $385 million, this contract has a five-year term, consisting of a one-year base period and four one-year renewal options.

With respect to the Alice Springs-Darwin railroad project, we own a 36.7% interest in a joint venture that is the holder of a 50-year concession contract with the Australian government to operate and maintain the railway. We account for this investment using the equity method of accounting in our G&I segment. Construction on the railway was completed in late 2003, and operations commenced in early 2004. In the first quarter of 2006, we recorded a $26 million impairment charge. In addition, in the first nine months of 2006, we recorded $11 million in losses related to our investment and made $10 million in advances to the joint venture. This joint venture has sustained losses since the railway commenced operations in early 2004 and at June 30, 2006, was projected to violate the joint venture’s loan covenants. These loans are non-recourse to us. We received revised financial forecasts from the joint venture during the first quarter of 2006, which took into account decreases, as compared to prior forecasts, in anticipated freight volume related to delays in mining of minerals, as well as a slowdown in the planned expansion of the Port of Darwin and ultimately contributed to the impairment charge recorded in the first quarter of 2006. At that time, the joint venture engaged investment bankers in an effort to raise additional capital for the venture. At the end of the second quarter of 2006, our valuation of our investment took into consideration the bids tendered at that time by interested parties to accomplish this recapitalization, and no further impairment was evident. However, the efforts to raise additional capital ceased during the third quarter because all previous bids were subsequently rejected or withdrawn. The board of the joint venture is currently attempting to restructure debt payment terms and raise additional subordinated financing. In October 2006, the joint venture violated its loan covenants by failing to make an interest and principal payment. In light of the loan covenant default and the joint venture’s need for additional equity or subordinated financing, we recorded a $32 million impairment charge in the third quarter of 2006. We will receive no tax benefit as this impairment charge is not deductible for Australian tax purposes. At September 30, 2006, our investment in this joint venture was $10 million and we had $0 additional funding commitments. In addition, the senior lenders have agreed to waive the financial covenant violations through November 15, 2006 to allow the shareholders time to arrange additional subordinated financing estimated at $12 million. We have offered to fund approximately $6 million provided that other shareholders commit to funding $6 million in the aggregate and the senior lenders agree to certain concessions including a principal payment holiday for 27 months and a reduction in the debt service reserve required by the existing indenture. Even if this additional investment is made and the senior lenders grant the concessions, a further impairment of our investment may be required. We believe that without a restructuring of the joint venture’s debt and an additional commitment for financing, we will record an additional impairment charge of $10 million, representing a full impairment of our remaining investment at September 30, 2006, at some point in the future.

In April 2006, Aspire Defence, a joint venture between us, Mowlem Plc. and a financial investor, was awarded a privately financed project contract, the Allenby & Connaught project, by the MoD to upgrade and provide a range of services to the British Army’s garrisons at Aldershot and around Salisbury Plain in the United Kingdom. In addition to a package of ongoing services to be delivered over 35 years, the project includes a nine- year construction program to improve soldiers’ single living, technical and administrative accommodations, along with leisure and recreational facilities. Aspire Defence will manage the existing properties and will be responsible for design, refurbishment, construction and integration of new and modernized facilities. At September 30, 2006, we indirectly owned a 45% interest in Aspire Defence, the project company that is the holder of the 35-year concession contract. In addition, at September 30, 2006, we owned a 50% interest in each of two joint ventures that provide the construction and the related support services to Aspire Defence. Our performance through the construction phase is supported by $159 million in letters of credit and surety bonds

54

totaling $209 million, both of which have been guaranteed by Halliburton. Furthermore, our financial and performance guarantees are joint and several, subject to certain limitations, with our joint venture partners. The project is funded through equity and subordinated debt provided by the project sponsors, including us, and the issuance of publicly held senior bonds. The entities in which we hold an interest are considered variable interest entities; however, we are not the primary beneficiary of these entities. We account for our interests in each of the entities using the equity method of accounting. As of September 30, 2006, the variable interest entities had aggregate total assets of $3.0 billion and aggregate total liabilities of $3.1 billion. Our maximum exposure to project company losses as of September 30, 2006 was limited to our commitment to fund subordinated debt totaling $102 million. Our maximum exposure to construction and operating joint venture losses is limited to the funding of any future losses incurred by those entities.

During the second quarter of 2006, we recorded a $17 million charge, including a $10 million impairment charge, on an equity method investment in a road project in the United Kingdom. We received a revised financial forecast during the second quarter of 2006, which showed a decrease in estimated revenue over the life of the project. Because of this new information, we recorded an impairment charge of $10 million and a $7 million loss during the second quarter of 2006 in our equity investment. As of September 30, 2006, our investment in this joint venture and the related company that performed the construction of the road was $0. As of September 30, 2006, we owned a 25% interest in the joint venture and had $0 of remaining funding commitments.

In July 2006, we resumed work under the U.S. Army Europe Support Contract, which was originally awarded in 2005. Under this contract, we will continue to provide support services to U.S. forces deployed in the Balkans. In addition, we will provide camp operations and maintenance, and transportation and maintenance services in support of troops throughout the U.S. Army Europe’s area of responsibility, which includes over 90 countries.

Adoption of SFAS No. 123(R). Certain of our employees and directors participate in Halliburton benefit plans. Effective January 1, 2006, we adopted the fair value recognition provisions of SFAS No. 123(R) using the modified prospective application. Accordingly, we will recognize compensation expense for all newly granted awards and awards modified, repurchased, or cancelled after January 1, 2006. Compensation cost for the unvested portion of awards that are outstanding as of January 1, 2006 is recognized ratably over the remaining vesting period based on the fair value at date of grant. Also, beginning with the January 1, 2006 purchase period, compensation expense for the Halliburton 2002 Employee Stock Purchase Plan (ESPP) is being recognized. Our total stock-based compensation expense, net of tax, for employee stock option awards, restricted stock awards, and the ESPP totaled approximately $6 million in the nine months ended September 30, 2006. On a pretax basis, expensing our costs for stock option awards and the ESPP in the first nine months of 2006 totaled approximately $5 million, which was in addition to $3 million in costs we have historically expensed related to other equity-based compensation and $1 million of incremental compensation cost related to modifications of previously granted stock-based awards retained when certain employees left the company. All expenses related to stock compensation awards were charged to the segments to which each affected employee is assigned.

Barracuda-Caratinga and Belanak projects. In June 2000, we entered into a contract with Barracuda & Caratinga Leasing Company B.V., the project owner, to develop the Barracuda and Caratinga crude oilfields, which are located off the coast of Brazil. The Barracuda-Caratinga project consists of two converted supertankers, Barracuda and Caratinga, to be used as floating production, storage, and offloading units, commonly referred to as FPSOs. The project also includes 32 hydrocarbon production wells, 22 water injection wells, and all subsea flow lines, umbilicals, and risers necessary to connect the underwater wells to the FPSOs. At the beginning of the project, we received $300 million of advanced payments, which were used to fund the initial and continuing working capital for the project and were applied by Petrobras as a credit against the final invoices. The construction manager and project owner’s representative is Petrobras, the Brazilian national oil company. The original completion date for the Barracuda vessel was December 2003, and the original completion date for the Caratinga vessel was April 2004. The project was significantly behind the original schedule, due in part to change orders from the project owner, and we have experienced significant losses related to this project. Currently, the Barracuda and Caratinga vessels are both fully operational.

55

We have recorded losses on the project of $15 million, $8 million, $407 million, $238 million and $117 million for the nine months ended September 30, 2006 and the years ended December 31, 2005, 2004, 2003 and 2002, respectively. The total losses recorded through September 30, 2006 of $785 million are due to higher costs, schedule extensions and certain warranty matters. Other contributing factors to these losses included a significant reduction in productivity during the latter stages of the project and rework that was required when we began to integrate the equipment modules onto the vessels. We have been in negotiations with the project owner since 2003 to settle the various issues that have arisen and have entered into several agreements to resolve those issues. As part of these settlements, we agreed to pay $22 million in liquidated damages. We funded $34 million in cash shortfalls, net of revenue received, during the first nine months of 2006.

At Petrobras’ direction, we have replaced certain bolts located on the subsea flowlines that have failed through mid-November 2005, and we understand that additional bolts have failed thereafter, which have been replaced by Petrobras. These failed bolts were identified by Petrobras when it conducted inspections of the bolts. The original design specification for the bolts was issued by Petrobras, and as such, we believe the cost resulting from any replacement is not our responsibility. Petrobras has indicated, however, that they do not agree with our conclusion. We have notified Petrobras that this matter is in dispute. We believe several possible solutions may exist, including replacement of the bolts. Estimates indicate that costs of these various solutions range up to $140 million. Should Petrobras instruct us to replace the subsea bolts, the prime contract terms and conditions regarding change orders require that Petrobras make progress payments of our reasonable costs incurred. Petrobras could, however, perform any replacement of the bolts and seek reimbursement from us. In March 2006, Petrobras notified us that they have submitted this matter to arbitration claiming $220 million plus interest for the cost of monitoring and replacing the defective stud bolts and, in addition, all of the costs and expenses of the arbitration including the cost of attorneys fees. We disagree with Petrobras’ claim since the bolts met Petrobras’ design specifications, and we do not believe there is any basis for the amount claimed by Petrobras. We intend to vigorously defend this matter and pursue recovery of the costs we have incurred to date through the arbitration process. Under the master separation agreement we will enter into with Halliburton in connection with this offering, Halliburton will agree, subject to certain conditions, to indemnify us and hold us harmless from all cash costs and expenses incurred as a result of the replacement of the subsea bolts. As of September 30, 2006 and December 31, 2005, we have not accrued any amounts related to this arbitration.

In April 2006, we executed an agreement with Petrobras that enabled us to achieve conclusion of the lenders’ reliability test and final acceptance of the FPSOs. These acceptances eliminated any further risk of liquidated damages being assessed but did not address the bolt arbitration discussed above. Our remaining obligation under the April 2006 agreement is primarily for warranty on the two vessels.

We have completed construction on another offshore FPSO named Belanak, which is currently in production. Our work on Belanak was pursuant to a fixed-price contract on which we incurred $29 million of losses in 2004. As a result of losses sustained on the Barracuda-Caratinga and Belanak projects, we announced in 2002 that we would no longer pursue bidding on high risk fixed-price EPC-CS contracts for offshore production facilities primarily due to the fact that the risk/reward equation for these types of projects had become unacceptable to us. We believe these projects involve a disproportionate risk and require using a large share of bonding and letter of credit capacity relative to the profit contribution provided by these types of projects. In contrast to risks involved in large onshore, fixed-price EPC-CS contracts, risks involved in these projects include lack of front-end definition of scope, lack of uniform approach to project execution, disproportionate risks allocated to contractors, increase in risk profile as projects shift into deepwater frontiers, unpredictable weather and ocean current conditions and unpredictable local manufacturing conditions and capacity.

Award fees. We provide substantial work under our government contracts to the DoD and other governmental agencies. Most of the services provided to the United States government are under cost- reimbursable contracts where we have the opportunity to earn an award fee based on our customer’s evaluation of the quality of our performance. These award fees are evaluated and granted by our customer periodically. For contracts entered into prior to June 30, 2003, all award fees are recognized during the term of the contract based

56

on our estimate of amounts to be awarded. For service-only contracts entered into subsequent to June 30, 2003, award fees are recognized only when definitized and awarded by the customer (see “—Critical Accounting Estimates”). Consequently, any award fees received in connection with work we may perform under the new LogCAP IV contract will be recognized when the award fee is definitized by our customer. In 2005, our customer for the LogCAP III contract definitized and granted award fees allocated to a significant amount of cost incurred to date, many of which related to costs incurred and services provided in earlier years. Accordingly, award fees totaling $53 million in excess of amounts previously accrued were recognized in 2005. In addition, based on the award fee scores, which determined the fees awarded during 2005, we increased our award fee accrual rate on the LogCAP III contract from 50% to 72%, which resulted in an additional $14 million of award fees being recorded in 2005. In the first quarter of 2006, we received a performance rating of “excellent” for our work under the LogCAP III contract. This rating translated to an average award fee of 90%. Based on this rating, our historical experience and our assessment of our performance, we increased our award fee accrual percentage from 72% to 80% in the first quarter of 2006.

Off-balance sheet arrangements. We participate, generally through an equity investment in a joint venture, partnership or other entity, in privately financed projects that enable our government customers to finance large-scale projects, such as railroads, and major military equipment purchases. We evaluate the entities that are created to execute these projects following the guidelines of Financial Accounting Standards Board (FASB) Interpretation No. 46R (see Note 19 “Equity Method Investments and Variable Interest Entities” in the notes to our consolidated financial statements for a description of our significant unconsolidated subsidiaries that are accounted for using the equity method of accounting). These projects typically include the facilitation of non-recourse financing, the design and construction of facilities, and the provision of operations and maintenance services for an agreed to period after the facilities have been completed. Our investments in privately financed project entities totaled $21 million and $145 million at September 30, 2006 and December 31, 2005, respectively. Our equity in earnings (losses) from privately financed project entities totaled $18 million, $(12) million and $(7) million for the years ended December 31, 2005, 2004 and 2003, respectively, and $(78) million and $(28) million for the nine months ended September 30, 2006 and 2005, respectively. As of September 30, 2006 and December 31, 2005, we had commitments to fund $107 million and $35 million, respectively, related to privately financed projects.

Other. Our 2005 results include $110 million in gains on the sale of our interest in several projects including the Dulles Greenway toll road, our interest in Chiyoda, and our minority interest in two ammonia plants located in the Caribbean as well as certain equipment in an inactive fabrication yard located in Scotland. Also included in this amount is a one-time distribution for which we recorded an $11 million gain prior to the sale of our interest in the joint venture that owned the Dulles Greenway toll road.

Restructuring. Effective October 1, 2004, we restructured our operations into the two segments discussed above. As a result of the reorganization and in a continuing effort to better position our company for the future, we eliminated certain internal expenditures and streamlined the entire organization. In connection with this restructuring, we recorded a $40 million restructuring charge in 2004, which primarily related to termination benefits. Our results for 2005 reflect cost savings related to this restructuring.

Backlog. As of September 30, 2006, our total backlog for continuing operations was $15.0 billion, of which $6.0 billion, or 40%, was attributable to our E&C segment and $9.0 billion, or 60%, was attributable to our G&I segment. As of September 30, 2006, our backlog for continuing operations attributable to our E&C segment’s gas monetization projects, our DML shipyard operations, our G&I segment’s contracts associated with our Middle East operations and our E&C segment’s offshore projects was $4.2 billion, $1.2 billion, $4.2 billion and $140 million, respectively. As of September 30, 2006, our backlog under the LogCAP III contract was $4.0 billion. We were awarded a task order for approximately $3.5 billion for our continued services in Iraq through September 2007 under the LogCAP III contract. For more information, please read “Business—Backlog.”

57

Correction of prior period results. In connection with a review of our consolidated 50%-owned GTL project in Escravos, Nigeria, which is part of our E&C segment, we identified increases in the overall estimated cost to complete the project. As a result, during the second quarter of 2006, we identified a $148 million charge, before income taxes and minority interest. We determined that $16 million of the $148 million charge was based on information available to us but not reported as of March 31, 2006. Of the $16 million related to the prior periods, $9 million was related to the quarter ended March 31, 2006 and $7 million was related to the quarter ended December 31, 2005. We have restated our financial statements for the quarter ended March 31, 2006 to include the $9 million charge ($2.9 million after minority interest and tax) as well as for other unrelated, individually insignificant adjustments that subsequently became known to us. The $9 million adjustment related to Escravos had the effect of reducing income (loss) from continuing operations before income taxes and minority interest by $9 million, increasing benefit (provision) for income taxes by $1.6 million, increasing minority interest in net income of subsidiaries by $2.9 million (net of tax of $1.6 million), and reducing net income by $2.9 million for the quarter ended March 31, 2006. These other adjustments had the effect of reducing pretax income and net income by $2 million and $5 million for the quarter ended March 31, 2006, respectively. We recorded the remaining $7 million charge ($2.3 million after minority interest and income taxes) in the quarter ended June 30, 2006, since the amounts were not material to 2005 or 2006 based on our 2006 projections.

In addition to the above, we adjusted our member’s equity and other balance sheet accounts as of January 1, 2003 to reflect a correction to DML’s initial purchase price allocation from a 1997 acquisition. DML’s original purchase price allocation did not adequately record the prepaid pension asset that existed at the acquisition date. The corrected allocation of purchase price to the pension asset also had the effect of increasing negative goodwill. The resulting negative goodwill would have been reversed in 2002 upon the adoption of SFAS 141, “Business Combinations”, and reflected in “cumulative effect of change in an accounting principle, net”. Accordingly, our January 1, 2003 consolidated balance sheet has been adjusted to increase member’s equity by $34 million, to increase prepaid pension asset by $72 million, to decrease property, plant, and equipment by $2 million, to decrease deferred taxes by $12 million and to increase minority interest by $24 million. Currency translation adjustments on the above resulted in increased equity at December 31, 2005, 2004 and 2003 of $9 million, $17 million and $8 million, respectively. We do not believe these adjustments have a material impact on balances previously reported.

Material weakness in financial controls. In connection with the Escravos restatement described above, we identified a material weakness in our financial controls. During the second quarter of 2006, we discovered a large increase in our estimated costs on the Escravos project as a result of our completing a first check estimate in June 2006. A first check estimate is a detailed process by which the project’s schedule and cost is re-estimated through its completion. We perform a first check estimate once sufficient engineering work has been completed allowing for a detailed cost re-estimate based on actual engineering drawings. The large increase in estimated costs identified on the Escravos project included the estimated costs for the plant scope changes resulting from the front-end engineering design validation, the impact of inflation on procurement costs due to schedule delays, and the costs of additional security needed due to the continued deterioration of civil conditions in Nigeria that had occurred.

As a result of the significant increase in estimated costs identified in our first check estimate, we performed a review to determine why these costs were not previously estimated and communicated. From this review, we learned that even though most of the cost increases could not be identified until the rescheduling and recosting exercise of the first check estimate, there were some cost increases that should have been recognized by existing procedures related to project deviations/changes which had been identified prior to March 31, 2006 but not included in the project cost estimate as of that date. Our policies require that all estimated costs attributed to project deviations/changes be included in the project cost estimate on a timely basis.

During the second quarter of 2006, we performed an additional review of our other significant fixed-price projects and found that the control policies and procedures which had not been followed on the Escravos project were being followed on these projects, providing us assurance that the control deficiency was isolated to the Escravos project. Further, we believe the first check estimate we prepared in the second quarter of 2006 mitigated the risk of any material errors in the Escravos project as of September 30, 2006.

58

We have taken appropriate personnel actions to upgrade project control personnel on the Escravos project and we have provided additional training to these new individuals concerning our company policies relating to project deviations/changes. We are also initiating control enhancements on the Escravos project, which will help identify any similar control deficiencies on a more timely basis in the future. These include expanded monthly project reviews for the Escravos project with increased focus on project deviations/changes.

We will not be able to conclude that the control deficiency related to the Escravos project has been completely remediated until we can reassess the Escravos project controls and the other control changes we are implementing. The reassessment is planned to take place before the end of 2006.

Results of Operations

	Years Ended December 31,								Nine Months Ended September 30,
	2005		2004			2003			2006			2005
	(In millions of dollars)
Revenue: (1)
G&I - Middle East Operations	$	5,966	$	7,454		$	3,604		$	3,952		$	4,424
G&I - DML Shipyard Operations		863		738			631			629			649
G&I - Other		1,307		1,217			1,239			846			933
Total Government and Infrastructure		8,136		9,409			5,474			5,427			6,006
E&C - Gas Monetization Projects		304		223			253			535			206
E&C - Offshore Projects		463		656			1,156			250			340
E&C - Other		1,243		1,618			1,980			912			870
Total Energy and Chemicals		2,010		2,497			3,389			1,697			1,416
Total revenue	$	10,146	$	11,906		$	8,863		$	7,124		$	7,422
Operating Income (loss):
G&I - Middle East Operations	$	167	$	25		$	46		$	119		$	119
G&I - DML Shipyard Operations		62		48			44			57			45
G&I - Other		103		9			99			(37	)		113
Total Government and Infrastructure		332		82			189			139			277
E&C - Gas Monetization Projects		13		22			41			(137	)		23
E&C - Offshore Projects		30		(454	)		(277	)		6			31
E&C - Other		80		(7	)		(17	)		117			17
Total Energy and Chemicals		123		(439	)		(253	)		(14	)		71
Total operating income (loss)	$	455	$	(357	)	$	(64	)	$	125		$	348

(1) Our revenue includes both equity in the earnings of unconsolidated affiliates as well as revenue from the sales of services into the joint ventures. We often participate on larger projects as a joint venture partner and also provide services to the venture as a subcontractor. The amount included in our revenue represents our share of total project revenue, including equity in the earnings from joint ventures and revenue from services provided to joint ventures.

Nine months ended September 30, 2006 compared to nine months ended September 30, 2005

Revenue. G&I revenue decreased $579 million to $5.4 billion for the first nine months of 2006 compared to $6.0 billion for the first nine months of 2005. This decrease was primarily due to a $548 million decrease in revenue from Iraq-related activities, a $32 million decrease in revenue from a government infrastructure project in Afghanistan and $58 million of impairment charges related to an equity investment in the Alice Springs-Darwin railroad project in Australia. These decreases were partially offset by a $51 million increase in revenue related to worldwide U.S. Naval assessment and repair work under the CONCAP III contract and revenue from various other infrastructure and government related activities.

G&I revenue from our Middle East operations, which includes Iraq-related activities, for the first nine months of 2006 was $4.0 billion compared to $4.4 billion for the first nine months of 2005. This $472 million

59

decrease was primarily due to lower activity on our LogCAP III contract as our customer continued to scale back the construction and procurement related to military sites in Iraq. This decrease was partially offset by $55 million of increased revenue related to our PCO Oil South contract, which is primarily due to increased procurement in 2006. We expect that substantially all of our work under the current PCO Oil South contract will be completed by the first quarter of 2007.

G&I revenue from our DML shipyard operations for the first nine months of 2006 was $629 million compared to $649 million in the same period of 2005. This decrease reflects lower spending by the MoD. DML shipyard operations revenue and operating results generally vary with the level of service provided on military vessels in a period. In addition, DML has experienced a decrease in activity on commercial shipbuilding as certain projects near completion.

E&C revenue increased $281 million to $1.7 billion for the first nine months of 2006 compared to $1.4 billion for the first nine months of 2005. This increase in revenue was primarily due to a $329 million increase in revenue from our gas monetization projects and a recently awarded ammonia plant EPC project in Egypt, which contributed an additional $125 million to the increase. In addition, several projects in Algeria contributed an additional $100 million to the increase. These increases were partially offset by a $194 million decrease in revenue from a crude oil project in Canada, a $75 million decrease in revenue from an olefin expansion project in Texas, and decreased revenue in our offshore projects.

E&C revenue from our gas monetization projects for the first nine months of 2006 was $535 million compared to $206 million for the first nine months of 2005. This increase is primarily due to the start-up of several projects awarded in 2005 or early 2006, including the front-end engineering and design work performed by us on the Pearl project and revenue earned on the Escravos GTL project. Revenue related to these two projects increased an aggregate of $284 million in the first nine months of 2006 compared to the same period in 2005. In addition, revenue from our Yemen, Skikda and Gorgon LNG projects increased an aggregate $98 million in the first nine months of 2006 compared to the same period in 2005. These increases were partially offset by a $46 million decrease in revenue related to our Tangguh LNG project and work on Trains 4, 5 and 6 of our Nigeria LNG projects. Our work on Trains 4 and 5 is nearing completion.

E&C revenue from our offshore projects for the first nine months of 2006 was $250 million compared to $340 million for the first nine months of 2005. This decrease in revenue is primarily due to reduced activity on several offshore engineering and EPC projects, including a $41 million decrease from the Barracuda-Caratinga and Belanak projects, and a $68 million decrease from two offshore engineering and management projects. In April of 2006, we received acceptance of the FPSOs on the Barracuda-Caratinga project. These decreases were partially offset by increased revenues from several other offshore projects. Our current offshore work is primarily related to work we are performing in the Caspian Sea.

Operating Income. G&I Operating income decreased $138 million to $139 million for the nine months ended September 30, 2006 compared to $277 million for the same nine-month period of 2005. This decrease is primarily related to $58 million of impairment charges recorded on an equity investment in an Australian railroad operation and a $17 million charge, which includes a $10 million impairment charge, recorded on an equity investment in a joint venture road project in the United Kingdom. In addition, we recorded an $85 million gain on the sale of an investment in a U.S. toll road in the third quarter of 2005, which contributed to the negative variance. These decreases were partially offset by a $12 million increase in operating income from DML operations and a $6 million gain on the sale of part of our interest in a United Kingdom government project.

G&I operating income from our Middle East operations was $119 million for both the first nine months of 2006 and the first nine months of 2005. Operating income on our LogCAP III contract decreased $3 million in the first nine months of 2006 compared to the same period in 2005. In addition, the results in the first nine months of 2005 were positively impacted by the settlement of dining facilities-related issues and award fees on definitized task orders. These decreases were partially offset by higher operating income from our PCO Oil South contract.

60

G&I operating income from our DML shipyard operations for the first nine months of 2006 increased to $57 million compared to $45 million for the first nine months of 2005, primarily due to the resolution of several items with our government and private customers.

E&C operating loss for the first nine months of 2006 was $14 million, compared to operating income of $71 million in the first nine months of 2005. The $85 million decrease was primarily due to a $148 million charge related to the Escravos GTL project in Nigeria, which is included in our gas monetization projects. In addition, operating income from our offshore projects decreased $26 million and we received lower recovery of costs on a crude oil facility project in Canada. These decreases were partially offset by an aggregate $58 million increase in operating income from an ammonia project in Egypt and a gas development EPC project in Algeria.

E&C operating loss from our gas monetization projects for the first nine months of 2006 was $137 million compared to operating income of $23 million for the first nine months of 2005. In the second quarter of 2006, we identified a $148 million charge, before income taxes and minority interests, related to our Escravos GTL project in Nigeria. This charge was primarily attributable to increases in the overall estimated cost to complete the project. The project has experienced delays relating to civil unrest and security on the Escravos River, near the project site, and further delays have resulted from scope changes and engineering and construction modifications. This charge was partially offset by an increase in operating income from more recently awarded projects such as our Yemen LNG project and the front-end engineering design and other engineering work performed on our Pearl GTL project.

E&C operating income from our offshore projects for the first nine months of 2006 was $6 million compared to $31 million for the first nine months of 2005. Operating income decreased primarily due to $15 million of additional charges for our Barracuda-Caratinga project recorded in the first quarter of 2006, a $13 million decrease from an engineering and procurement project in the Caspian Sea and a $7 million decrease from an offshore engineering and management project. These decreases were partially offset by a $19 million increase from the gas development project in Algeria. In 2002, we announced that we would no longer pursue bidding on high-risk fixed-price contracts for offshore production facilities.

Non-operating items. Related party interest expense increased $19 million in the first nine months of 2006 compared to the first nine months of 2005 primarily due to the conversion of the non-interest bearing portion of our intercompany payable to Halliburton into interest bearing subordinated intercompany notes payable to subsidiaries of Halliburton, which occurred in December 2005.

Net interest income increased $13 million in the first nine months of 2006 compared to the first nine months of 2005 due primarily to additional interest earned on cash advances from our customers and on tax refunds.

Provision for income taxes from continuing operations in the first nine months of 2006 was $64 million compared to $138 million in the same period of 2005. Our effective tax rate was higher in the first nine months of 2006 primarily due to higher foreign taxes paid in that period and a non-deductible capital loss recorded on our railway project in Australia.

Minority interest in net (income) loss of subsidiaries decreased $44 million compared to the first nine months of 2005 primarily due to the loss from the consolidated 50%-owned GTL project in Escravos, Nigeria, which was partially offset by earnings from DML.

Income from discontinued operations, net of tax provision, all of which is related to the operations of our Production Services group, was $87 million for the nine months ended September 30, 2006, which included a pre-tax gain of $120 million.

Foreign currency gains (losses), net. Foreign currency gains (losses), net decreased by $11 million in the first nine months of 2006 compared to the first nine months of 2005. This decrease is primarily attributable to foreign currency losses on the proceeds from the sale of our Production Services group. These proceeds were payable in U.S. dollars and held by our U.K. subsidiary with a British Pound functional currency. The British Pound strengthened against the U.S. dollar during the period, resulting in a net loss.

61

Year ended December 31, 2005 compared to year ended December 31, 2004

Revenue. G&I revenue decreased $1.3 billion to $8.1 billion in 2005 compared to $9.4 billion in 2004. This decrease is primarily related to decreases in our Middle East operations, which was partially offset by increased revenue from DML shipyard operations and a $230 million increase in revenue associated with hurricane repair efforts for United States naval facilities under our CONCAP contract.

Revenue from our Middle East operations in 2005 was $6.0 billion compared to $7.5 billion in 2004. This $1.5 billion decrease is primarily due to the completion of our Restore Iraqi Oil (RIO) contract in 2004, which contributed $1.0 billion to the decrease, and $345 million in lower revenue from our LogCAP III contract. In addition, revenue from our PCO Oil South contract was $98 million lower in 2005 compared to 2004.

Revenue from our DML shipyard operations in 2005 was $863 million compared to $738 million in 2004. The increase was primarily attributed to an increase in commercial shipbuilding revenue associated with three new projects. DML also increased its involvement with naval support contracts in communications, weapons and spares. DML also experienced increased work associated with the MoD, DML’s largest customer.

E&C revenue decreased $487 million to $2.0 billion in 2005 compared to $2.5 billion in 2004. Revenue from our offshore projects decreased $193 million and revenue from oil and gas projects in Africa decreased $240 million. These decreases were partially offset by an $81 million increase in revenue from our gas monetization projects.

Revenue from our gas monetization projects in 2005 was $304 million compared to $223 million in 2004. This increase was primarily due to the start-up of several projects awarded in late 2004 or 2005, including the front-end engineering and design work performed on our Pearl project, and the Escravos GTL project. Revenue related to these two projects increased $95 million in 2005 compared to 2004. In addition, revenue from our Tangguh, Yemen, Gorgon and Skikda LNG projects as well as Train 6 of our Nigeria LNG project increased an aggregate $137 million of revenue in 2005 compared to 2004. These increases were partially offset by a $137 million of decreased revenue related to our Segas LNG project in Egypt and Trains 4 and 5 of our Nigeria LNG project, which were nearing completion in 2005 and early 2006.

Revenue from our offshore projects in 2005 was $463 million compared to $656 million in 2004, a decrease of $193 million. This decrease was attributable to decreased revenue from our Barracuda-Caratinga project in Brazil and Belanak project in Indonesia, which decreased an aggregate of $149 million. These two projects were either completed or were nearing completion in 2005. In addition, revenue from our PEMEX project in Mexico decreased $26 million. These decreases were partially offset by a combined $45 million increase related to our project in the Caspian Sea.

Operating income. G&I operating income increased $250 million to $332 million in 2005 compared to $82 million in 2004. Operating income from our Middle East operations and DML shipyard operations for 2005 increased $142 million and $14 million, respectively, compared to 2004. Hurricane repair efforts for United States Naval facilities on the Gulf Coast under the CONCAP construction contingency contract also contributed to the increase. Operating income in 2005 also included $96 million from the sale of and one-time cash distribution from our interest in the Dulles Greenway toll road joint venture. In addition, G&I segment results in 2004 included restructuring charges of $12 million.

Operating income from our Middle East operations in 2005 was $167 million compared to $25 million in 2004. Operating income on our LogCAP III contract increased $153 million in 2005 compared to 2004, primarily due to $43 million of additional income from award fees on definitized LogCAP III task orders, $10 million from the settlement of dining facilities-related issues, $14 million from the increase of our award fee accrual rate from 50% to 72% (due to the definitization of a substantial amount of task orders in the first six months of 2005), and $11 million as a result of resolving fuel and other issues with the customer. In addition, we incurred approximately $11 million in charges associated with potentially disallowed costs, primarily related to Iraq

62

activities, in 2005 compared to $83 million in 2004. These increases were partially offset by a decrease in operating income as we completed the RIO contract in 2004.

Operating income from our DML shipyard operations in 2005 was $62 million compared to $48 million in 2004. The increase was primarily attributable to three new commercial projects and an increase in the level of activity with the MoD, which is DML’s largest customer.

E&C operating income increased $562 million to $123 million in 2005 compared to a loss of $439 million in 2004. This increase in operating income was primarily due to losses, incurred in 2004, on our offshore projects. Operating income in 2005 also benefited from $21 million of gains on sales of assets. These increases were partially offset by a $9 million decrease in operating income from our gas monetization projects.

Operating income from our gas monetization projects in 2005 was $13 million compared to operating income of $22 million in 2004. Operating income on our Tangguh and Gorgon projects, as well as Train 6 of our Nigeria LNG project contributed $51 million in 2005. This increase was partially offset by reduced earnings due to the completion of our Segas and other projects.

Operating income from our offshore projects in 2005 was $30 million compared to an operating loss of $454 million in 2004. This increase was primarily due to losses incurred in 2004, which did not recur in 2005. These losses include a $407 million loss on the Barracuda-Caratinga project and a $29 million loss on the Belanak project.

Non-operating items. Related party interest expense increased $9 million to $24 million in 2005 compared to $15 million in 2004. This increase was primarily due to an overall increase in variable interest rates associated with our intercompany debt and interest expense charged on $774 million of intercompany notes with Halliburton, which were executed in December 2005. Prior to the execution of these notes, portions of our intercompany debt were non-interest bearing.

Provision for income taxes on income from continuing operations in 2005 of $182 million resulted in an effective tax rate of 42% compared to an effective tax rate of 25% on losses incurred in 2004. Our 2005 tax rate is higher than our statutory rate of 35% primarily due to foreign tax credit displacement resulting from the domestic net operating losses from the asbestos settlement by Halliburton. The 2004 effective rate is lower than our statutory rate of 35% due to unfavorable effect of the valuation allowance recorded on foreign tax credit carryforwards.

Minority interest in net income of subsidiaries increased $16 million to $41 million in 2005 compared to $25 million in 2004. This increase is primarily due to earnings growth from the DML shipyard and earnings from a consolidated joint venture formed in 2005 for a GTL project in Nigeria.

Income from discontinued operations, net of tax, increased $19 million to $30 million in 2005 compared to $11 million in 2004 and relates to the Production Services group that was sold in May 2006.

Year ended December 31, 2004 compared to year ended December 31, 2003

Revenue. G&I revenue increased $3.9 billion to $9.4 billion in 2004 compared to $5.5 billion in 2003. This increase was primarily due to $3.9 billion of increased revenue from our Middle East operations and $107 million of increased revenue from DML shipyard operations.

Revenue from our Middle East operations in 2004 was $7.5 billion compared to $3.6 billion in 2003. This $3.9 billion increase was primarily due to $3.8 billion of increased revenue related to our LogCAP III contract as we continued to ramp up Iraq-related services provided to our customer. In addition, we recognized $268 million in additional revenue related to the PCO Oil South contract, which began in 2004. These increases were partially offset by a $304 million decrease in revenue from our RIO contract, which was completed in 2004.

63

Revenue from our DML shipyard operations in 2004 was $738 million compared to $631 million in 2003. DML shipyard operations, revenue and operating results generally vary with the level of service provided on military vessels in a period.

E&C revenue decreased $892 million to $2.5 billion in 2004 compared to $3.4 billion in 2003. This decrease was primarily due to a $500 million decrease in revenue from our offshore projects and a $30 million decrease in revenue from our gas monetization projects. In addition, we recorded lower revenue from a hydrocarbon project in Europe in 2004 compared to 2003. These decreases were partially offset by higher revenue on refining projects in Canada and an olefins project in the United States.

Revenue from our gas monetization projects in 2004 was $223 million compared to $253 million in 2003. The decrease in revenue is primarily due to the completion of Train 3 of our Nigeria LNG project and decreased revenue from Trains 4 and 5 of our Nigeria LNG project.

Revenue from our offshore projects in 2004 was $656 million compared to $1.2 billion in 2003. Revenue decreased primarily due to a $380 million decrease in revenue from our Barracuda-Caratinga and Belanak projects, and a $90 million decrease in our PEMEX project in Mexico, as the activity related to these projects decreased. In addition, since we were no longer pursuing bids on high-risk fixed-price contracts for offshore production facilities, we did not generate any revenue from new offshore projects during these periods.

Operating income. G&I operating income decreased $107 million to $82 million in 2004 compared to $189 million in 2003. This decrease resulted from $94 million in write-downs on infrastructure projects in Europe and Africa and on a government project in Afghanistan, the completion of the construction phase of a rail project in Australia, and a reduction in activities related to the Balkans support contract. Operating income from our Middle East operations decreased $21 million, while operating income from our DML shipyard operations increased $4 million. In addition, the 2004 results were also impacted by a restructuring charge of $12 million due to the reorganization of our business into two segments, which related to personnel termination benefits.

Operating income from our Middle East operations in 2004 was $25 million compared to $46 million in 2003. Operating income on our LogCAP III contract increased $98 million in 2004 compared to 2003, primarily due the increased activity resulting from ramping up our Iraq-related services. This increase was offset by $83 million in charges incurred in 2004 associated with potentially disallowed costs, primarily related to Iraq activities.

Operating income from our DML shipyard operations in 2004 was $48 million compared to $44 million in 2003. DML shipyard operations, revenue and operating results generally vary with the level of service provided on military vessels in a period.

E&C operating loss increased $186 million to $439 million in 2004 compared to an operating loss of $253 million in 2003. This increase was primarily due to a $177 million increase in losses from our offshore projects and a decrease of $19 million in operating income from our gas monetization projects. Also included in the 2004 results was a restructuring charge of $28 million due to the reorganization of our business. The charge related to personnel termination benefits and asset impairments. Operating losses in 2004 were partially offset by an increase in a refining project in Canada.

Operating income from our gas monetization projects in 2004 was $22 million compared to operating income of $41 million in 2003. The decrease in operating income is primarily due to the winding down of our work related to Train 3 of our Nigeria LNG project and our Segas project in Egypt.

Operating loss from our offshore projects in 2004 was $454 million compared to an operating loss of $277 million in 2003. This increase was primarily due to $407 million in losses incurred on our Barracuda-Caratinga project, compared to $238 million in 2003, and $29 million in losses incurred on our Belanak project. The losses recognized in 2004 on the Barracuda-Caratinga project were primarily due to an amended agreement with

64

Petrobras, higher cost estimates, schedule delays, and increased contingencies for the balance of the project. Specifically, in the second quarter, with the integration phase of the Barracuda vessel, we experienced a significant reduction in productivity and rework was required from the vessel conversion.

Non-operating items. Related party interest expense decreased $21 million to $15 million in 2004 compared to $36 million in 2003. This decrease was due primarily to restructuring and settlement of certain intercompany debt in 2003.

Our income tax benefit on income from continuing operations in 2004 of $96 million resulted in an effective tax rate of 25% on losses incurred in 2004 compared to an effective tax rate of 10% on losses incurred in 2003. The 2004 effective rate is lower than our statutory rate of 35% due to the unfavorable effect of the valuation allowance recorded on foreign tax credit carryforwards. The 2003 effective rate of 10% was also primarily due to the unfavorable effect of recording valuation allowance for foreign tax credit carryforwards and prior year return to provision adjustments.

Income from discontinued operations, net of tax, increased $2 million to $11 million in 2004 from $9 million in 2003 and relates to the Production Services group that was sold in May 2006.

Liquidity and Capital Resources

At September 30, 2006, cash and equivalents totaled $1.0 billion, and at December 31, 2005 and 2004, cash and equivalents totaled $394 million and $234 million, respectively. These balances include cash and cash from advanced payments related to contracts in progress held by ourselves or our joint ventures that we consolidate for accounting purposes and which totaled $562 million at September 30, 2006, $223 million at December 31, 2005, and $58 million at December 31, 2004. The use of these cash balances is limited to the specific projects or joint venture activities and are not available for other projects, general cash needs or distribution to us without approval of the board of directors of the respective joint venture or subsidiary.

Historically, our primary sources of liquidity were cash flow from operations, including cash advance payments from our customers, and borrowings from our parent, Halliburton. In addition, at times during 2004 and 2005, we sold receivables under our U.S. government accounts receivable facility. Effective December 16, 2005, we entered into a bank syndicated unsecured $850 million five-year revolving credit facility (Revolving Credit Facility), which extends through 2010 and is available for cash advances and letters of credit. In connection therewith, the U.S. government accounts receivable facility was terminated and an intercompany payable to Halliburton of $774 million was converted into Subordinated Intercompany Notes payable due on or before December 31, 2010. We expect our future liquidity will be provided by cash flow from operations, including advance cash payments from our customers, and borrowings under our Revolving Credit Facility.

As mentioned above, we previously utilized borrowings from Halliburton as a primary source of liquidity. In October 2005, Halliburton capitalized $300 million of the outstanding intercompany balance to equity through a capital contribution. On December 1, 2005, the remaining intercompany balance was converted into the Subordinated Intercompany Notes to Halliburton. At September 30, 2006 and December 31, 2005, the outstanding principal balance of the Subordinated Intercompany Notes was $774 million. Interest on each Subordinated Intercompany Note accrues at an annual rate of 7.5% and is payable semi-annually beginning June 30, 2006. Under the agreements entered into concurrently with the Revolving Credit Facility (the Subordination Agreements), these notes are subordinated to the Revolving Credit Facility. In October 2006, we repaid $324 million in aggregate principal amount of the $774 million of indebtedness we owe under the Subordinated Intercompany Notes. Under the terms of the Revolving Credit Facility, we are only permitted to repay the Subordinated Intercompany Notes with cash available from certain specified sources, including net

65

proceeds from this offering, net proceeds from the May 2006 sale of our Production Services group and any cash available from a reduction since November 30, 2005 of the working capital requirements of our operations related to our RIO, PCO Oil South and LogCAP III contracts. In addition, subject to certain exceptions, the

Subordination Agreements restrict the repayment of certain of our other indebtedness. The amount owed under the Subordinated Intercompany Notes is reflected in our consolidated financial statements at September 30, 2006 and December 31, 2005 as Notes payable to related party.

Our Revolving Credit Facility is available for cash advances required for working capital and letters of credit to support our operations. Amounts drawn under the Revolving Credit Facility bear interest at variable rates based on a base rate (equal to the higher of Citibank’s publicly announced base rate, the Federal Funds rate plus 0.5% or a calculated rate based on the certificate of deposit rate) or the Eurodollar Rate, plus, in each case, the applicable margin. The applicable margin will vary based on our utilization spread. At September 30, 2006 and December 31, 2005, we had $0 of cash draws and $54 million and $25 million, respectively, in letters of credit issued and outstanding, which reduced the availability under the Revolving Credit Facility to $796 million and $825 million, respectively. In addition, we pay a commitment fee on any unused portion of the credit line under the Revolving Credit Facility. Further, our credit facility limits the amount of new letters of credit and other debt we can incur outside of the credit facility to $250 million, which could adversely affect our ability to bid or bid competitively on future projects if the credit facility is not amended or replaced.

Letters of credit, bonds and financial and performance guarantees. In connection with certain projects, we are required to provide letters of credit, surety bonds or other financial and performance guarantees to our customers. As of September 30, 2006, we had $724 million in letters of credit and financial guarantees outstanding, of which $54 million were issued under our Revolving Credit Facility. Over $647 million of the remaining $670 million were issued under various facilities and are irrevocably and unconditionally guaranteed by Halliburton. Of the total outstanding, $551 million relate to our joint venture operations, including $159 million issued in connection with our Allenby & Connaught project. In addition, at September 30, 2006, there were $15 million of performance letters of credit issued in connection with the Barracuda-Caratinga project. Currently, the Barracuda and Caratinga vessels are both fully operational. The remaining $158 million of outstanding letters of credit relate to various other projects. At September 30, 2006, $252 million of the $724 million in outstanding letters of credit had triggering events that would entitle a bank to require cash collateralization. In addition, Halliburton has guaranteed surety bonds and provided direct guarantees primarily related to our performance. We expect to cancel these letters of credit, surety bonds and other guarantees as we complete the underlying projects. We have minimal stand-alone bonding capacity without Halliburton, and Halliburton will not be obligated to provide credit support for our letters of credit, surety bonds and other guarantees after this offering, except to the limited extent it has agreed to do so under the terms of the master separation agreement. We are engaged in discussions with surety companies to obtain such stand-alone bonding capacity.

We and Halliburton have agreed that the existing surety bonds, letters of credit, performance guarantees, financial guarantees and other credit support instruments guaranteed by Halliburton will remain in full force and effect following the separation of our companies. In addition, we and Halliburton have agreed that until December 31, 2009, Halliburton will issue additional guarantees, indemnification and reimbursement commitments for our benefit in connection with (a) letters of credit necessary to comply with our EBIC contract, our Allenby & Connaught project and all other contracts that were in place as of December 15, 2005; (b) surety bonds issued to support new task orders pursuant to the Allenby & Connaught project, two job order contracts for our G&I segment and all other contracts that were in place as of December 15, 2005; and (c) performance guarantees in support of these contracts. Each credit support instrument outstanding at the time of this offering and the additional guarantees, indemnification and reimbursement commitments will remain in effect until the earlier of: (1) the termination of the underlying project contract or our obligations thereunder or (2) the expiration of the relevant credit support instrument in accordance with its terms or release of such instrument by our customer. In addition, we have agreed to use our reasonable best efforts to attempt to release or replace Halliburton’s liability under the outstanding credit support instruments and any additional credit support instruments relating to our business for which Halliburton may become obligated for which such release or

66

replacement is reasonably available. For so long as Halliburton or its affiliates remain liable with respect to any credit support instrument, we have agreed to pay the underlying obligation as and when it becomes due. Furthermore, we will agree to pay to Halliburton a quarterly carry charge for its guarantees of our outstanding letters of credit and surety bonds and will agree to indemnify Halliburton for all losses in connection with the outstanding credit support instruments and any new credit support instruments relating to our business for which Halliburton may become obligated following this offering. Please read “Our Relationship With Halliburton—Master Separation Agreement—Credit Support Instruments.”

As the need arises, future projects will be supported by letters of credit issued under our Revolving Credit Facility or arranged on a unilateral basis. In connection with the issuance of letters of credit under the Revolving Credit Facility, we are charged an issuance fee and a quarterly fee on outstanding letters of credit based on an annual rate.

Debt covenants. The Revolving Credit Facility contains a number of covenants restricting, among other things, our ability to incur additional indebtedness and liens, sales of our assets and payment of dividends, as well as limiting the amount of investments we can make, and payments to Halliburton under the Subordinated Intercompany Notes. We are limited in the amount of additional letters of credit and other debt we can incur outside of the Revolving Credit Facility. Also, under the current provisions of the Revolving Credit Facility, it is an event of default if any person or two or more persons acting in concert, other than Halliburton or our Company, directly or indirectly acquire 25% or more of the combined voting power of all outstanding equity interests ordinarily entitled to vote in the election of directors of KBR Holdings, LLC, the borrower under the facility.

The Revolving Credit Facility also requires us to maintain certain financial ratios, as defined by the Revolving Credit Facility agreement, including a debt-to-capitalization ratio that does not exceed 55% until June 30, 2007 and 50% thereafter; a leverage ratio that does not exceed 3.5; and a fixed charge coverage ratio of at least 3.0. At September 30, 2006 and December 31, 2005, we were in compliance with these ratios and other covenants.

Cash flow activities	Years Ended December 31,									Nine Months Ended September 30,
	2005			2004			2003			2006			2005
	(In millions)
Cash flows provided by (used in) operating activities	$	527		$	(61	)	$	(899	)	$	919		$	140
Cash flows provided by (used in) investing activities		20			(85	)		(59	)		233			71
Cash flows provided by (used in) financing activities		(375	)		(83	)		453			(545	)		(90	)
Effect of exchange rate changes on cash		(12	)		24			86			21			(2	)
Increase (decrease) in cash and equivalents	$	160		$	(205	)	$	(419	)	$	628		$	119

Operating activities. Cash provided by operations was $919 million for the nine months ended September 30, 2006 compared to cash provided by operations of $140 million in the same period of 2005. In the first nine months of 2006, we received $335 million of advanced billings on several projects including our Escravos project. In addition, our working capital requirements for our Iraq-related work, excluding cash and equivalents, decreased $163 million from $495 million at December 31, 2005 to $332 million at September 30, 2006. These increases were partially offset by an increase in working capital requirements related to new projects initiated in 2006. We also contributed $105 million to fund our pension plans in the first nine months of 2006 and experienced higher payroll and related payments due to the timing of our payroll payments.

Cash flows from operations were $527 million in 2005. The increase in cash flow from operations in 2005 compared to 2004 was primarily due to better operating results and a reduction in working capital required in

67

support of the U.S. government’s activities in Iraq. Net income increased to $240 million in 2005, compared to a

net loss of $303 million in 2004. Our working capital requirements for our Iraq-related work, excluding cash and equivalents, decreased from $700 million at December 31, 2004 to $495 million at December 31, 2005. The working capital of $700 million at December 31, 2004 excluded $263 million of receivables sold under our U.S. government accounts receivable facility, which was terminated in December 2005. The working capital decrease was mainly due to the settlement of dining facilities-related issues and fuel issues and resolution of RIO project issues. These increases in cash flow were partially offset by cash outlays required to fund losses on the Barracuda-Caratinga project totaling $169 million in 2005.

Cash flows used in operations were $61 million in 2004. The increase in cash flow from operations in 2004 compared to 2003 was primarily due to a reduction in working capital required in support of the U.S. government’s activities in Iraq. Our working capital requirements for our Iraq-related work, excluding cash and equivalents, decreased from $885 million at December 31, 2003 to $700 million at December 31, 2004. These increases were offset by cash outlays totaling $501 million, which were required to fund losses on the Barracuda-Caratinga project in 2004.

Investing activities. Cash provided by investing activities for the nine months ended September 30, 2006 totaled $233 million compared to cash provided by investing activities of $71 million in the same period for 2005. In the second quarter of 2006, we completed the sale of our Production Services group, which was part of our E&C segment. In connection with the sale, we received net proceeds of $265 million. During the first nine months of 2005, we received $85 million in cash from the sale of the Dulles Greenway toll road in Virginia.

Cash flows provided by investing activities totaled $20 million in 2005 compared to cash flows used in investing activities of $85 million in 2004. The increase in cash flow from investing activities was primarily due to the sale of and one-time cash distribution from our interest in the Dulles Greenway toll road in 2005, which provided $96 million of net cash inflows. Capital expenditures of $76 million in 2005 were consistent with 2004. Capital spending in 2005 was primarily directed to our implementation of an enterprise system, SAP, offset by lower spending in 2005 at our DML shipyard.

Cash flows used in investing activities totaled $85 million in 2004. The increase in cash flows used in 2004 compared to cash flows used in investing activities of $59 million in 2003 is primarily related to an increase in capital expenditures for 2004.

Financing activities. Cash flows used in financing activities for the nine months ended September 30, 2006 totaled $545 million, compared to cash flows used in financing activities of $90 million in the same period for 2005 and is primarily related to borrowings under the Halliburton Cash Management Note discussed below. Cash flows used in or provided by financing activities in 2005, 2004 and 2003 are primarily related to payments from or payments to Halliburton in order to obtain funds to support our operations or to repay borrowings from Halliburton with excess funds from operations.

Historically, our daily cash needs have been funded through intercompany borrowings from our parent, Halliburton, while our surplus cash was invested with Halliburton on a daily basis. Effective December 1, 2005, we entered into Subordinated Intercompany Notes with Halliburton whereby our $774 million intercompany payable balance was converted into Subordinated Intercompany Notes payable due in December 2010 that each have an annual interest rate of 7.5%. The total outstanding balance on these notes was $774 million at September 30, 2006.

Halliburton will continue to provide daily cash management services. Accordingly, we will invest surplus cash with Halliburton on a daily basis, which will be returned as needed for operations. Halliburton executed a demand note payable (Halliburton Cash Management Note) for amounts outstanding under these arrangements. Annual interest on the Halliburton Cash Management Note is based on the closing rate of overnight Federal Funds rate determined on the first business day of each month. Similarly, we may, from time to time, borrow funds from Halliburton, subject to limitations provided under the Revolving Credit Facility, on a daily basis pursuant to a note payable (KBR Cash Management Note). Annual interest on the KBR Cash Management Note

68

is based on the six-month Eurodollar Rate plus 1.00%. At December 31, 2005, we had a net receivable due from Halliburton of $121 million, which includes a $165 million receivable from Halliburton under the Halliburton Cash Management Note. At September 30, 2006, we had a net receivable due from Halliburton of $648 million, which includes a $732 million receivable from Halliburton under the Halliburton Cash Management Note.

On November 29, 2002, DML entered into a credit facility denominated in British pounds with Bank of Scotland, HSBC Bank and The Royal Bank of Scotland totaling $138 million. The U.S. dollar amounts presented were converted using published exchange rates for the applicable periods. This facility, which is non-recourse to us, matures in September 2009, provides for a $133 million term loan facility and a $19 million revolving credit facility. The interest rate for both the term loan and revolving credit facility is variable based on an adjusted LIBOR rate and DML must maintain certain financial covenants. At September 30, 2006, there was $22 million outstanding under this term loan facility. At December 31, 2005, DML had $31 million outstanding under the term loan facility, which is payable in quarterly installments through September 2009. At September 30, 2006 and December 31, 2005, there was $0 outstanding under the revolving credit facility. In addition, DML had $3 million and $3 million of other long-term debt outstanding at September 30, 2006 and December 31, 2005, respectively. The interest rate on this debt is variable and payments are due quarterly through October 2008. DML also has a $28 million overdraft facility for which there was $0 outstanding at September 30, 2006 and December 31, 2005.

On June 6, 2005, our 55%-owned subsidiary, M.W. Kellogg Limited, entered into a credit facility with Barclays Bank totaling $26 million. The U.S. dollar amounts presented were converted using published exchange rates for the applicable period. This facility, which is non-recourse to us is primarily used for bonding, guarantee, and other indemnity purposes. Fees are assessed monthly in the amount of 0.25% per annum of the average outstanding balance. Amounts outstanding under the facility are payable upon demand and the lender may require cash collateral for any amounts outstanding under the facility. At September 30, 2006 and December 31, 2005, there was $2 million of bank guarantees outstanding under the facility.

Future sources of cash. Future sources of cash include cash flow from operations, including cash advance payments from our customers, and borrowings under our Revolving Credit Facility. The Revolving Credit Facility is available for cash advances required for working capital and letters of credit to support our operations. Liquidity is also provided by advance billings on contracts in progress. However, to meet our short- and long-term liquidity requirements, we will primarily look to cash generated from operating activities. As such, we will be required to consider the working capital requirements of future projects.

Future uses of cash. Future uses of cash will primarily relate to working capital requirements for our operations. For a discussion of risks related to our working capital requirements and sources of liquidity following our separation from Halliburton, please read “Risk Factors—Other Risks Related to Our Business—We experience increased working capital requirements from time to time associated with our business, and such an increased demand for working capital could adversely affect our ability to meet our liquidity needs.” In addition, we will use cash to fund capital expenditures, pension obligations, operating leases, long-term debt repayment and various other obligations, including the commitments discussed in the table below, as they arise. In October 2006, we repaid $324 million in aggregate principal amount of the indebtedness we owed under the Subordinated Intercompany Notes. We also expect to repay in full the remaining indebtedness owed under the Subordinated Intercompany Notes with net proceeds from this offering and, if the net proceeds from this offering are not sufficient to repay the indebtedness in full, available cash balances from other sources that are permitted by the covenants under our Revolving Credit Facility.

Capital expenditures. Capital spending for 2006 is expected to be approximately $82 million. The capital expenditures budget for 2006 includes a steady level of activities related to our DML shipyard and decreased software spending as we move forward with the implementation of SAP.

69

Commitments and other contractual obligations. The following table summarizes our significant contractual obligations and other long-term liabilities as of December 31, 2005:

	Payments Due
	2006		2007		2008		2009		2010		Thereafter		Total
	(In millions)
Long-term debt (a)	$	18	$	17	$	2	$	—	$	—	$	—	$	37
Intercompany debt (b)		—		—		—		—		774		—		774
Intercompany interest (b)		58		58		58		58		58		—		290
Operating leases		62		52		38		36		35		190		413
Purchase obligations (c)		11		2		2		1		1		—		17
Barracuda-Caratinga		12		—		—		—		—		—		12
Pension funding Obligations (d)		110		—		—		—		—		—		110
Total	$	271	$	129	$	100	$	95	$	868	$	190	$	1,653

(a) DML revolving credit facility and associated interest based on adjusted LIBOR rate.

(b) Subordinated Intercompany Notes and related interest thereon at a 7.5% annual rate. In October 2006, we repaid $324 million in aggregate principal amount of the indebtedness we owe under the Subordinated Intercompany Notes. At September 30, 2006, the outstanding amount of this indebtedness was $774 million in aggregate principal amount. We also expect to repay in full the remaining indebtedness owed under the Subordinated Intercompany Notes with net proceeds from this offering and, if the net proceeds from this offering are not sufficient to repay the indebtedness in full, available cash balances from other sources that are permitted by the covenants under our Revolving Credit Facility. Please read “Use of Proceeds.”

(c) The purchase obligations disclosed above do not include purchase obligations that we enter into with our vendors in the normal course of business that support existing contracting arrangements with our customers. The purchase obligations with our vendors can span several years depending on the duration of the projects. In general, the costs associated with the purchase obligations are expensed to correspond with the revenue earned on the related projects.

(d) We have contributed $105 million in the first nine months of 2006, which is included in the $113 million, to fund our pension plans.

In addition to the commitments above, we had commitments of $122 million at September 30, 2006 and $79 million at December 31, 2005 to provide funds to related companies, including $107 million at September 30, 2006 and $35 million at December 31, 2005 to fund our privately financed projects. These commitments arose primarily during the start-up of these entities or due to losses incurred by them. We expect approximately $4 million of the commitments at September 30, 2006 to be paid during the next twelve months. In addition, we funded $34 million on the Barracuda-Caratinga project, net of revenue received, during the first nine months of 2006.

Other factors affecting liquidity

In May 2004, we entered into an agreement to sell, assign, and transfer our entire title and interest in specified U.S. government accounts receivable to a third party. The total amount of receivables outstanding under this agreement as of December 31, 2004 was $263 million. At December 31, 2005, these receivables were collected, the balance was retired, and the facility was terminated.

As of September 30, 2006, we had incurred $136 million of costs under the LogCAP III contract that could not be billed to the government due to lack of appropriate funding on various task orders. These amounts were associated with task orders that had sufficient funding in total, but the funding was not appropriately allocated within the task order. We are in the process of preparing a request for a reallocation of funding to be submitted to the client for negotiation. The project anticipates the negotiations will result in an appropriate distribution of funding by the client and collection of the full amounts due.

70

Halliburton will agree to indemnify us and our greater than 50%-owned subsidiaries for fines or other monetary penalties or direct monetary damages, including disgorgement, as a result of claims made or assessed against us by U.S. and certain foreign governmental authorities or a settlement thereof relating to FCPA matters. If we incur losses as a result of or relating to FCPA matters, or as a result of violations of United States antitrust laws arising out of ongoing bidding practices investigations, for which the Halliburton indemnity will not apply, we may not have the liquidity or funds to address those losses. Please read “Our Relationship with Halliburton—Master Separation Agreement—Indemnification—FCPA Indemnification” and “—Enforceability of Halliburton FCPA Indemnification” and “Business—Legal Proceedings—Bidding Practices Investigations.”

Halliburton will also agree to indemnify us for out-of-pocket cash costs and expenses, or cash settlement or cash arbitration awards in lieu thereof, we may incur as a result of the replacement of certain subsea flow-line bolts installed in connection with the Barracuda-Caratinga project. If we incur losses relating to the Barracuda-Caratinga project for which the Halliburton indemnity will not apply, we may not have the liquidity or funds to address those losses.

We may take or fail to take actions that could result in our indemnification from Halliburton with respect to FCPA Matters or matters relating to the Barracuda-Caratinga project no longer being available, and the Halliburton indemnities do not apply to all potential losses. For additional information regarding these indemnification agreements and related risks, please read “Our Relationship With Halliburton” and “Risk Factors.”

Halliburton has incurred $9 million, $9 million, $8 million and $0 for the nine months ended September 30, 2006 and for the years ended December 31, 2005, 2004 and 2003, respectively, for expenses relating to the FCPA and bidding practices investigations. In 2004, $1.5 million of the $8 million incurred was charged to us. Except for this $1.5 million, Halliburton has not charged these costs to us. These expenses were incurred for the benefit of both Halliburton and us, and we and Halliburton have no reasonable basis for allocating these costs between Halliburton and us.

Critical Accounting Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to select appropriate accounting policies and to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. Our critical accounting policies are described below to provide a better understanding of how we develop our assumptions and judgments about future events and related estimations and how they can impact our financial statements. A critical accounting estimate is one that requires our most difficult, subjective, or complex estimates and assessments and is fundamental to our results of operations.

We base our estimates on historical experience and on various other assumptions we believe to be reasonable according to the current facts and circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We believe the following are the critical accounting policies used in the preparation of our consolidated financial statements in accordance with accounting principles generally accepted in the United States, as well as the significant estimates and judgments affecting the application of these policies. This discussion and analysis should be read in conjunction with our consolidated financial statements and related notes included in this prospectus.

Percentage of completion. Revenue from contracts to provide construction, engineering, design or similar services are reported on the percentage-of-completion method of accounting. This method of accounting requires us to calculate job profit to be recognized in each reporting period for each job based upon our projections of future outcomes, which include estimates of the total cost to complete the project; estimates of the project schedule and completion date; estimates of the percentage the project is complete; and amounts of any probable unapproved claims and change orders included in revenue.

71

At the outset of each contract, we prepare a detailed analysis of our estimated cost to complete the project. Risks relating to service delivery, usage, productivity, and other factors are considered in the estimation process. Our project personnel periodically evaluate the estimated costs, claims, change orders, and percentage of completion at the project level. The recording of profits and losses on long-term contracts requires an estimate of the total profit or loss over the life of each contract. This estimate requires consideration of contract revenue, change orders, and claims, less costs incurred and estimated costs to complete. Anticipated losses on contracts are recorded in full in the period in which they become evident. Profits are recorded based upon the total estimated contract profit times the current percentage-complete for the contract.

When calculating the amount of total profit or loss on a long-term contract, we include unapproved claims as revenue when the collection is deemed probable based upon the four criteria for recognizing unapproved claims under the American Institute of Certified Public Accountants Statement of Position 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts.” Including probable unapproved claims in this calculation increases the operating income (or reduces the operating loss) that would otherwise be recorded without consideration of the probable unapproved claims. Probable unapproved claims are recorded to the extent of costs incurred and include no profit element. In all cases, the probable unapproved claims included in determining contract profit or loss are less than the actual claim that will be or has been presented to the customer. We are actively engaged in claims negotiations with our customers, and the success of claims negotiations has a direct impact on the profit or loss recorded for any related long-term contract. Unsuccessful claims negotiations could result in decreases in estimated contract profits or additional contract losses, and successful claims negotiations could result in increases in estimated contract profits or recovery of previously recorded contract losses.

At least quarterly, significant projects are reviewed in detail by senior management. We have a long history of working with multiple types of projects and in preparing cost estimates. However, there are many factors that impact future costs, including but not limited to weather, inflation, labor and community disruptions, timely availability of materials, productivity, and other factors as outlined in our “Risk Factors” and “Cautionary Statement About Forward-Looking Statements.” These factors can affect the accuracy of our estimates and materially impact our future reported earnings. In the past, we have incurred substantial losses on projects that were not initially projected, including our Barracuda-Caratinga project (see “Barracuda-Caratinga Project” in Note 6 of our consolidated financial statements for further discussion).

Accounting for government contracts. Most of the services provided to the United States government are governed by cost-reimbursable contracts. Services under our LogCAP, PCO Oil South, and Balkans support contracts are examples of these types of arrangements. Generally, these contracts contain both a base fee (a fixed profit percentage applied to our actual costs to complete the work) and an award fee (a variable profit percentage applied to definitized costs, which is subject to our customer’s discretion and tied to the specific performance measures defined in the contract, such as adherence to schedule, health and safety, quality of work, responsiveness, cost performance, and business management).

Base fee revenue is recorded at the time services are performed, based upon actual project costs incurred, and includes a reimbursement fee for general, administrative, and overhead costs. The general, administrative, and overhead cost reimbursement fees are estimated periodically in accordance with government contract accounting regulations and may change based on actual costs incurred or based upon the volume of work performed. Revenue is reduced for our estimate of costs that may be categorized as disputed or unallowable as a result of cost overruns or the audit process.

Award fees are generally evaluated and granted periodically by our customer. For contracts entered into prior to June 30, 2003, award fees are recognized during the term of the contract based on our estimate of amounts to be awarded. Once award fees are granted and task orders underlying the work are definitized, we adjust our estimate of award fees to actual amounts earned. Our estimates are often based on our past award experience for similar types of work. We have been receiving award fees on the Balkans project since 1995, and our estimates for award fees for this project have generally been accurate in the periods presented. During 2005, we began to receive

72

LogCAP award fee scores, and, based on these actual amounts, we adjusted our accrual rate for future awards. The controversial nature of this contract may cause actual awards to vary significantly from past experience.

For contracts containing multiple deliverables entered into subsequent to June 30, 2003 (such as PCO Oil South), we analyze each activity within the contract to ensure that we adhere to the separation guidelines of Emerging Issues Task Force Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables,” and the revenue recognition guidelines of Staff Accounting Bulletin No. 104 “Revenue Recognition.” For service-only contracts and service elements of multiple deliverable arrangements, award fees are recognized only when definitized and awarded by the customer. Award fees on government construction contracts are recognized during the term of the contract based on our estimate of the amount of fees to be awarded.

Similar to many cost-reimbursable contracts, these government contracts are typically subject to audit and adjustment by our customer. Each contract is unique; therefore, the level of confidence in our estimates for audit adjustments varies depending on how much historical data we have with a particular contract. Further, the significant size and controversial nature of our contracts may cause actual awards to vary significantly from past experience.

Income tax accounting. We are currently included in the consolidated U.S. federal income tax return of Halliburton. Additionally, many of our subsidiaries are subject to consolidation, group relief or similar provisions of tax law in foreign jurisdictions that allow for sharing of tax attributes with other Halliburton affiliates. Our income tax expense is calculated on a pro rata basis. Additionally, intercompany settlements attributable to utilization of tax attributes are dictated by a tax sharing agreement. Our tax sharing agreement with Halliburton provides for settlement of tax attributes utilized by Halliburton on a consolidated basis. Therefore, intercompany settlements due to utilized attributes are only established to the extent that the attributes decreased the tax liability of another affiliate in any given jurisdiction. The adjustment to reflect the difference between the tax provision/benefit calculated as described above and the amount settled with Halliburton pursuant to the tax sharing agreement is recorded as a contribution or distribution to Member’s equity. For purposes of determining income tax expense, it is assumed that we will continue to file on this consolidated basis.

Deferred tax assets and liabilities are recognized for the expected future tax consequences of events that have been recognized in the financial statements or tax returns. We apply the following basic principles in accounting for our income taxes: a current tax liability or asset is recognized for the estimated taxes payable or refundable on tax returns for the current year; a deferred tax liability or asset is recognized for the estimated future tax effects attributable to temporary differences and carryforwards; the measurement of current and deferred tax liabilities and assets is based on provisions of the enacted tax law, and the effects of potential future changes in tax laws or rates are not considered; and the value of deferred tax assets is reduced, if necessary, by the amount of any tax benefits that, based on available evidence, are not expected to be realized.

In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. A valuation allowance is provided for deferred tax assets if it is more likely than not that these items will not be realized. We consider the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, we believe it is more likely than not that we will realize the benefits of these deductible differences, net of the existing valuation allowances.

Our methodology for recording income taxes requires a significant amount of judgment in the use of assumptions and estimates. Additionally, we use forecasts of certain tax elements such as taxable income and foreign tax credit utilization, as well as evaluate the feasibility of implementing tax planning strategies. Given the inherent uncertainty involved with the use of such variables, there can be significant variation between anticipated and actual results. Unforeseen events may significantly impact these variables, and changes to these variables could have a material impact on our income tax accounts related to both continuing and discontinued operations.

73

We have operations in a number of countries other than the United States. Consequently, we are subject to the jurisdiction of a significant number of taxing authorities. The income earned in these various jurisdictions is taxed on differing bases, including income actually earned, income deemed earned, and revenue-based tax withholding. The final determination of our tax liabilities involves the interpretation of local tax laws, tax treaties, and related authorities in each jurisdiction. Changes in the operating environment, including changes in tax law and currency/repatriation controls, could impact the determination of our tax liabilities for a tax year.

Tax filings of our subsidiaries, unconsolidated affiliates, and related entities are routinely examined in the normal course of business by tax authorities. These examinations may result in assessments of additional taxes, which we work to resolve with the tax authorities and through the judicial process. Predicting the outcome of disputed assessments involves some uncertainty. Factors such as the availability of settlement procedures, willingness of tax authorities to negotiate, and the operation and impartiality of judicial systems vary across the different tax jurisdictions and may significantly influence the ultimate outcome. We review the facts for each assessment, and then utilize assumptions and estimates to determine the most likely outcome and provide taxes, interest, and penalties as needed based on this outcome.

Legal and Investigation Matters. As discussed in Notes 13 and 14 of our consolidated financial statements, as of September 30, 2006 and December 31, 2005, we have accrued an estimate of the probable and estimable costs for the resolution of some of these matters. For other matters for which the liability is not probable and reasonably estimable, we have not accrued any amounts. Attorneys in our legal department monitor and manage all claims filed against us and review all pending investigations. Generally, the estimate of probable costs related to these matters is developed in consultation with internal and outside legal counsel representing us. Our estimates are based upon an analysis of potential results, assuming a combination of litigation and settlement strategies. The precision of these estimates is impacted by the amount of due diligence we have been able to perform. We attempt to resolve these matters through settlements, mediation, and arbitration proceedings when possible. If the actual settlement costs, final judgments, or fines, after appeals, differ from our estimates, our future financial results may be materially and adversely affected. We have in the past recorded significant adjustments to our initial estimates of these types of contingencies.

Pensions. Our pension benefit obligations and expenses are calculated using actuarial models and methods, in accordance with SFAS No. 87, “Employers’ Accounting for Pensions.” Two of the more critical assumptions and estimates used in the actuarial calculations are the discount rate for determining the current value of plan benefits and the expected rate of return on plan assets. Other critical assumptions and estimates used in determining benefit obligations and plan expenses, including demographic factors such as retirement age, mortality, and turnover, are also evaluated periodically and updated accordingly to reflect our actual experience.

Discount rates are determined annually and are based on rates of return of high-quality fixed income investments currently available and expected to be available during the period to maturity of the pension benefits. Expected long-term rates of return on plan assets are determined annually and are based on an evaluation of our plan assets, historical trends, and experience, taking into account current and expected market conditions. Plan assets are comprised primarily of equity and debt securities. As we have both domestic and international plans, these assumptions differ based on varying factors specific to each particular country or economic environment.

The discount rate utilized to determine the projected benefit obligation at the measurement date for our United States pension plans remained flat at 5.75% at December 31, 2005 and 2004. The discount rate utilized to determine the projected benefit obligation at the measurement date for our United Kingdom pension plans, which constitutes all of our international plans and 98% of all plans, was reduced from 5.50% at December 31, 2004 to 5.00% at December 31, 2005. This decrease in discount rate resulted in increases in the present value of our benefit obligations and plan expenses. An additional future decrease in the discount rate of 50 basis points for our United Kingdom pension plans would increase our projected benefit obligation by an estimated $336 million, while a similar increase in the discount rate would reduce our projected benefit obligation by an estimated $300 million.

74

Our defined benefit plans reduced pretax earnings by $48 million, $58 million and $44 million for the years ended December 31, 2005, 2004 and 2003, respectively. Included in the amounts were earnings from our

expected pension returns of $161 million, $150 million and $117 million for the years ended December 31, 2005, 2004 and 2003, respectively. Unrecognized actuarial gains and losses are being recognized over a period of 11 to 15 years, which represents the expected remaining service life of the employee group. Our unrecognized actuarial gains and losses arise from several factors, including experience and assumptions changes in the obligations and the difference between expected returns and actual returns on plan assets. Actual returns were $470 million, $220 million and $134 million for the years ended December 31, 2005, 2004 and 2003, respectively. The difference between actual and expected returns is deferred as an unrecognized actuarial gain or loss and is recognized as future pension expense. Our unrecognized actuarial loss at December 31, 2005 was $495 million, of which $19 million will be recognized as a component of our expected 2006 pension expense. During 2005, we made contributions to fund our defined benefit plans of $47 million. We currently expect to make contributions in 2006 of approximately $113 million, of which $105 million had been paid as of September 30, 2006.

The actuarial assumptions used in determining our pension benefits may differ materially from actual results due to changing market and economic conditions, higher or lower withdrawal rates, and longer or shorter life spans of participants. While we believe that the assumptions used are appropriate, differences in actual experience or changes in assumptions may materially affect our financial position or results of operations.

Financial Instruments Market Risk

Foreign currency risk. We have foreign currency exchange rate risk resulting from international operations. We do not comprehensively hedge the exposure to currency rate changes; however, we selectively manage these exposures through the use of derivative instruments to mitigate our market risk from these exposures. The objective of our risk management program is to protect our cash flow related to sales or purchases of goods or services from market fluctuations in currency rates. We do not use derivative instruments for trading purposes. We used a Monte Carlo transformation to analyze our year-end 2005 derivative instruments used to hedge our foreign currency exposure noting the value at risk was immaterial.

Interest rate risk. The following table represents principal amounts of our long-term debt at December 31, 2005 and related weighted average interest rates on the repaid amounts by year of maturity for our long-term debt.

	2006			2007			2008			2009		2010			Thereafter		Total
	(millions of dollars)
Fixed-rate debt:
Repayment amount ($US)	$	—		$	—		$	—		$	—	$	774		$	—	$	774
Weighted average interest rate on repaid amount		—			—			—			—		7.5	%		—		7.5	%
Variable-rate debt:
Repayment amount ($US)	$	16		$	16		$	2		$	—	$	—		$	—	$	34
Weighted average interest rate on repaid amount		5.7	%		5.7	%		6.0	%		—		—			—		5.7	%

Environmental Matters

We are subject to numerous environmental, legal, and regulatory requirements related to our operations worldwide. In the United States, these laws and regulations include, among others: the Comprehensive Environmental Response, Compensation, and Liability Act; the Resources Conservation and Recovery Act; the Clean Air Act; the Federal Water Pollution Control Act; and the Toxic Substances Control Act.

In addition to the federal laws and regulations, states and other countries where we do business often have numerous environmental, legal, and regulatory requirements by which we must abide. We evaluate and address the environmental impact of our operations by assessing and remediating contaminated properties in order to

75

avoid future liabilities and comply with environmental, legal, and regulatory requirements. On occasion, we are involved in specific environmental litigation and claims, including the remediation of properties we own or have

operated, as well as efforts to meet or correct compliance-related matters. Our Health, Safety and Environment group has several programs in place to maintain environmental leadership and to prevent the occurrence of environmental contamination. We do not expect costs related to environmental matters to have a material adverse effect on our consolidated financial position or our results of operations.

Related Party Transactions

We conduct business with Halliburton entities on a commercial basis. In connection with these transactions, we recognize revenue as services are rendered and costs as they are incurred. Amounts billed to us by Halliburton were primarily for services provided by Halliburton’s Energy Services Group on projects in the Middle East and were $0, $0, $18 million and $60 million for the nine months ended September 30, 2006 and the years ended December 31, 2005, 2004 and 2003, respectively, and are included in cost of services in the consolidated statements of operations. Amounts we billed to Halliburton’s Energy Services Group were $1 million, $1 million, $4 million and $4 million for the nine months ended September 30, 2006 and the years ended December 31, 2005, 2004 and 2003, respectively.

In addition, Halliburton and certain of its subsidiaries provide various support services to us, including information technology, legal and internal audit. Costs for information technology, including payroll processing services, which totaled $7 million, $20 million, $19 million and $22 million for the nine months ended September 30, 2006 and for the years ended December 31, 2005, 2004 and 2003, respectively, are allocated to us based on a combination of factors, including relative revenues, assets and payroll, and negotiation of the reasonableness of the charge. Costs for other services allocated to us were $17 million, $20 million, $20 million and $18 million for the nine months ended September 30, 2006 and for the years ended December 31, 2005, 2004 and 2003, respectively. Costs for these other services, including legal services and audit services, are primarily charged to us based on direct usage of the service. Costs allocated to us using a method other than direct usage are not significant individually or in the aggregate. We believe the allocation methods are reasonable. In addition, we lease office space to Halliburton at our Leatherhead, U.K. location.

Halliburton centrally develops, negotiates and administers our risk management process. The insurance program includes broad, all-risk coverage of worldwide property locations, excess worker’s compensation, general, automobile and employer liability, director’s and officer’s and fiduciary liability, global cargo coverage and other standard business coverages. Net expenses of $13 million, $17 million, $20 million, and $21 million representing our share of these risk management coverages and related administrative cost, have been allocated to us for the nine months ended September 30, 2006 and the years ended December 31, 2005, 2004 and 2003, respectively. These expenses are included in cost of services in the consolidated statements of operations.

We are self insured, or participate in a Halliburton self-insured plan, for certain insurable risks, such as general liability, property damage and workers’ compensation. However, subject to specific limitations, Halliburton has umbrella insurance coverage for some of these risk exposures.

In connection with certain projects, we are required to provide letters of credit, surety bonds and guarantees to our customers. As of September 30, 2006, in addition to the $54 million of letters of credit outstanding under our revolving credit facility, we had additional letters of credit and financial guarantees totaling approximately $670 million, of which, approximately $551 million related to our joint venture operations, including $159 million issued in connection with the Allenby & Connaught project. Of the $724 million in letters of credit outstanding at September 30, 2006, $647 million were irrevocably and unconditionally guaranteed by Halliburton. With the execution of the April 2006 agreement with Petrobras, the Barracuda-Caratinga project performance letters of credit were reduced to $15 million. The remaining $158 million of outstanding letters of credit related to various other projects. In addition, Halliburton has guaranteed surety bonds and provided direct guarantees primarily related to our performance. Under certain reimbursement agreements, if we were unable to reimburse a bank under a paid

76

letter of credit and the amount due is paid by Halliburton, we would be required to reimburse Halliburton for any

amounts drawn on those letters of credit or guarantees in the future. We expect to cancel these letters of credit, surety bonds and other guarantees as we complete the underlying projects.

Prior to the closing of this offering, we will enter into various agreements to complete the separation of our business from Halliburton, including, among others, a master separation agreement, transition services agreements and a tax sharing agreement. The master separation agreement will provide for, among other things, our responsibility for liabilities relating to our business and the responsibility of Halliburton for liabilities unrelated to our business. The master separation agreement contains additional indemnification obligations and other ongoing commitments between us and Halliburton. The tax sharing agreement provides for certain U.S. income tax allocations of liabilities and other agreements between us and Halliburton with respect to tax matters. Under the transition services agreements, Halliburton will continue to provide various interim corporate support services to us and we will continue to provide various interim corporate support services to Halliburton. Because the terms of these transactions and agreements were determined by Halliburton, their terms may be less favorable to us than the terms we could have obtained from an unaffiliated third party. In addition, while we are controlled by Halliburton, it is possible for Halliburton to cause us to amend these agreements on terms that may be less favorable to us than the current terms of the agreements. For a description of these agreements and the other agreements that we will enter into with Halliburton, please read “Our Relationship With Halliburton.”

Halliburton has incurred $9 million, $9 million, $8 million and $0 for the nine months ended September 30, 2006 and for the years ended December 31, 2005, 2004 and 2003, respectively, for expenses relating to the FCPA and bidding practices investigations. In 2004, $1.5 million of the $8 million incurred was charged to us. Except for this $1.5 million, Halliburton has not charged these costs to us. These expenses were incurred for the benefit of both Halliburton and us, and we and Halliburton have no reasonable basis for allocating these costs between Halliburton and us.

There are risks associated with the master separation agreement and related ancillary agreements. Please read “Risk Factors—Risks Related to Our Affiliation With Halliburton—The terms of our separation from Halliburton, the related agreements and other transactions with Halliburton were determined by Halliburton and thus may be less favorable to us than the terms we could have obtained from an unaffiliated third party.”

Recent Accounting Pronouncements

In March 2005, the FASB issued FASB Interpretation No. 47 (FIN 47), “Accounting for Conditional Asset Retirement Obligations, an interpretation of FASB Statement No. 143.” This statement clarifies that an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation when incurred if the liability’s fair value can be reasonably estimated. The provisions of FIN 47 were adopted as of December 31, 2005. The total liability at adoption for asset retirement obligations and the related accretion and depreciation expense for all periods presented is immaterial to our consolidated financial position and results of operations.

We adopted the provisions of SFAS No. 123(R) “Share-Based Payment” on January 1, 2006 using the modified prospective application. Certain of our key employees participate in the Halliburton stock-based employee compensation plans. Accordingly, we will recognize compensation expense for all newly granted awards and awards modified, repurchased, or cancelled after January 1, 2006. Compensation expense for the unvested portion of awards that were outstanding as of January 1, 2006 will be recognized ratably over the remaining vesting period based on the fair value at date of grant as calculated under the Black-Scholes option pricing model. This treatment will be consistent with our pro forma disclosure under SFAS No. 123. We will recognize compensation expense using the Black-Scholes pricing model for the ESPP beginning with the January 1, 2006 purchase period.

In June 2006, the FASB issued FASB Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109.” This interpretation clarifies the accounting for

77

uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes.” The interpretation prescribes a recognition threshold and measurement attribute for a tax position taken or expected to be taken in a tax return and also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006. We will not elect early adoption of this interpretation and will adopt the provisions of FIN 48 beginning January 1, 2007. We are currently evaluating what impact, if any, this statement will have on our financial statements.

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R).” SFAS No. 158 requires an employer to:

• recognize on its balance sheet the funded status (measured as the difference between the fair value of plan assets and the projected benefit obligation) of pension and other postretirement benefit plans;

• recognize, through comprehensive income, certain changes in the funded status of a defined benefit and postretirement plan in the year in which the changes occur through comprehensive income;

• measure plans assets and benefit obligations as of the end of the employer’s fiscal year, and;

• disclose additional information.

The requirement to recognize the funded status of a benefit plan and the additional disclosure requirements are effective for fiscal years ending after December 15, 2006. We will adopt these SFAS No. 158 requirements for our fiscal year ending December 31, 2006. The requirement to measure plan assets and benefit obligations as of the date of the employer’s fiscal year-end is effective for fiscal years ending after December 15, 2008. We will not elect early adoption of these additional SFAS No. 158 requirements and will adopt these requirements for our fiscal year ending December 31, 2008.

We are currently assessing the quantitative impact to our financial statements, which we believe will be material. For example, using the information disclosed as of December 31, 2005, total assets as of December 31, 2005 would have been approximately $73 million lower, total liabilities would have been approximately $136 million higher, minority interest would have been approximately $74 million lower, and member’s equity and accumulated other comprehensive loss would have been $135 million lower. Because our pension and other postretirement benefit plans are dependant on future events and circumstances and current actuarial assumptions, the impact at the time of adoption of SFAS No. 158 will differ from these amounts.

78

BUSINESS

General

We are a leading global engineering, construction and services company supporting the energy, petrochemicals, government services and civil infrastructure sectors. We are the largest U.S.-based international contractor according to Engineering News-Record based on fiscal 2005 construction revenue from projects outside a company’s home country. Engineering News-Record also ranks us the fourth largest U.S.-based contractor overall and the fifth largest U.S.-based contractor in the industrial process and petroleum market based on fiscal 2005 construction revenue. We are a leader in many of the growing end-markets that we serve, particularly gas monetization, having designed and constructed, alone or with joint venture partners, more than half of the world’s operating LNG production capacity over the past 30 years. In addition, we are one of the ten largest government defense contractors worldwide according to a Defense News ranking based on fiscal 2005 revenue and, accordingly, we believe we are the world’s largest government defense services provider. For fiscal year 2005, we were the sixth largest contractor for the DoD based on its prime contract awards.

We offer our wide range of services through two business segments, E&C and G&I. Although we provide a wide range of services, our business in both our E&C segment and our G&I segment is heavily focused on major projects. At any given time, a relatively few number of projects and joint ventures represent a substantial part of our operations.

Energy and Chemicals. Our E&C segment designs and constructs energy and petrochemical projects, including large, technically complex projects in remote locations around the world. Our expertise includes onshore oil and gas production facilities, offshore oil and gas production facilities, including platforms, floating production and subsea facilities (which we refer to collectively as our offshore projects), onshore and offshore pipelines, LNG and GTL gas monetization facilities (which we refer to collectively as our gas monetization projects), refineries, petrochemical plants (such as ethylene and propylene) and Syngas, primarily for fertilizer-related facilities. We provide a wide range of EPC-CS services, as well as program and project management, consulting and technology services.

Government and Infrastructure. Our G&I segment delivers on-demand support services across the full military mission cycle from contingency logistics and field support to operations and maintenance on military bases. In the civil infrastructure market, we operate in diverse sectors, including transportation, waste and water treatment, and facilities maintenance. We provide program and project management, contingency logistics, operations and maintenance, construction management, engineering, and other services to military and civilian branches of governments and private customers worldwide. We currently provide these services in the Middle East to support one of the largest U.S. military deployments since World War II, as well as in other global locations where military personnel are stationed. A significant portion of our G&I segment’s current operations relate to the support of United States government operations in the Middle East, which we refer to as our Middle East operations. We are also the majority owner of DML, the owner and operator of Western Europe’s largest naval dockyard complex. Our DML shipyard operations are primarily engaged in refueling nuclear submarines and performing maintenance on surface vessels for the U.K. Ministry of Defence (MoD) as well as limited commercial projects.

We provide services to a diverse customer base, including international and national oil and gas companies, independent refiners, petrochemical producers, fertilizer producers, and domestic and foreign governments. We pursue many of our projects through joint ventures and alliances with other industry participants. For more information, please read “—Joint Ventures and Alliances.” Demand for our services depends primarily on our customers’ capital expenditures and budgets for construction and defense services. We are currently benefiting from increased capital expenditures by our petroleum and petrochemicals customer base driven by high crude oil and natural gas prices and general global economic expansion. We expect demand for our services will continue to increase with the growth in world energy consumption, which is expected to increase over 50% by 2030 according to the International Energy Agency. We also expect the heightened focus on global security, military

79

operations and major military force realignments, as well as global growth in government outsourcing, to enhance demand for our services.

For the year ended December 31, 2005, we had total revenue of $10.1 billion and income from continuing operations of $210 million. For the nine months ended September 30, 2006, we had total revenue of $7.1 billion and income from continuing operations of $38 million compared to total revenue of $7.4 billion and income from continuing operations of $162 million for the nine months ended September 30, 2005. As of September 30, 2006, our total backlog for continuing operations was $15.0 billion, of which $6.0 billion, or 40%, was attributable to our E&C segment and $9.0 billion, or 60%, was attributable to our G&I segment. For more information, please read “—Backlog.”

Our Competitive Strengths

We believe our competitive strengths position us to continue to capitalize upon the growth occurring in the end-markets we serve. Our key competitive strengths include:

• Industry leading global, large-scale EPC-CS experience in the upstream and downstream energy sectors.

• Oil and gas production. Since designing and constructing the world’s first offshore oil and gas production platform in 1947, we have built some of the world’s largest oil and gas production projects and expanded our upstream capabilities to include onshore production, gas processing, flowlines and pipelines, and offshore fixed platforms and semi-submersible floating production units. Our gas processing expertise includes feasibility studies, gas processing plant design, low temperature gas separation and purification, liquefied petroleum gas recovery, enhanced oil recovery, liquid hydrogen recovery and refinery fuel gas processing.

• Gas monetization (LNG and GTL). We have designed and constructed, alone or with joint venture partners, more than half of the world’s operating LNG production capacity over the past 30 years and have designed more LNG receiving terminals outside of Japan than any other contractor. We have built or are currently executing EPC-CS LNG liquefaction projects in eight countries. Additionally, we are actively involved in the growing GTL market, having obtained awards for two of the three projects worldwide that were either being built or were in the front-end engineering design phase as of September 30, 2006.

• Petrochemicals. We have more than 60 years of experience building petrochemical plants and licensing process technology necessary for the production of petrochemicals around the world. We have designed, licensed and/or constructed more than 800 petrochemical projects worldwide, which include more than 30% of worldwide greenfield ethylene capacity added since 1986. We have developed or otherwise have the right to license technologies for the production of a variety of petrochemicals and chemicals, including ethylene and propylene. We also license a variety of technologies for the transformation of hydrocarbons into commodity chemicals such as phenol and aniline, which are used in the production of consumer end-products.

• Refining. We have designed, constructed and/or licensed technology for more than 50 greenfield refineries and over 1,000 new refining units, retrofits or upgrades. During the past thirty years, there have been no new refineries built in the United States and few new refineries built worldwide. Therefore, most of the recent services we have provided to our customers have been in retrofitting or upgrading units in existing refineries. We have specialized expertise in processes that transform low value crude oil into high value transportation fuels, such as hydroprocessing, fluid catalytic cracking and residuum upgrading, and we provide proprietary heavy oil technologies to maximize refinery production yield.

• Integrated EPC-CS services with a proprietary technology offering. We offer our energy and petrochemicals customers a fully integrated suite of EPC-CS and related services, which span the entire facility lifecycle from project development and feasibility studies through execution, facility

80

commissioning and start-up, and operations and maintenance. This range of services allows us to

provide our customers a single-source, integrated solution for fast and efficient project execution. We have developed, either independently or with others, a broad range of proprietary technologies for the petrochemicals, refining and Syngas industries, including technologies for the production of ethylene, propylene, ammonia and phenol, and for residuum upgrading, fluid catalytic cracking and hydroprocessing. In addition, we own and operate a technology center that actively works with our customers to develop new technologies and improve existing ones. During the past sixty years, we have licensed ammonia process technologies for more than 200 ammonia plants and provided some combination of EPC-CS services for over 120 of these facilities. We are working to identify new technologically driven opportunities in emerging markets, including coal monetization technologies to promote more environmentally friendly uses of abundant coal resources and CO₂ sequestration to reduce CO₂ emissions by capturing and injecting them underground. We believe our technology portfolio and experience in the commercial application of these technologies and related know-how differentiates us from other EPC contractors, enhances our margins and encourages customers to utilize our broader range of EPC-CS services. Customers typically select our process technologies in the beginning of a project’s development, thereby providing us with an early customer access advantage that positions us favorably for future EPC-CS work for the resulting project. These technologies also provide additional revenue opportunities in the form of front-end licensing fees.

• Comprehensive government support services capabilities. We believe we are the world’s largest government defense services provider and a leader in developing large civil infrastructure projects. Our extensive capabilities from contingency logistics to facilities operations and maintenance to engineering and construction services allow us to serve the diverse needs of our government customers. Our global employee base and ability to quickly secure additional necessary resources provide us with the flexibility to mobilize immediately and provide responsive solutions, refined from our experience operating around the world under challenging conditions. Our personnel work primarily with the governments of the United States and United Kingdom by providing military theater support, including the design, construction and operation of military installations, and civilian infrastructure services. We have integrated these services and capabilities to support U.S. and coalition military personnel primarily in the Middle East and the Balkan states and to assist in the reconstruction efforts underway in Iraq. Across our military support service offerings, we also execute major civil infrastructure projects such as designing and constructing roads, ports, housing and command center facilities.

• Strong, long-term relationships with key customers. We maintain strong, long-term relationships with our key customers, including international and national oil and gas companies and the world’s largest defense and government outsourcers. For example, in the early 1970s, we designed four platforms for British Petroleum’s (BP) Forties Field in the North Sea. Today, we continue to provide services to BP, including the development of the Azeri-Chirag-Gunashli fields in the Caspian Sea, the BP Tangguh LNG Project in Indonesia and the In Amenas Gas Processing plant in Algeria. Our customers include other major international oil companies such as Chevron Corporation, ExxonMobil Corporation and Royal Dutch Shell Petroleum Company, and major national oil companies such as Sonatrach (Algeria’s national oil company) and Nigeria National Petroleum Corp. In the government services sector, we have over 60 years of experience and have provided support for many U.S. military operations. Our often decades-long relationships with our customers enable us to understand their needs and to execute projects more quickly and efficiently.

• Global footprint and proven ability to perform in remote and difficult environments. We believe the size and scale of our global operations provide us with a significant advantage compared to our competitors. Our oil and gas customers are increasingly making investment decisions to monetize energy reserves located in remote environments around the globe as current crude oil and natural gas prices make these investments more economically viable. Our resources and expertise allow us to operate in geographies with limited on-site infrastructure where many of these reserves are located. We deliver EPC-CS capabilities worldwide from the Canadian oil sands, to the oil and gas fields of the Middle East and Russia, to offshore facilities in North America, the North Sea, Africa and Asia Pacific. We have recently completed or are currently working on major projects in Algeria, Angola, Australia, Egypt, Indonesia, Nigeria and Yemen. Additionally, with processing facilities increasingly being built near oil and gas

81

extraction points, we believe our local presence, supported by our regionally based high-value execution centers in Monterrey, Mexico and Jakarta, Indonesia (which utilize lower cost, skilled engineers and other professionals to support projects around the world), will continue to provide us with a competitive strength and strong platform for growth. Our G&I segment is currently providing military support personnel and services to U.S. and international troops in Iraq, Afghanistan and Eastern Europe. As military operations increasingly focus on the global war on terror, we believe our ability to meet the needs of governments and militaries worldwide, at any time and on any scale, will be a critical differentiating factor for us.

• Experienced management team and workforce. Our management team and workforce includes professionals who have served at many levels of our company and possess strong industry expertise, many of whom also have extensive overseas field experience. We believe this background provides our leadership team with the perspective to understand and anticipate both the needs of our customers and the execution challenges to meet those needs. As of December 31, 2005, we had over 57,000 employees in our continuing operations.

Our Business Strategy

Our strategy is to create stockholder value by leveraging our competitive strengths and focusing on the many opportunities in the growing end-markets we serve. Key features of our strategy include:

• Capitalize on leadership positions in growth markets. We intend to leverage our leading positions in the energy, petrochemicals and government services sectors to grow our market share.

Worldwide energy consumption is expected to increase over 50% by 2030, requiring $17 trillion of investment (including exploration, development, transmission and distribution) from 2004 through 2030 according to the International Energy Agency, or approximately $625 billion per year. To meet the expected increase in worldwide natural gas consumption, Cambridge Energy Research Associates expects today’s LNG production volumes to triple by 2020, which is expected to require approximately $200 billion of total investment. We believe we are well positioned to win project awards for additional gas monetization projects, having designed and constructed, alone or with joint venture partners, more than half of the world’s operating LNG production capacity over the past 30 years. With our experience and track record, we also believe we are well positioned to win awards for additional gas monetization facilities, oil and gas production facilities, petrochemical plants, new and retrofit refinery projects, and pipeline projects.

In the government services sector, our military customers are focused on winning the global war on terror, providing for homeland security and outsourcing “non-combatant” support services in order to direct greater resources towards combat and defense forces. Our experience and competitive strengths in logistics, contingency support, international operations and integrated security are likely to remain in demand, whether in support of peacekeeping, combat operations or homeland security.

• Leverage technology portfolio for continued growth. We intend to capitalize on our E&C segment’s portfolio of process and design technologies and experience in the commercial application of these technologies to strengthen and differentiate our service offerings, enhance our competitiveness and increase our profitability. Our technological expertise and know-how reduces our reliance on lower margin, more commoditized service offerings and better positions us for EPC-CS package awards. We have developed, either independently or with others, solutions to support upstream oil and gas producers, including our designs for offshore and semi-submersible production facilities. To support downstream oil and gas producers, we also develop and license process and petrochemical technologies, which allow our customers to monetize previously uneconomical residual or by-product materials. Our technologies provide additional revenue opportunities in the form of front-end licensing fees and a competitive strength in the pursuit of new front-end engineering design work that can be leveraged into full EPC-CS awards.

• Selectively pursue new projects to enhance profitability and mitigate risk. We intend to focus our resources on projects and services where we believe we have competitive strengths as part of our efforts

82

to increase our profitability and reduce our execution risk. We believe our market experience combined with key skills, knowledge and data derived from prior projects enhances our risk assessment and mitigation capabilities, enabling us to more effectively evaluate, structure and execute future projects, thereby increasing the attractiveness of our service offering to customers. Similarly, we have chosen to exit certain businesses in which we did not perceive a competitive and economic advantage. Consistent with this approach, in 2002 we announced that we would no longer pursue bidding on high risk fixed-price EPC-CS contracts for offshore production facilities. We now focus on lower risk offshore opportunities, including cost-reimbursable EPC-CS projects, fixed-price engineering-only projects or fixed-price engineering-procurement projects. Through our new executive-led business development oversight department, we are establishing greater discipline and stricter controls with respect to our pursuit of projects, including E&C projects that historically were frequently structured as fixed-price contracts, in order to meet our more stringent technical, financial, commercial and legal parameters for risk and return. We anticipate that the proportion of fixed-price components in the E&C portion of our portfolio may decline in the future as we focus on increasing profitability while mitigating risk. Additionally, we are working more closely with our government customers prior to project initiation to define the needs, scope and scale of an operation in order to reduce the potential for billing disputes and limit withholdings on future task orders under our government contracts. We believe this focused approach enhances our margins, reduces our project execution risk and positions us for continued growth.

• Maintain a balanced and diversified portfolio. We seek to maintain a balanced and diversified portfolio of projects across end-markets, services and contract types in order to increase our operating flexibility and reduce our exposure to any particular end-market. Our E&C segment is heavily focused on oil and gas end-markets, but our ability to serve the full facility lifecycle as well as the differing subsectors of these end-markets reduces our reliance on any particular service or industry subsector. At the same time, our G&I segment continues to focus on diversifying its project portfolio as we expect the volume of work in Iraq under LogCAP III will continue to decline as our customer scales back the amount of services we provide under this contract and replaces it with a new multiple service provider contract. Our overall portfolio is also diversified by contract type. As of September 30, 2006, our total backlog for continuing operations was $15 billion, of which $5.5 billion, or 37%, was attributable to fixed-price contracts and $9.5 billion, or 63%, was attributable to cost-reimbursable contracts. Historically, our E&C segment has frequently entered into fixed-price contracts. Our strategy is to continue to evaluate E&C projects on a fixed-price basis, taking into account underlying cost volatilities, scope definition, acceptable returns for the risks to be performed and our financial ability, namely letters of credit and bonding, required to execute these projects. If we are unable to successfully address these items as well as other forms of risk, we will seek to perform these projects on a cost-reimbursable basis. Our G&I segment operates primarily under cost-reimbursable contracts.

• Provide global execution on a cost-effective basis. In order to meet the demands of our global customers, we have developed expertise in positioning our expatriate employees around the world and hiring and training a local workforce. These capabilities benefit virtually all of our programs and projects. We seek to leverage these capabilities to allow us to meet the technical project requirements of a job at a lower cost. To enhance these existing capabilities, we employ the latest technologies and telecommunications systems to combine our resources into a global virtual execution team that delivers world-class service on a cost-effective basis around the world. For example, we combine E&C resources in Houston, London and Singapore with our high-value execution centers and our other local offices to offer integrated project management, process engineering, global procurement and technology services. We believe the integration of our regional offices, high-value execution centers and local resources enables us to provide more cost-effective global solutions for our customers.

Our History

We trace our history and culture to two businesses, The M.W. Kellogg Company (Kellogg) and Brown & Root, Inc. (Brown & Root). Each firm has a history of working in the oil and gas and government services businesses and, through a series of acquisitions became the engineering and construction subsidiary of Halliburton.

83

George and Herman Brown joined together in 1919 with their brother-in-law Dan Root to build what would become the largest engineering and construction firm in the United States, Brown & Root. In 1946, Brown & Root created a petroleum and chemicals division and won the first major contract to build a chemical plant for Diamond Alkali on the Houston Ship Channel. The following year, it developed the world’s first major offshore production platform. The company’s government services began in 1941 when Brown & Root entered into the shipbuilding business and completed 359 destroyer escorts and other vessels for the United States Navy. In 1951, Brown & Root won a contract to recondition 1,500 World War II tanks. Halliburton acquired Brown & Root in 1962. In the 1960s, NASA named Brown & Root as the architect engineer for the Johnson Space Center. In 1965, Brown & Root built the first offshore platform in the North Sea for Conoco in what later would become a major offshore hub. In 1987, Brown & Root made an initial investment in DML, which owns and operates the Devonport Royal Dockyard, Western Europe’s largest naval dockyard complex. In 1997 Brown & Root became the majority owner of DML.

Kellogg was founded in New York by Morris W. Kellogg in 1901 as a small pipe fabrication company. It soon expanded into the business of designing and constructing power plant chimneys and later moved into process engineering for the downstream oil and gas business. In 1927, Kellogg established its first laboratory for pilot testing new technologies, forming the foundation of Kellogg’s strong research and development focus that still exists today. In 1942, Kellogg built the first fluid catalytic cracking facility in Baton Rouge, Louisiana and in 1956 Kellogg built the first crude oil based liquid ethylene cracking facility in Europe. Kellogg first entered the LNG business in 1977 when it was selected to build a LNG liquefaction project in Skikda, Algeria. In 1988, Kellogg was acquired and became the key engineering arm of Dresser Industries.

In 1998, when Halliburton merged with Dresser Industries, Kellogg and Brown & Root were combined to form KBR. Today, KBR serves its customers through two segments. E&C combines Kellogg’s technology-based EPC capabilities with Brown & Root’s internationally recognized engineering, general contracting and maintenance capabilities. G&I has evolved from Brown & Root’s expertise in providing engineering, construction and other services to military and civilian branches of governments.

Our Energy and Chemicals Segment

Service Offerings

Program and Project Management. We provide program and project management services for EPC-CS projects, including many of today’s large-scale, multi-billion dollar projects. We have more than 400 project management, engineering and construction managers who assume overall responsibility for all aspects of a project, from feasibility studies to facilities commissioning and start-up. In addition, we often act as our customer’s direct representative, or program management contractor, by overseeing the work of other engineering and construction contractors.

Engineering. Our engineering capabilities span the entire project lifecycle, including: feasibility studies, conceptual engineering and front-end engineering design during project planning and development; detailed engineering during project execution; and asset optimizations, such as enhanced oil recovery and de-bottlenecking, to enhance efficiency and functionality during the operating life of a facility. We deliver our engineering services through over 4,000 engineers working out of 14 engineering offices around the world and utilizing industry leading design technologies.

Procurement. Our procurement services include purchasing, materials management, expediting, inspection and logistics. The procurement of materials and equipment generally accounts for between 30% and 40% of the total capital expenditures for any given project. Our procurement professionals are located in our headquarters office in Houston, as well as our offices in London, Johannesburg and Singapore.

Construction. Our construction capabilities entail all aspects of construction execution, including construction management, hiring and training local workforces, subcontracts management, and an extensive

84

support organization for systems, equipment and tools. We are capable of delivering these services in remote and difficult environments all over the world in a safe, timely, quality-conscious and cost-effective manner.

Facility Commissioning and Start-up. We have a dedicated group that provides facility commissioning, start-up, training and other ongoing services as part of the lifecycle of a project. During facility commissioning and start-up, our team performs safety checks and equipment tests and provides personnel training for facility operations. The key experiences from each project are recorded in a facility performance database as part of our efforts to enhance our performance on future projects.

Operations and Maintenance. We provide plant project management, plant operations and maintenance services, such as repair, renovation, predictive and preventative services, and other aftermarket services to customer facilities. These services may be “pull-through” projects that transition from an EPC-CS project or stand-alone operations and maintenance contracts. Services focus on asset management or long-term facility care using direct hire maintenance technicians along with knowledge-based systems.

Consulting. We provide expert consulting services in every phase of the project lifecycle for onshore, offshore, and deepwater oil and gas developments. As we do with respect to our EPC-CS service offerings, we provide expert technical and management advice, including studies, conceptual and detailed engineering, project management and construction advisory services. In addition, we provide semi-submersible marine and naval architectural consulting services to the offshore oil and gas industry.

Technology. We develop or otherwise have the right to license proprietary technologies in the areas of olefins, refining, petrochemicals, fertilizers and semi-submersible technology and have extensive experience in the commercial application of these technologies. In addition, we own and operate a technology center that actively works with our customers to develop new technologies and improve existing technologies. We license these technologies to our customers for the design, engineering and construction of oil and gas and petrochemical facilities. We believe this technology portfolio helps us secure full EPC-CS project awards.

The following diagram provides a summary depiction of the project lifecycle and the primary services we deliver through every major phase of a project’s development.

Energy and Chemicals—Project Lifecycle

85

Markets

Our E&C segment provides services to the upstream and downstream energy market sectors, including:

• Oil and gas production;

• Gas monetization (LNG and GTL);

• Petrochemicals;

• Refining;

• Syngas (including fertilizers, hydrogen and methanol); and

• Emerging markets.

Oil and Gas Production

World energy consumption is expected to increase over 50% by 2030 primarily as a result of strong and growing economies in Asia Pacific, Africa, the Middle East and Central and South America, according to the International Energy Agency. In order to meet growing energy demands, oil and gas companies are increasing their exploration, production and transportation spending to increase production capacity and supply. Production companies are investing in development projects which may not have been economically viable at lower than current oil and gas price levels. As a result, more technologically complex projects are being undertaken to develop reserves in deepwater offshore, arctic regions and other remote locations. Capital investment in oil and gas infrastructure is expected to total approximately $6 trillion through 2030 according to the International Energy Agency.

We have over 70 years of experience and innovation in building upstream production and transport facilities, which extract product from the wellhead and deliver it to downstream processing facilities. We provide our full complement of EPC-CS services to a broad array of upstream infrastructure projects, which include onshore production facilities and flowlines, pipelines and export terminals, offshore fixed platforms, floating production storage and offloading facilities and semi-submersible floating production units, as well as subsea umbilicals, risers and flowlines for offshore production. We have the experience and capabilities to deliver these services globally and in difficult environments. In addition, we continue to develop enabling technologies and project execution methods, such as riser and hull designs for deepwater and arctic developments, improving our ability to execute projects in these challenging environments.

Gas Monetization

Natural gas is projected to be the fastest growing component of primary energy consumption over the next two decades. The main driver for this growth is electric power generation, due to growing power demand combined with environmental regulations that require the use of cleaner burning fuels. Energy Information Administration estimates that worldwide natural gas consumption will increase by almost 70% from 2002 to 2025. Trillions of cubic feet of “stranded” natural gas are located in remote areas such as the Middle East, Russia, Africa and Asia Pacific. Many of these resources are isolated from traditional gas infrastructure and primary demand centers located in the United States, Western Europe, Japan and Korea, and therefore cannot be developed and transported by traditional means. As a result, economical transportation of natural gas is a critical element in future development to meet the current and expected future supply/demand imbalances. Gas monetization technologies, including LNG and GTL, permit the economical development of these stranded resources.

Liquefied Natural Gas. LNG is natural gas that has been reduced to 1/600th of its volume by cooling it through a sophisticated refrigeration process until it liquefies. LNG is odorless, colorless, non-toxic and non-corrosive, and is among the world’s most environmentally friendly fossil fuels. In liquid form, LNG allows for natural gas to be shipped economically in specialized tankers across international waters and reconverted to gas at receiving terminals in major import markets. Cambridge Energy Research Associates expects today’s LNG production volumes to triple by 2020, with an annual average growth rate of 6.5% to 8% over this period, representing about 20% of global natural gas supply.

86

We have designed and constructed, alone or with joint ventures, more than half of the world’s operating LNG production capacity since the mid-1970s and have designed 54% of the LNG receiving terminals in operation outside of Japan. We have built or are currently executing EPC-CS LNG liquefaction projects in eight countries, often in areas where it has been necessary to create infrastructure and train a local workforce.

Gas-to-Liquids. GTL is a process through which natural gas is chemically converted into high quality premium liquid hydrocarbons that can be used directly as fuel or blended with lower quality fuel to bring it into compliance with environmental and performance specifications. High crude oil prices in recent years and technological advances in processing have made GTL an attractive option for monetizing stranded natural gas. Like LNG facilities, processing facilities for GTL are complex, capital intensive and usually located in remote and difficult environments. As of December 31, 2005, at least six major GTL projects were either announced or under serious consideration for implementation by 2010, representing a combined anticipated investment of over $20 billion. As of September 30, 2006, three of these projects were either being built or were in the front-end design phase. We and our gas alliance partner, JGC Corporation of Japan, have established ourselves in the GTL market and are involved in two of these three GTL projects. Significant investments in GTL technology are in progress or being considered in gas-rich countries such as Algeria, Australia, Colombia, Nigeria, Qatar and Russia.

Petrochemicals

The petrochemicals industry produces chemicals that are used to make a variety of consumer products, from plastics to car tires to compact discs. Some of these chemicals include ethylene, propylene, phenol and aniline. Global demand for consumer products, particularly in North America and Asia Pacific, continues to drive the need for increased production of ethylene, propylene and associated derivatives. According to Hydrocarbon Processing, the petrochemicals market currently represents approximately 44% of annual worldwide capital expenditures in the onshore process industry, representing an annual investment of approximately $40 billion.

We have more than sixty years of experience building petrochemical plants and licensing process technology necessary for the production of petrochemicals around the world. We have licensed and designed more than 800 petrochemical projects worldwide, and we have provided EPC-CS services to more than 160 of these facilities. Additionally, more than 30% of greenfield worldwide ethylene capacity added since 1986 was licensed, designed and/or constructed by us. In Saudi Arabia, our technology has been used in four of the eight operating ethylene plants.

We provide a range of services to the petrochemicals end-market, including technology and basic engineering packages, detailed engineering, procurement, construction, and facility commissioning and start-up. We develop or otherwise have the right to license various leading petrochemical technologies and have extensive experience in the commercial application of these technologies. These technologies include Selective Cracking Optimum Recovery (SCORE^™) and SUPERFLEX^™. SCORE^™ is a highly-efficient, reliable and cost-effective process for the production of ethylene which includes technology developed by us and ExxonMobil. SUPERFLEX^™ is a flexible proprietary technology for the production of high yields of propylene using low value chemicals. We also license a variety of technologies for the transformation of raw materials into commodity chemicals such as phenol and aniline used in the production of consumer end-products.

Refining

Over the next nine years, significant investments are expected in refining infrastructure with estimated total capital investments of approximately $200 billion through 2015 according to Purvin & Gertz. Due to shortages of refining capacity in the United States, exacerbated by the lack of new refineries built during the last few decades, refiners are considering the expansion of existing capacity or the construction of new refineries. In the United States, we have been selected to provide conceptualization, planning and early design services for a 325,000 barrels per day refinery expansion project being considered by Motiva Enterprises.

We are a leader in the petroleum refining market, having designed and/or constructed more than fifty greenfield refineries and over one thousand refining units, retrofits or upgrades since the 1950s. Our Residuum

87

Oil Supercritical Extraction (ROSE^™) heavy oil technology is designed to maximize refinery production yield from each barrel of crude oil. The by-products, known as asphaltines, can be used as a low-cost alternative fuel. We have licensed 40 ROSE^™ units, eight of which have been licensed in the past two years.

In addition to our expertise in heavy oils, in the last ten years we have licensed and designed, either independently or through our alliance with ExxonMobil Research & Engineering, over 200 hydroprocessing, fluid catalytic cracking and environmentally friendly clean fuels projects.

Syngas

Syngas is a mixture of hydrogen and carbon monoxide derived from natural gas, oil, or coal. Approximately 65% of Syngas produced is converted into ammonia, which is used in the fertilizer industry. The global demand for fertilizers has been increasing to accommodate the food production necessary to sustain an expanding population. Production capacity for ammonia, which is primarily used to produce fertilizer, is expected to increase by 16.4 million tons over the next five years according to Fertecon, which would roughly be equal to four to five ammonia plants per year. A developing source for Syngas is coal gasification, as described in “—Emerging Markets.”

We are a licensor of ammonia process technologies. During the past sixty years, we have licensed ammonia process technologies for more than 200 ammonia plants and provided some combination of EPC-CS services for over 120 of these facilities. As a result, we have extensive experience in the commercial application of these process technologies. We also have a portfolio of proprietary ammonia processes for the conversion of Syngas to ammonia. KAAPplus^™, our ammonia process which combines features of the KBR Advanced Ammonia Process, the KBR Reforming Exchanger System and the KBR Purifier technology, contributes to reduced capital cost, lower energy consumption and higher reliability for ammonia producers. Complementing our technologies, we offer a range of services, from project development and feasibility studies, through execution and start-up, operation and maintenance and advance process automation.

Emerging Markets

As a technology-based EPC-CS contractor, we are focused on monitoring emerging markets and the development of promising new technologies in various stages of maturity, with the goal of nurturing the technologies until the market becomes commercially viable. We are currently focusing on coal gasification and CO₂ sequestration as key emerging market opportunities.

Due to growing environmental regulations, a cleaner method of converting coal to Syngas is needed. Together with our partner Southern Company, we have been selected by the U.S. Department of Energy under its Clean Coal Power Initiative to build a 285-megawatt coal gasification facility in central Florida. The project, which uses our KBR Transport Gasifier^™ technology, is a commercial demonstration of advanced coal-based gasification technology. The facility is expected to gasify Powder River Basin sub-bituminous coal to produce power in a gas turbine combined cycle and has a target completion date in 2010. The KBR Transport Gasifier^™ technology is economically attractive compared to commercially available alternatives. It effectively handles low quality coals, including sub-bituminous and lignites that make up half the proven U.S. and worldwide coal reserves. Due to sustained energy demand and the high price of natural gas, coal gasification offers an economic alternative source of natural gas. As the energy supply tightens and environmental concerns increase, customers are beginning to seriously consider different sources of energy and new applications of conventional energy resources such as our coal gasification technology.

Coal gasification also allows for the capture of CO₂. A major challenge for the oil and gas industry is the amount of CO₂ produced, not only in downstream refining but also during a variety of processes used to deliver cleaner gas. We are helping to mitigate CO₂ emissions, either by injecting CO₂ underground to enhance oil and gas recovery, or by storing CO₂ in depleted underground reservoirs. We have drawn upon our extensive experience designing CO₂ compression systems for fertilizer plants to help design and build the world’s first full scale carbon dioxide capture project at BP’s In Salah gas development project in Algeria. About one million tons of CO₂ greenhouse gas are expected to be separated and reinjected into deep wells every year throughout the first two decades of the In Salah project’s operation, nearly as much CO₂ as 200,000 passenger cars emit annually.

88

Significant Projects

The following table summarizes several representative E&C projects currently in progress or recently completed within each of our primary end-markets.

Oil and Gas Production
Project Name	Customer Name	Location	Contract Type	Description
Azeri-Chirag- Gunashli	AIOC	Azerbaijan	Cost-reimbursable	Engineering and procurement services for six offshore platforms, subsea facilities, 600 kilometers of offshore pipeline and onshore terminal upgrades.
In Amenas Gas Development	British Petroleum / Sonatrach	Algeria	Fixed-price	EPC-CS services for gas processing facility, associated pipeline and infrastructure; joint venture with JGC.
Block 18 -Greater Plutonio	British Petroleum Angola	Angola	Cost-reimbursable	EPCm services for a floating production storage and offloading unit and subsea facilities.

LNG
Project Name	Customer Name	Location	Contract Type	Description
Tangguh LNG	BP Berau Ltd.	Indonesia	Fixed-price	EPC-CS services for two LNG liquefaction trains; joint venture with JGC and PT Pertafenikki Engineering of Indonesia.
Yemen LNG	Yemen LNG Company Ltd.	Yemen	Fixed-price	EPC-CS services for two LNG liquefaction trains; joint venture with JGC and Technip.
NLNG Trains 4, 5 and 6	Nigeria LNG Ltd.	Nigeria	Fixed-price	EPC-CS services for three LNG liquefaction trains; working through TSKJ joint venture.
GTL
Project Name	Customer Name	Location	Contract Type	Description
Escravos GTL	Chevron Nigeria Ltd. & Nigeria National Petroleum Corp.	Nigeria	Fixed-price	EPC-CS services for a GTL plant producing diesel, naphtha and liquefied petroleum gas; joint venture with JGC and Snamprogetti.
Pearl GTL	Qatar Shell GTL Ltd	Qatar	Cost-reimbursable	Front-end engineering design work and project management for the overall complex and EPCm for the GTL synthesis and utilities portions of the complex; joint venture with JGC.

89

Petrochemicals
Project Name	Customer Name	Location	Contract Type	Description
Sasol Superflex	Sasol Limited	South Africa	Cost-reimbursable	EPCm and facility commissioning and start-up services for propylene plant using KBR’s SUPERFLEX™ technology.
JUPC ethylene	Jubail United Petrochemicals Corporation	Saudi Arabia	Fixed-price	EPCm for ethylene plant construction and capacity expansion project.
Ethylene/Olefins Facility	Saudi Kayan Petrochemical Company	Saudi Arabia	Fixed-price	Basic process design and EPCm services for a new ethylene facility using SCORE™ technology
Refining
Project Name	Customer Name	Location	Contract Type	Description
UE-1 Upgrader Expansion Project	Syncrude Canada Ltd.	Canada	Cost-reimbursable	Recently completed EPCm revamp and greenfield refinery project for the production of Syncrude Sweet Blend.
Jamnagar Refinery Expansion	ExxonMobil	India	Multiple fixed-price contracts	Licensing and basic engineering packages for clean fuels and alkylation units.
Greenfield Refinery Project	Saudi Aramco/ ConocoPhillips	Saudi Arabia	Cost-reimbursable	Program management services including front end engineering development for a new 400,000 barrels per day greenfield refinery
Synthesis Gas / Fertilizer
Project Name	Customer Name	Location	Contract Type	Description
Egypt Ammonia Plant	Egypt Basic Industries Corporation	Egypt	Fixed-price	EPC-CS services for an ammonia plant based on KBR Advanced Ammonia Process technology.
Emerging Markets
Project Name	Customer Name	Location	Contract Type	Description
Orlando Power Project	Southern Company/U.S. Department of Energy	Florida	Cost-reimbursable	Engineering for a power plant 50% funded by the U.S. Department of Energy that will utilize KBR’s Transport Gasifier™ technology.
In Salah Gas	BP	Algeria	Fixed-price	EPC-CS services for a gas field CO2 sequestration development project.

90

Our Government and Infrastructure Segment

Service Offerings

Program and Project Management. With our ability to rapidly deploy on-demand support services, we provide large-scale program and project management services to our global government customers. Our management services capabilities are used throughout a project from initial planning to final execution in which we are able to deliver a combination of our contingency logistics, operations and maintenance, construction management and engineering services. These services can also include integrated security solutions to both the public and private sectors.

Contingency Logistics. We are one of the world’s largest military logistics providers with over 20,000 employees and over 30,000 subcontractor employees providing contingency or wartime logistics support to military and civilian personnel around the world as of December 31, 2005. Our rapid response logistics capabilities may include any combination of our broader service offerings, including program and project management, operations and maintenance, construction management and engineering services.

Operations and Maintenance. We have been providing systems and personnel needed to maintain worldwide government facilities for over 40 years. Our comprehensive operations and maintenance services include transportation services, quality of life services, facilities management, and maintenance and support services. Our quality of life services include housing, food service, laundry and dry cleaning, and morale, welfare and recreation services. Our maintenance services include vehicle and equipment maintenance, aircraft servicing, minor construction and repair, grounds maintenance, housing maintenance and weapons range maintenance. Our support services capabilities include refuse collection, power production and management, water treatment and distribution, wastewater treatment, hazardous waste management, custodial services, fuels handling and management, transportation services and security support.

Construction Management. We provide a broad array of construction management experience and capabilities, from design and modifications to the construction of major projects in remote and difficult environments. Our capabilities include design-build, security improvements and upgrades, construction, additions and alterations, and renovations and repairs. Our specific expertise includes barracks and camps, laboratory, healthcare and maintenance facilities, ports, embassies and consulates, utilities, schools, airfield and aviation facilities, correctional facilities, transit maintenance buildings, training facilities, and administration and operational facilities.

Engineering. We maintain an active global consulting practice providing engineering services, which include planning, design and feasibility study services, to government and commercial customers in the transportation, water resources and facilities end-markets. Our projects include highways, bridges, aviation facilities, water resources and water and wastewater utilities.

Submarine and Warship Maintenance. Through our Devonport Management Limited subsidiary, we own and operate the largest naval dockyard complex in Western Europe. Devonport Royal Dockyard is the only site in the United Kingdom equipped and licensed to refit, refuel and defuel nuclear-powered submarines for the U.K. MoD. We provide design, project and construction management services, maintenance and capability upgrades for vessels, as well as prime design, supply, support and overhaul of naval equipment and systems. We also provide project and construction management to the MoD on major naval programs, such as the MoD’s new aircraft carrier program known as the “Carrier Vessel Future.” We are also one of three companies short-listed by the MoD to be the project integrator for the vessels under the MoD’s Military Afloat Reach and Sustainability program.

Management Consulting and Training. We are a management consulting and training provider. Our services include capability development, project management, engineering and business analysis support, as well as military training, including air crew and ground crew, integrated logistics support and project management training.

Privately Financed Projects. On a selective basis, we are also a developer of and investor in privately financed projects that enable our customers to finance large-scale infrastructure projects, major military

91

equipment purchases or industrial facilities. We enter into non-recourse financing arrangements to secure additional contracts for the provision of engineering, construction and long-term operation and maintenance services for an agreed period after the projects have been completed or equipment has been delivered.

Markets

Our G&I segment provides services to the following end-markets:

• U.S. Department of Defense;

• U.K. Ministry of Defence;

• Other national governments and agencies; and

• State and local governments.

U. S. Department of Defense. The DoD is the largest customer of our G&I segment. With a fiscal 2007 discretionary budget request of approximately $439 billion, the DoD is one of the U.S. government’s largest federal agencies. In addition, billions of congressionally approved supplemental dollars were allocated to the DoD in 2006 for the global war on terror. The DoD is restructuring its organization to focus its resources on combat forces and increase outsourcing of non-core support services. The DoD has recently changed the way it mobilizes forces and engages in conflicts by moving to the use of smaller, more rapidly deployable forces to address a shifting and often unidentifiable threat. These trends are also creating demand for our engineering and construction and operations and maintenance capabilities for military infrastructure required to support long-term deployments. We are currently providing contingency support services, including food service, fuel and equipment transportation, laundry and other services critical to maintaining troop deployments primarily in the Middle East and the Balkan states.

The DoD is also reviewing its current base operations through its “Base Realignment and Closure” initiative intended to create greater efficiency within the military budget, while also increasing troop preparedness. Under this initiative, the DoD plans to undertake a significant base closure and consolidation program which, in addition to base operations and maintenance outsourcing opportunities, is also likely to create additional engineering and construction opportunities to accommodate these changes to base infrastructure.

U.K. Ministry of Defence. The MoD is the second largest customer of our G&I segment. With a fiscal year 2006 budget of approximately £30.9 billion, the MoD is currently undertaking a defense modernization program, including new submarines, surface combatants, support ships, strike and mobility aircraft, and surveillance and electronic warfare systems. The MoD is engaged in a detailed defense industrial base review and is examining approaches toward the effective rationalization and upgrading of its assets, leading to a greater use of outsourced services and privately financed project arrangements.

Other National Governments and Agencies. We provide logistics, base operating support, construction and engineering services to other executive branch agencies of the U.S. government including the Department of State, Department of Homeland Security, Department of Energy and the National Institutes of Health. In addition, we support the Australian Ministry of Defence, the U.K. National Health Service and other national and federal government agencies. In response to recent attacks on U.S. facilities overseas, the Department of State has embarked on a fourteen-year, $17.5 billion program to design and build new U.S. embassy and consular compounds, as well as install security upgrades at dozens of existing U.S. diplomatic facilities. Additionally, prompted by the increased focus on domestic security and emergency response (including for natural disasters), the Department of Homeland Security has experienced greater need for outsourced services. The Department of Energy has a history of utilizing contractors to support and maintain its aging infrastructure and facilities and is expected to increase its utilization of outsourcing in order to meet its maintenance needs in the face of budgetary constraints. We also provide non-defense-related services to federal agencies, such as our work with the National Institutes of Health since 1993. We provide technical facilities renovation, design, construction, and maintenance services for six National Institutes of Health buildings at its Maryland campus. For the Australian Ministry of Defence, we provide air and related support training and services, and for the U.K. National Health Service, we provide systems, tools and infrastructure support to modernize the department’s computer systems.

92

State and Local Governments. Our primary focus within the state and local government sectors is on civil infrastructure where we believe there has been a general trend of historic under-investment. The American Society of Civil Engineers gave the United States infrastructure a “D” or “poor” rating in its 2005 Report Card for America’s Infrastructure. In particular, infrastructure related to the quality of water, wastewater, roads and transit, airports and educational facilities has declined while demand for expanded and improved infrastructure continues to outpace funding.

Significant Contracts

The following table summarizes several significant contracts under which our G&I segment is currently providing or has recently provided services.

Contingency Logistics
Project Name	Customer Name	Location	Contract Type	Description
LogCAP III	U.S. Army	Worldwide	Cost-reimbursable	Contingency support services.
PCO Oil South	U.S. Army	Iraq	Cost-reimbursable	Restoration of Iraqi oil fields (southern region).
Restore Iraqi Oil (RIO)	U.S. Army	Iraq	Cost-reimbursable	Restoration of Iraqi oil fields.
AFCAP	U.S. Air Force	Worldwide	Cost-reimbursable	Contingency support services.
TDA	U.K. Ministry of Defence	Worldwide	Fixed-price	Battlefield infrastructure support.
Contingency Support Project	U.S. Department of Homeland Security	United States	Cost-reimbursable	Indefinite delivery/indefinite quantity contingency support services.
Operations and Maintenance
Project Name	Customer Name	Location	Contract Type	Description
Balkan Support	U.S. Army	Balkans region	Cost-reimbursable	Theater-level logistics and base operating support services.
Los Alamos National Laboratory	University of California for the U.S. Department of Energy	New Mexico	Cost-reimbursable	Site support services.
Fort Knox	U.S. Air Force	Kentucky	Cost-reimbursable	Base support services.
Construction Management and Engineering
Project Name	Customer Name	Location	Contract Type	Description
CONCAP III	U.S. Navy	Worldwide	Cost-reimbursable	Emergency construction services.
CENTCOM	U.S. Army	Middle East	Combination of fixed-price and cost-reimbursable	Construction of military infrastructure and support facilities.
U.S. Embassy Macedonia	U.S. Department of State	Macedonia	Fixed-price	Design and construction of embassy.
Scottish Water	Scottish Water	Scotland	Cost-reimbursable	Program management of water assets renewal.
Hope Downs DES	Rio Tinto for Hope Downs joint venture	Australia	Cost-reimbursable	EPCm services supporting mine development.

93

Submarine and Warship Maintenance
Project Name	Customer Name	Location	Contract Type	Description
DML—Victorious LOP(R)	U.K. Ministry of Defence	U.K.	Fixed-price	Submarine refuel, refit and maintenance.
DML—WSMI (Warship Modernization Initiative)	U.K. Ministry of Defence	U.K.	Cost-reimbursable	Range of engineering, logistics and facilities management tasks mostly at DML’s main dockyard site.
CVF (Future Aircraft Carrier)	U.K. Ministry of Defence	U.K.	Cost-reimbursable	Program management of future aircraft carriers.
Management Consulting and Training
Project Name	Customer Name	Location	Contract Type	Description
Air 87	Australian Aerospace for the Australian Army	Australia	Fixed-price	Helicopter training services throughout the equipment lifecycle.
Air 9000	Australian Aerospace for the Australian Army	Australia	Fixed-price	Helicopter training services to support the acquisition of a new helicopter.
Privately Financed Projects
Project Name	Customer Name	Location	Contract Type	Description
FreightLink— Alice Springs-Darwin Railway	Various	Australia	Fixed-price and market rates	Design, build, own, finance and operate railway/freight services.
Heavy Equipment Transporter	U.K. Ministry of Defence	Worldwide	Combination of fixed- price and cost- reimbursable	Own, finance, operate and service battle tank transporter fleet.
Aspire Defence— Allenby & Connaught	U.K. Ministry of Defence	U.K.	Combination of fixed- price and cost-reimbursable	Own, finance, upgrade and service army facilities.

Joint Ventures and Alliances

We enter into joint ventures and alliances with other industry participants in order to reduce and diversify risk, increase the number of opportunities that can be pursued, capitalize on the strengths of each party and the relationships of each party with different potential customers, and allow for greater flexibility in choosing the preferred location for our services based on the greatest cost and geographical efficiency. Several examples of these joint ventures and alliances are described below. All joint venture ownership percentages presented are as of September 30, 2006.

• We began working with JGC in 1978 to pursue an LNG project in Malaysia. This relationship was formalized into a gas alliance agreement in 1999, which was renewed in 2005. Under the alliance, KBR

94

and JGC have agreed to jointly promote and market their capabilities in the natural gas industry. Our ownership interest in current projects with JGC varies between 25% and 55% depending on the number of parties involved. The alliance expires in August 2008, but contains a provision contemplating renewals as agreed by the parties. In the last 27 years, the majority of our LNG and GTL projects have been pursued jointly with JGC. KBR and JGC have been awarded twenty-one front-end engineering design and/or EPC-CS contracts for LNG and GTL facilities, and have completed over 30 million metric tons per annum of LNG capacity between 2000 and 2005. We operate this alliance through global hubs in Houston, Yokohama and London. Pursuant to the terms of our gas alliance agreement, if and when the distribution of our common stock by Halliburton to its stockholders occurs the alliance may be terminated by either party.

• M.W. Kellogg Limited (MWKL) is a London-based joint venture that provides full EPC-CS contractor services for LNG, GTL and onshore oil and gas projects. MWKL is owned 55% by us and 45% by JGC. MWKL supports both of its parent companies, on a stand-alone basis or through our gas alliance with JGC, and also provides services to other third party customers. We consolidate MWKL for financial accounting purposes.

• TSKJ is a joint venture formed to design and construct large-scale projects in Nigeria. TSKJ’s members are Technip, SA of France, Snamprogetti Netherlands B.V., which is a subsidiary of Saipem SpA of Italy, JGC and us, each of which has a 25% interest. TSKJ has completed five LNG production facilities on Bonny Island, Nigeria and is currently working on a sixth such facility. We account for this investment using the equity method of accounting.

• Devonport Management Limited owns and operates the Devonport Royal Dockyard located in Plymouth, England. We own 51% of DML. Balfour Beatty and Weir Group own the remaining interests. DML provides several services to the MoD, including sole-source contracting for nuclear refitting and refueling of the MoD’s nuclear submarine fleet, surface ship maintenance and upgrading, naval base management and operational services. We consolidate DML for financial accounting purposes. The MoD has the right at any time to assume control of the dockyard operated by DML if the MoD deems it to be in the essential security interests of the United Kingdom. The MoD has asked for assurances that our financial stability, after a distribution by Halliburton to its stockholders of our common stock that it owns following this offering, will continue to satisfy the MoD’s requirements.

• Brown & Root-Condor Spa (BRC), a joint venture with Sonatrach and another Algerian company, enhances our ability to operate in Algeria by providing access to local resources. BRC executes work for Algerian and international customers, including Sonatrach. BRC has built oil and gas production facilities and civil infrastructure projects, including hospitals and office buildings. We have a 49% interest in the joint venture. We account for this investment using the equity method of accounting.

• KSL is a joint venture with Shaw Group and Los Alamos Technical, formed to provide support services to the Los Alamos National Laboratory in New Mexico. We are a 55% owner and the managing partner of KSL. The joint venture serves as subcontractor to the University of California, which in December 2005 won a rebid for laboratory operatorship. As part of the rebid, the University of California system is required to continue using KSL for support services. This contract has five one-year extension options beginning in 2008. We consolidate KSL for financial accounting purposes.

• FreightLink—The Alice Springs-Darwin railroad is a privately financed project initiated in 2001 to build, own and operate the transcontinental railroad from Alice Springs to Darwin, Australia and has been granted a 50-year concession period by the Australian government. We provided EPC services and are the largest equity holder in the project with a 36.7% interest, with the remaining equity held by eleven other participants. We account for this investment using the equity method of accounting.

• Aspire Defence—Allenby-Connaught is a joint venture between us, Mowlem Plc. and a financial investor formed to contract with the MoD to upgrade and service certain United Kingdom military facilities. In addition to a package of ongoing services to be delivered over 35 years, the project includes a nine-year construction program. We indirectly own a 45% interest in Aspire Defence, the project

95

company that is the holder of the 35-year concession contract. In addition, we own a 50% interest in each of the two joint ventures that provide the construction and related support services to Aspire Defence. We account for this investment using the equity method of accounting.

• In 2002, we entered into a cooperative agreement with ExxonMobil Research and Engineering Company for licensing fluid catalytic cracking technology that was an extension of a previous

95.1

agreement with Mobil Oil Corporation. Under this alliance, we offer to the industry certain fluid catalytic cracking technology that is available from both parties. We lead the marketing effort under this collaboration, and we co-develop certain new fluid catalytic cracking technology.

Backlog

Backlog represents the dollar amount of revenue we expect to realize in the future as a result of performing work under multi-period contracts that have been awarded to us. Backlog is not a measure defined by generally accepted accounting principles, and our methodology for determining backlog may not be comparable to the methodology used by other companies in determining their backlog. Backlog may not be indicative of future operating results. Not all of our revenue is recorded in backlog for a variety of reasons, including the fact that some projects begin and end within a short-term period. Many contracts do not provide for a fixed amount of work to be performed and are subject to modification or termination by the customer. The termination or modification of any one or more sizeable contracts or the addition of other contracts may have a substantial and immediate effect on backlog.

We generally include total expected revenue in backlog when a contract is awarded and/or the scope is definitized. On our projects related to unconsolidated joint ventures, we include our percentage ownership of the joint venture’s backlog. Because these projects are accounted for under the equity method, only our share of future earnings from these projects will be recorded in our revenue. Our backlog for projects related to unconsolidated joint ventures in our continuing operations totaled $4.4 billion, $2.9 billion and $0.8 billion at September 30, 2006 and at December 31, 2005 and 2004, respectively. We also consolidate joint ventures which are majority-owned and controlled or are variable interest entities in which we are the primary beneficiary. Our backlog for projects related to consolidated joint ventures with minority interests includes 100% of the backlog associated with those joint ventures and totaled $4.2 billion, $3.6 billion and $0.4 billion at September 30, 2006 and at December 31, 2005 and 2004, respectively.

For long-term contracts, the amount included in backlog is limited to five years. In many instances, arrangements included in backlog are complex, nonrepetitive in nature, and may fluctuate depending on expected revenue and timing. Where contract duration is indefinite, projects included in backlog are limited to the estimated amount of expected revenue within the following twelve months. Certain contracts provide maximum dollar limits, with actual authorization to perform work under the contract being agreed upon on a periodic basis with the customer. In these arrangements, only the amounts authorized are included in backlog. For projects where we solely act in a project management capacity, we only include our management scope of each project in backlog.

Backlog⁽¹⁾⁽²⁾

	December 31,						September 30, 2006
	2005		2004		2003
	(In millions)
G&I—Middle East Operations	$	2,139	$	1,732	$	2,336	$	4,157
G&I—DML Shipyard Operations		1,305		883		1,137		1,182
G&I—Other		1,708		2,128		2,628		3,629
E&C—Gas Monetization		3,651		443		422		4,179
E&C—Offshore Projects		275		444		545		140
E&C—Other		1,511		1,462		1,578		1,707
Total backlog for continuing operations	$	10,589	$	7,092	$	8,646	$	14,994

(1) Our backlog for continuing operations does not include backlog associated with our E&C segment’s Production Services group, which we sold in May 2006 and have accounted for as discontinued operations. Backlog for the Production Services group was $1.2 billion, $1.3 billion and $1.1 billion as of December 31, 2005, 2004 and 2003, respectively.

96

(2) Our G&I segment’s total backlog from continuing operations attributable to firm orders was $5.9 billion, $3.4 billion, $3.9 billion and $5.0 billion as of September 30, 2006 and December 31, 2005, 2004 and 2003, respectively. Our G&I segment’s total backlog from continuing operations attributable to unfunded orders was $3.1 billion, $1.8 billion, $816 million and $1.1 billion as of September 30, 2006 and December 31, 2005, 2004 and 2003, respectively.

We estimate that as of September 30, 2006, 51% of our E&C segment backlog and 66% of our G&I segment backlog will be complete within one year. As of September 30, 2006, 37% of our backlog for continuing operations was attributable to fixed-price contracts and 63% was attributable to cost-reimbursable contracts. For contracts that contain both fixed-price and cost-reimbursable components, we characterize the entire contract based on the predominant component. As of September 30, 2006, our backlog under the LogCAP III contract was $4.0 billion. We were awarded a task order for approximately $3.5 billion for our continued services in Iraq through September 2007 under the LogCAP III contract. Unfunded government orders are firm but not yet funded, letters of intent, and contracts awarded but not signed.

Contracts

Our contracts can be broadly categorized as either cost-reimbursable or fixed-price, sometimes referred to as lump-sum. Some contracts can involve both fixed-price and cost-reimbursable elements.

Fixed-price contracts are for a fixed sum to cover all costs and any profit element for a defined scope of work. Fixed-price contracts entail more risk to us because they require us to predetermine both the quantities of work to be performed and the costs associated with executing the work. Although fixed-price contracts involve greater risk than cost-reimbursable contracts, they also are potentially more profitable for the contractor, since the owner/customer pays a premium to transfer many risks to the contractor.

Cost-reimbursable contracts include contracts where the price is variable based upon our actual costs incurred for time and materials, or for variable quantities of work priced at defined unit rates, including reimbursable labor hour contracts. Profit on cost-reimbursable contracts may be based upon a percentage of costs incurred and/or a fixed amount. Cost-reimbursable contracts are generally less risky than fixed-price contracts because the owner/customer retains many of the risks.

In 2002, we announced that we would no longer pursue bidding on high risk fixed-price EPC-CS contracts for offshore production facilities. We have only two remaining major fixed-price EPC-CS offshore construction projects. As of September 30, 2006, they were substantially complete.

Our G&I segment provides substantial work under government contracts with the DoD and other governmental agencies. These contracts include our LogCAP contract and contracts to rebuild Iraq’s petroleum industry such as the PCO Oil South contract. If our customer or a government auditor finds that we improperly charged any costs to a contract, these costs are not reimbursable or, if already reimbursed, the costs must be refunded to the customer. If performance issues arise under any of our government contracts, the government retains the right to pursue remedies, which could include threatened termination or termination under any affected contract. Furthermore, the government may terminate or reduce the amount of work under certain of our contracts at any time.

Competition and Scope of Global Operations

Our services are sold in highly competitive markets throughout the world. The principal methods of competition with respect to sales of our services include:

• price;

• service delivery, including the ability to deliver personnel, processes, systems and technology on an “as needed, where needed, when needed” basis with the required local content and presence;

• health, safety, and environmental standards and practices;

97

• financial strength;

• service quality;

• warranty;

• breadth of technology and technical sophistication; and

• customer relationships.

We conduct business in over 45 countries. Our operations in countries other than the United States accounted for approximately 87% of our consolidated revenue during 2005 and 90% of our consolidated revenue during 2004. Based on the location of services provided, 50% of our consolidated revenue in 2005 and 45% in 2004 was from our operations in Iraq, primarily related to our work for the United States government. Revenue from our operations in Iraq represented approximately 27% of our consolidated revenue in 2003. Also, 8% of our consolidated revenue during 2005 was from the United Kingdom.

We market substantially all of our services through our servicing and sales organizations. We serve highly competitive industries and we have many substantial competitors. Some of our competitors have greater financial and other resources and access to capital than we do, which may enable them to compete more effectively for large-scale project awards. Since the markets for our services are vast and cross numerous geographic lines, we cannot make a meaningful estimate of the total number of our competitors.

Our operations in some countries may be adversely affected by unsettled political conditions, acts of terrorism, civil unrest, expropriation or other governmental actions, and exchange control and currency problems. Except for our government services work in Iraq, we believe the geographic diversification of our business activities reduces the risk that a loss of operations in any one country would be material to our operations taken as a whole.

Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Financial Instruments Market Risk” and Note 18 to our consolidated financial statements for information regarding our exposures to foreign currency fluctuations, risk concentration, and financial instruments used to minimize our risks.

Customers

We provide services to a diverse customer base, including international and national oil and gas companies, independent refiners, petrochemical producers, fertilizer producers and domestic and foreign governments. Revenue from the U.S. government, resulting primarily from work performed in the Middle East by our G&I segment, represented 65% of our 2005 consolidated revenue, 67% of our 2004 consolidated revenue, and 47% of our 2003 consolidated revenue. No other customer represented more than 10% of consolidated revenue in any of these periods.

Raw Materials

Equipment and materials essential to our business are available from worldwide sources. Current market conditions have triggered constraints in the supply chain of certain equipment and materials. We are proactively seeking ways to ensure the availability of equipment and materials as well as manage rising costs. Our procurement department is actively leveraging our size and buying power through several programs designed to ensure that we have access to key equipment and materials at the best possible prices and delivery schedule. Please read, “Risk Factors—Risks Related to Our Customers and Contracts—Difficulties in engaging third party subcontractors, equipment manufacturers or materials suppliers or failures by third party subcontractors, equipment manufacturers or materials suppliers to perform could result in projects delays and cause us to incur additional costs.”

98

Intellectual Property

We have developed or otherwise have the right to license leading technologies, including technologies held under license from third parties, used for the production of a variety of petrochemicals and chemicals and in the areas of olefins, refining, fertilizers and semi-submersible technology. Our petrochemical technologies include SCORE^™ and SUPERFLEX^™. SCORE^™ is a process for the production of ethylene which includes technology developed with ExxonMobil. SUPERFLEX^™ is a flexible proprietary technology for the production of high yields of propylene using low value chemicals. We also license a variety of technologies for the transformation of raw materials into commodity chemicals such as phenol and aniline used in the production of consumer end-products. Our Residuum Oil Supercritical Extraction (ROSE^™) heavy oil technology is designed to maximize the refinery production yield from each barrel of crude oil. The by-products from this technology, known as asphaltines, can be used as a low-cost alternative fuel. We are also a licensor of ammonia process technologies and have the right to license ammonia processes used in the conversion of Syngas to ammonia. KAAPplus^™, our ammonia process which combines the best features of the KBR Advanced Ammonia Process, the KBR Reforming Exchanger System and the KBR Purifier technology, offers ammonia producers reduced capital cost, lower energy consumption and higher reliability. We believe our technology portfolio and experience in the commercial application of these technologies and related know-how differentiates us from other EPC contractors, enhances our margins and encourages customers to utilize our broad range of EPC-CS services.

Our rights to make use of technologies licensed to us are governed by written agreements of varying durations, including some with fixed terms that are subject to renewal based on mutual agreement. For example, our SCORE^TM license runs until 2028 while our rights to SUPERFLEX^TM currently expire in 2013. Both may be further extended and we have historically been able to renew existing agreements as they expire. We expect these and other similar agreements to be extended so long as it is mutually advantageous to both parties at the time of renewal. For technologies we own, we protect our rights through patents and confidentiality agreements to protect our know-how and trade secrets. Our ammonia process technology is protected through twenty-two active patents, the last of which expires in 2022.

Technology Development

We own and operate a technology center that actively works with our customers to develop new technologies and improve existing ones. We license these technologies to our customers for the design, engineering and construction of oil and gas and petrochemical facilities. We are also working to identify new technologically driven opportunities in emerging markets, including coal monetization technologies to promote more environmentally friendly uses of abundant coal resources and CO₂ sequestration to reduce CO₂ emissions by capturing and injecting them underground. Our expenditures for research and development activities were $2 million in 2005 and $6 million in each of 2004 and 2003. We make additional technology expenditures in connection with our technology center, our licenses and for new technologies developed jointly with our customers. As an example, we make expenditures in connection with the development or use of technology with respect to our projects that are charged to the particular projects and are not included as part of our research and development expenditures.

Seasonality

On an overall basis, our operations are not generally affected by seasonality. Weather and natural phenomena can temporarily affect the performance of our services, but the widespread geographic scope of our operations mitigates those effects.

Employees

As of December 31, 2005, we had over 57,000 employees in our continuing operations and over 5,500 employees in our E&C segment’s Production Services group, which we sold in May 2006 and which we have

99

accounted for as discontinued operations. At December 31, 2005, approximately 9% of the employees in our continuing operations were subject to collective bargaining agreements. Based upon the geographic diversification of our employees, we believe any risk of loss from employee strikes or other collective actions would not be material to the conduct of our operations taken as a whole. We believe that our employee relations are good.

Health and Safety

We are subject to numerous health and safety laws and regulations. In the United States, these laws and regulations include: the Federal Occupation Safety and Health Act and comparable state legislation, the Mine Safety and Health Administration laws, and safety requirements of the Departments of State, Defense, Energy and Transportation. We are also subject to similar requirements in other countries in which we have extensive operations, including the United Kingdom where we are subject to the various regulations enacted by the Health and Safety Act of 1974.

These regulations are frequently changing, and it is impossible to predict the effect of such laws and regulations on us in the future. We actively seek to maintain a safe, healthy and environmentally friendly work place for all of our employees and those who work with us. However, we provide some of our services in high-risk locations and, as a result, we may incur substantial costs to maintain the safety of our personnel.

Environmental Regulation

We are subject to numerous environmental, legal, and regulatory requirements related to our operations worldwide. In the United States, these laws and regulations include, among others:

• the Comprehensive Environmental Response, Compensation and Liability Act;

• the Resources Conservation and Recovery Act;

• the Clean Air Act;

• the Federal Water Pollution Control Act; and

• the Toxic Substances Control Act.

In addition to federal laws and regulations, states and other countries where we do business often have numerous environmental, legal, and regulatory requirements by which we must abide. We evaluate and address the environmental impact of our operations by assessing and remediating contaminated properties in order to avoid future liabilities and comply with environmental, legal, and regulatory requirements. On occasion, we are involved in specific environmental litigation and claims, including the remediation of properties we own or have operated, as well as efforts to meet or correct compliance-related matters.

We do not expect costs related to these remediation requirements to have a material adverse effect on our consolidated financial position or our results of operations.

Properties

We own or lease properties in domestic and foreign locations. The following locations represent our major facilities.

Location	Owned/Leased	Description	Segment
Houston, Texas	Leased(1)	High-rise office facility	E&C
Arlington, Virginia	Leased	Campus facility	G&I
Houston, Texas	Owned	Campus facility	G&I and E&C
Leatherhead, United Kingdom	Owned	Campus facility	G&I and E&C

(1) At September 30, 2006, we had a 50% interest in a joint venture which owns this office facility.

100

We also own or lease numerous small facilities that include our technology center, sales offices and project offices throughout the world. We own or lease marine fabrication facilities covering approximately 446 acres in Texas, England and Scotland. Our marine facilities located in Texas and Scotland are currently for sale. All of our owned properties are unencumbered and we believe all properties that we currently occupy are suitable for their intended use.

Legal Proceedings

DCAA Audit Issues

Our operations under United States government contracts are regularly reviewed and audited by the DCAA, and other governmental agencies. The DCAA serves in an advisory role to our customer. When issues are found during the governmental agency audit process, these issues are typically discussed and reviewed with us. The DCAA then issues an audit report with its recommendations to our customer’s contracting officer. In the case of management systems and other contract administrative issues, the contracting officer is generally with the DCMA. We then work with our customer to resolve the issues noted in the audit report. If our customer or a government auditor finds that we improperly charged any costs to a contract, these costs are not reimbursable, or, if already reimbursed, the costs must be refunded to the customer. Because of the scrutiny involving our government contracts operations, issues raised by the DCAA may be more difficult to resolve.

Dining Facilities. Recently, the DCAA has raised questions regarding $95 million of costs related to dining facilities in Iraq. We have responded to the DCAA that we believe our costs are reasonable.

Fuel. In December 2003, the DCAA issued a preliminary audit report that alleged that we may have overcharged the Department of Defense by $61 million in importing fuel into Iraq. The DCAA questioned costs associated with fuel purchases made in Kuwait that were more expensive than buying and transporting fuel from Turkey. We responded that we had maintained close coordination of the fuel mission with the Army Corps of Engineers, or “COE,” which was our customer and oversaw the project throughout the life of the task orders and that the COE had directed us to use the Kuwait sources. After a review, the COE concluded that we obtained a fair price for the fuel. However, Department of Defense officials referred the matter to the agency’s inspector general, which we understand commenced an investigation.

Laundry. Prior to the fourth quarter of 2005, we received notice from the DCAA that it recommended withholding $18 million of subcontract costs related to the laundry service for one task order in southern Iraq for which it believes we and our subcontractors have not provided adequate levels of documentation supporting the quantity of the services provided. In the fourth quarter of 2005, the DCAA issued a notice to disallow costs totaling approximately $12 million, releasing $6 million of amounts previously withheld. In the second quarter of 2006, we successfully resolved this matter with the DCAA and received payment of the remaining $12 million.

Containers. In June 2005, the DCAA recommended withholding certain costs associated with providing containerized housing for soldiers and supporting civilian personnel in Iraq. The DCAA had recommended that the costs be withheld pending receipt of additional explanation or documentation to support the subcontract costs. Approximately $55 million has been withheld as of September 30, 2006, of which $17 million has been withheld from our subcontractors. We will continue working with the government and our subcontractors to resolve this issue.

Other Issues. The DCAA is continuously performing audits of costs incurred for the foregoing and other services provided by us under our government contracts. During these audits, there are likely to be questions raised by the DCAA about the reasonableness or allowability of certain costs or the quality or quantity of supporting documentation. The DCAA might recommend withholding some portion of the questioned costs while the issues are being resolved with our customer. We do not believe any potential withholding will have a significant or sustained impact on our liquidity.

101

McBride qui tam suit

In September 2006, we became aware of a qui tam action filed against us by a former employee alleging various wrongdoings in the form of overbillings of our customer on the LogCAP III contract. This case was originally filed pending the government’s decision whether or not to participate in the suit. In June 2006, the government formally declined to participate. The principal allegations are that our compensation for the provision of Morale, Welfare and Recreation (MWR) facilities under LogCAP III is based on the volume of usage of those facilities and that we deliberately overstated that usage. In accordance with the contract, we charged our customer based on actual cost, not based on the number of users. It was also alleged that, during the period from November 2004 into mid-December 2004, we continued to bill the customer for lunches, although the dining facility was closed and not serving lunches. There are also allegations regarding housing containers and our provision of services to our employees and contractors. Our investigation is in its earliest stages. However, we believe the allegations to be without merit, and we intend to vigorously defend this action. As of September 30, 2006, we had accrued $0 in connection with this matter.

Investigations Relating to Iraq and Kuwait

In October 2004, we reported to the DoD Inspector General’s office that two former employees in Kuwait may have had inappropriate contacts with individuals employed by or affiliated with two third party subcontractors prior to the award of the subcontracts. The Inspector General’s office may investigate whether these two employees may have solicited and/or accepted payments from those third party subcontractors while they were employed by us.

We also provided information to the DoD Inspector General’s office in February 2004 about other contacts between former employees and our subcontractors and, in March 2006, one of these former employees pled guilty to taking money in exchange for awarding work to a Saudi Arabian subcontractor. The Inspector General’s investigation of these matters may continue.

In October 2004, a civilian contracting official in the COE asked for a review of the process used by the COE for awarding some of the contracts to us. We understand that the DoD Inspector General’s office may review the issues involved.

We understand that the DOJ, an Assistant United States Attorney based in Illinois, and others are investigating these and other individually immaterial matters we have reported relating to our government contract work in Iraq. If criminal wrongdoing were found, criminal penalties could range up to the greater of $500,000 in fines per count for a corporation or twice the gross pecuniary gain or loss. We also understand that certain of our current and former employees have received subpoenas and have given or may give grand jury testimony related to some of these matters.

The Balkans

We have had inquiries in the past by the DCAA and the civil fraud division of the DOJ into possible overcharges for work performed during 1996 through 2000 under a contract in the Balkans, for which inquiry has not yet been completed by the DOJ. Based on an internal investigation, we credited our customer $2 million during 2000 and 2001 related to our work in the Balkans as a result of billings for which support was not readily available. We believe that the preliminary DOJ inquiry relates to potential overcharges in connection with a part of the Balkans contract under which approximately $100 million in work was done. We believe that any allegations of overcharges would be without merit. Amounts accrued related to this matter as of September 30, 2006 are not material.

SIGIR Report

In October 2006, the Special Inspector General For Iraq Reconstruction, or SIGIR, issued a report stating that we have improperly labeled reports provided to our customer, AMC, as proprietary data, when the data marked as such does not relate to internal contractor information. We will work with AMC to address the issues raised by the SIGIR report.

102

FCPA Investigations

The SEC is conducting a formal investigation into whether improper payments were made to government officials in Nigeria through the use of agents or subcontractors in connection with the construction and subsequent expansion by TSKJ of a multibillion dollar natural gas liquefaction complex and related facilities at Bonny Island in Rivers State, Nigeria. The DOJ is also conducting a related criminal investigation. The SEC has also issued subpoenas seeking information, which we are furnishing, regarding current and former agents used in connection with multiple projects, including current and prior projects, over the past 20 years located both in and outside of Nigeria in which we, The M.W. Kellogg Company, M.W. Kellogg Limited or their or our joint ventures are or were participants. In September 2006, the SEC requested that we enter into a tolling agreement with respect to its investigation. We anticipate that we will enter into an appropriate tolling agreement with the SEC.

TSKJ is a private limited liability company registered in Madeira, Portugal whose members are Technip SA of France, Snamprogetti Netherlands B.V. (a subsidiary of Saipem SpA of Italy), JGC Corporation of Japan, and Kellogg Brown & Root LLC (a subsidiary of ours and successor to The M.W. Kellogg Company), each of which had a 25% interest in the venture at September 30, 2006. TSKJ and other similarly owned entities entered into various contracts to build and expand the liquefied natural gas project for Nigeria LNG Limited, which is owned

by the Nigerian National Petroleum Corporation, Shell Gas B.V., Cleag Limited (an affiliate of Total), and Agip International B.V. (an affiliate of ENI SpA of Italy). M.W. Kellogg Limited is a joint venture in which we had a 55% interest at September 30, 2006, and M.W. Kellogg Limited and The M.W. Kellogg Company were subsidiaries of Dresser Industries before Halliburton’s 1998 acquisition of Dresser Industries. The M.W. Kellogg Company was later merged with a Halliburton subsidiary to form Kellogg Brown & Root, one of our subsidiaries.

The SEC and the DOJ have been reviewing these matters in light of the requirements of the FCPA. Halliburton has been cooperating with the SEC and DOJ investigations and with other investigations in France, Nigeria and Switzerland into the Bonny Island project. Halliburton’s Board of Directors has appointed a committee of independent directors to oversee and direct the FCPA investigations. Halliburton, acting through its committee of independent directors, will continue to oversee and direct the investigations after the offering, and our directors that are independent of Halliburton and us, acting as a committee of our board of directors, will monitor the continuing investigations directed by Halliburton.

The matters under investigation relating to the Bonny Island project cover an extended period of time (in some cases significantly before Halliburton’s 1998 acquisition of Dresser Industries and continuing through the current time period). We have produced documents to the SEC and the DOJ both voluntarily and pursuant to company subpoenas from the files of numerous officers and employees of Halliburton and KBR, including many current and former executives of Halliburton and KBR, and we are making our employees available to the SEC and the DOJ for interviews. In addition, we understand that the SEC has issued a subpoena to A. Jack Stanley, who formerly served as a consultant and chairman of Kellogg Brown & Root and to others, including certain of our current and former employees, former executive officers and at least one of our subcontractors. We further understand that the DOJ has issued subpoenas for the purpose of obtaining information abroad, and we understand that other partners in TSKJ have provided information to the DOJ and the SEC with respect to the investigations, either voluntarily or under subpoenas.

The SEC and DOJ investigations include an examination of whether TSKJ’s engagements of Tri-Star Investments as an agent and a Japanese trading company as a subcontractor to provide services to TSKJ were utilized to make improper payments to Nigerian government officials. In connection with the Bonny Island project, TSKJ entered into a series of agency agreements, including with Tri-Star Investments, of which Jeffrey Tesler is a principal, commencing in 1995 and a series of subcontracts with a Japanese trading company commencing in 1996. We understand that a French magistrate has officially placed Mr. Tesler under investigation for corruption of a foreign public official. In Nigeria, a legislative committee of the National Assembly and the Economic and Financial Crimes Commission, which is organized as part of the executive branch of the government, are also investigating these matters. Our representatives have met with the French

103

magistrate and Nigerian officials. In October 2004, representatives of TSKJ voluntarily testified before the Nigerian legislative committee. We are also aware that the Serious Frauds Office in the United Kingdom is conducting an investigation relating to the activities of TSKJ.

We notified the other owners of TSKJ of information provided by the investigations and asked each of them to conduct their own investigation. TSKJ has suspended the receipt of services from and payments to Tri-Star Investments and the Japanese trading company and has considered instituting legal proceedings to declare all agency agreements with Tri-Star Investments terminated and to recover all amounts previously paid under those agreements. In February 2005, TSKJ notified the Attorney General of Nigeria that TSKJ would not oppose the Attorney General’s efforts to have sums of money held on deposit in accounts of Tri-Star Investments in banks in Switzerland transferred to Nigeria and to have the legal ownership of such sums determined in the Nigerian courts.

As a result of these investigations, information has been uncovered suggesting that, commencing at least 10 years ago, members of TSKJ planned payments to Nigerian officials. We have reason to believe, based on the ongoing investigations, that payments may have been made by agents of TSKJ to Nigerian officials. In addition, information recently uncovered suggests that, prior to 1998, plans may have been made by employees of The M.W.

Kellogg Company to make payments to government officials in connection with the pursuit of a number of other projects in countries outside of Nigeria. Certain of these employees are current employees or a consultant of ours. As a result, the consultant may be placed on suspension, and Halliburton’s pending investigation will include a review of the actions of these employees.

In June 2004, all relationships with Mr. Stanley and another consultant and former employee of M.W. Kellogg Limited were terminated. The termination of Mr. Stanley occurred because of violations of Halliburton’s Code of Business Conduct that allegedly involved the receipt of improper personal benefits from Mr. Tesler in connection with TSKJ’s construction of the Bonny Island project.

In 2006, Halliburton suspended the services of another agent who, until such suspension, had worked for us outside of Nigeria on several current projects and on numerous older projects going back to the early 1980s. The suspension will continue until such time, if ever, as Halliburton can satisfy itself regarding the agent’s compliance with applicable law and Halliburton’s Code of Business Conduct. In addition, Halliburton is actively reviewing the compliance of an additional agent on a separate current Nigerian project with respect to which Halliburton has recently received from a joint venture partner on that project allegations of wrongful payments made by such agent.

If violations of the FCPA were found, a person or entity found in violation could be subject to fines, civil penalties of up to $500,000 per violation, equitable remedies, including disgorgement (if applicable) generally of profits, including prejudgment interest on such profits, causally connected to the violation, and injunctive relief. Criminal penalties could range up to the greater of $2 million per violation or twice the gross pecuniary gain or loss from the violation, which could be substantially greater than $2 million per violation. It is possible that both the SEC and the DOJ could assert that there have been multiple violations which could lead to multiple fines. The amount of any fines or monetary penalties which could be assessed would depend on, among other factors, the findings regarding the amount, timing, nature and scope of any improper payments, whether any such payments were authorized by or made with knowledge of us or our affiliates, the amount of gross pecuniary gain or loss involved, and the level of cooperation provided to the government authorities during the investigations. Agreed dispositions of these types of violations also frequently result in an acknowledgement of wrongdoing by the entity and the appointment of a monitor on terms negotiated with the SEC and the DOJ to review and monitor current and future business practices, including the retention of agents, with the goal of assuring compliance with the FCPA. Other potential consequences could be significant and include suspension or debarment of our ability to contract with governmental agencies of the United States and of foreign countries.

These investigations could also result in (1) third-party claims against us, which may include claims for special, indirect, derivative or consequential damages, (2) damage to our business or reputation, (3) loss of, or adverse effect on, cash flow, assets, goodwill, results of operations, business, prospects, profits or business value,

104

(4) adverse consequences on our ability to obtain or continue financing for current or future projects and/or (5) claims by directors, officers, employees, affiliates, advisors, attorneys, agents, debt holders or other interest holders or constituents of us or our subsidiaries. In this connection, we understand that the government of Nigeria gave notice in 2004 to the French magistrate of a civil claim as an injured party in that proceeding. We are not aware of any further developments with respect to this claim. In addition, we could incur costs and expenses for any monitor required by or agreed to with a governmental authority to review our continued compliance with FCPA law.

The investigations by the SEC and DOJ and foreign governmental authorities are continuing. We do not expect these investigations to be concluded prior to conclusion of this offering or in the immediate future. The various governmental authorities could conclude that violations of the FCPA or applicable analogous foreign laws have occurred with respect to the Bonny Island project and other projects in or outside of Nigeria. In such circumstances, the resolution or disposition of these matters, even after taking into account the indemnity from Halliburton with respect to liabilities for fines or other monetary penalties or direct monetary damages, including disgorgement, that may be assessed by the U.S. and certain foreign governments or governmental agencies against us or our greater than 50%-owned subsidiaries could have a material adverse effect on our business, prospects, results or operations, financial condition and cash flow. Please read “—Risks Related to Our Affiliation With Halliburton—Halliburton’s indemnity for Foreign Corrupt Practices Act matters does not apply to all potential losses, Halliburton’s actions may not be in our stockholders’ best interests and we may take or fail to take actions that could result in our indemnification from Halliburton with respect to Foreign Corrupt Practices Act matters no longer being available.”

Bidding Practices Investigations

In connection with the investigation into payments relating to the Bonny Island project in Nigeria, information has been uncovered suggesting that Mr. Stanley and other former employees may have engaged in coordinated bidding with one or more competitors on certain foreign construction projects and that such coordination possibly began as early as the mid-1980s.

On the basis of this information, Halliburton and the DOJ have broadened their investigations to determine the nature and extent of any improper bidding practices, whether such conduct violated United States antitrust laws, and whether former employees may have received payments in connection with bidding practices on some foreign projects.

If violations of applicable United States antitrust laws occurred, the range of possible penalties includes criminal fines, which could range up to the greater of $10 million in fines per count for a corporation, or twice the gross pecuniary gain or loss, and treble civil damages in favor of any persons financially injured by such violations. Criminal prosecutions under applicable laws of relevant foreign jurisdictions and civil claims by, or relationship issues with customers, are also possible. Halliburton’s indemnity does not apply to liabilities, if any, for fines, other monetary penalties or other potential losses arising out of violations of United States antitrust laws.

Possible Algerian Investigation

We believe that an investigation by a magistrate or a public prosecutor in Algeria may be pending with respect to sole source contracts awarded to Brown & Root-Condor Spa, a joint venture among Kellogg Brown & Root Ltd UK, Centre de Recherche Nuclear de Draria and Holding Services para Petroliers Spa. We had a 49% interest in this joint venture as of September 30, 2006.

Iraq Overtime Litigation

During the fourth quarter of 2005, a group of present and former employees working on the LogCAP III contract in Iraq and elsewhere filed a class action lawsuit alleging that we wrongfully failed to pay time and a

105

half for hours worked in excess of 40 per work week and that “uplift” pay, consisting of a foreign service bonus, an area differential and danger pay, was only applied to the first 40 hours worked in any work week. The class alleged by plaintiffs consists of all current and former employees on the LogCAP III contract from December 2001 to present. The basis of plaintiffs’ claims is their assertion that they are intended third party beneficiaries of the LogCAP III contract, and that the LogCAP III contract obligated us to pay time and a half for all overtime hours. We have moved to dismiss the case on a number of bases. On September 26, 2006, the court granted the motion to dismiss insofar as claims for overtime pay and “uplift” pay are concerned, leaving only a contractual claim for miscalculation of employees’ pay. It is premature to assess the probability of an adverse result on that remaining claim. However, because the LogCAP III contract is cost-reimbursable, we believe that we could charge any adverse award to the customer. On October 13, 2006, the plaintiffs filed their notice of appeal. It is our intention to vigorously defend the appeal and the judgment of dismissal. As of September 30, 2006, we had $0 accrued related to this matter.

Asbestos and Silica Settlement and Prepackaged Chapter 11 Proceeding and Completion

In December 2003, six of our subsidiaries (and two other entities that are subsidiaries of Halliburton) sought Chapter 11 protection to avail themselves of the provisions of Sections 524(g) and 105 of the United States Bankruptcy Code to discharge current and future asbestos and silica personal injury claims and demands. Prior to proceeding with the Chapter 11 filing, the affected subsidiaries solicited acceptances from then known asbestos and silica claimants to a “prepackaged” plan of reorganization. Over 98% of voting asbestos claimants and over 99% of voting silica claimants approved the plan of reorganization, which was filed as part of the Chapter 11 proceedings. The order confirming the Chapter 11 plan of reorganization became final and nonappealable on December 31, 2004, and the plan of reorganization became effective in January 2005. Under the plan of reorganization, all then current and future asbestos and silica personal injury claims and demands against those subsidiaries were channeled into trusts established for the benefit of asbestos and silica personal injury claimants, thus releasing our subsidiaries from those claims.

In accordance with the plan of reorganization, in January 2005 Halliburton contributed the following to trusts for the benefit of current and future asbestos and silica personal injury claimants:

• approximately $2.3 billion in cash;

• 59.5 million shares of Halliburton common stock; and

• notes then valued at approximately $55 million.

Halliburton will reimburse us with respect to our obligations under one of the notes, which was valued at $10 million as of September 30, 2006. Pursuant to the plan of reorganization and the order confirming the plan, a permanent injunction has been issued enjoining the prosecution of asbestos and silica personal injury claims and demands against our subsidiaries and our affiliates.

106

MANAGEMENT

Directors and Executive Officers

The following table sets forth information concerning our executive officers and directors upon completion of this offering, including their ages, as of September 15, 2006:

Name	Age	Position with KBR, Inc.
William P. Utt	49	President, Chief Executive Officer and Director
Cedric W. Burgher	46	Senior Vice President and Chief Financial Officer
John L. Rose	60	Executive Vice President, Energy and Chemicals
Bruce A. Stanski	46	Executive Vice President, Government and Infrastructure
Andrew D. Farley	42	Senior Vice President, General Counsel and Secretary
Klaudia J. Brace	50	Senior Vice President, Administration
John W. Gann, Jr.	49	Vice President and Chief Accounting Officer
Albert O. Cornelison, Jr.(1)	57	Director
C. Christopher Gaut(1)	50	Director
Andrew R. Lane(1)	47	Director
Mark A. McCollum(1)	47	Director
Richard J. Slater	60	Director Nominee

⁽¹⁾ Messrs. Cornelison, Gaut, Lane and McCollum are executive officers of Halliburton.

William P. Utt was named our President and Chief Executive Officer in March 2006 and became a member of our board of directors in September 2006. Mr. Utt is the former President and Chief Executive Officer of SUEZ Energy North America, where he had responsibility for the retail energy, energy marketing and trading and power generation and development businesses from 2000 until he joined us.

Cedric W. Burgher has served as our Senior Vice President and Chief Financial Officer since November 2005. Mr. Burgher served as the Chief Financial Officer of Burger King Corporation from September 2004 to September 2005. Mr. Burgher worked for Halliburton from September 2001 to September 2004, most recently as the Vice President and Treasurer and, prior to that, as the Vice President of Investor Relations.

John L. Rose became our Executive Vice President, Energy and Chemicals in June 2006. From September 2005 to June 2006, he was our Vice President, Upstream, covering the onshore and offshore oil and gas, LNG and GTL markets. Mr. Rose also served as our Vice President, Subsidiary Operations and Production Services from April 2004 to September 2005. Between October 2000 and April 2004, he served as Executive Director in our joint venture with Mitsubishi.

Bruce A. Stanski has served as our Executive Vice President of the Government and Infrastructure division since September 2005. Mr. Stanski served as our Senior Vice President, Government Operations from August 2004 to September 2005. From June 2002 to July 2004, Mr. Stanski was our Senior Vice President and Chief Financial Officer. From March 2001 to May 2002, Mr. Stanski was Vice President, Strategic Planning. Since joining us in 1995, Mr. Stanski has held various positions within our company including Vice President of Shared Services.

Andrew D. Farley became our Senior Vice President and General Counsel in June 2006 and our Secretary in October 2006. Prior thereto, Mr. Farley served as Vice President – Legal of our Energy and Chemicals segment beginning in May 2003, as Chief Counsel – International of Halliburton’s Energy Services Group from June 2002 to May 2003 and as Assistant General Counsel and Assistant Corporate Secretary of Halliburton from April 2002 to June 2002. From October 2000 to April 2002, he served as chief counsel for Landmark Graphics Corporation.

107

Klaudia J. Brace has served as our Senior Vice President, Administration since April 2006. From May 1996 to April 2006, Ms. Brace was Senior Vice President, Business Control and Human Resources, and Chief Accounting Officer of SUEZ Energy North America, where she managed the financial reporting, accounting, control and human resources functions of the company.

John W. Gann, Jr. has served as our Vice President and Chief Accounting Officer since December 2004. From 2002 to December 2004, Mr. Gann was a Partner in Ernst & Young, LLP. Mr. Gann spent 22 years with Arthur Andersen LLP and served as an audit and business advisory partner from 1994 to 2002.

Albert O. Cornelison, Jr. has been Executive Vice President and General Counsel of Halliburton since 2002. Mr. Cornelison served as Vice President and Associate General Counsel of Halliburton, heading the intellectual property, environmental and litigation practice groups from 1998 to 2002.

C. Christopher Gaut has been Executive Vice President and Chief Financial Officer of Halliburton Company since March 2003. Prior to joining Halliburton, Mr. Gaut was Senior Vice President and Chief Financial Officer of ENSCO International, Inc. from December 1987 to February 2003, as well as Member—Office of the President and Chief Operating Officer from January 2002 to February 2003.

Andrew R. Lane has been Halliburton’s Executive Vice President and Chief Operating Officer since December 2004. Prior to assuming that role, Mr. Lane was our President and Chief Executive Officer from July 2004 to March 2006. From April 2004 to June 2004, he was Senior Vice President, Global Operations of Halliburton’s Energy Services Group. Mr. Lane was President of the Landmark Division of Halliburton’s Energy Services Group from May 2003 to March 2004. From January 2002 to April 2003, he served as Chief Operating Officer and then as President and Chief Executive Officer of Landmark Graphics Corporation. From January 2000 to December 2001, Mr. Lane was Vice President, Production Enhancement in Halliburton’s Energy Services Group.

Mark A. McCollum has been Senior Vice President and Chief Accounting Officer of Halliburton since August 2003. Mr. McCollum worked for Tenneco from January 1995 to July 2003, most recently as the Senior Vice President and Chief Financial Officer and, prior to that, as the Vice President, Corporate Development and the Vice President, Controller.

Richard J. Slater has been chairman of ORBIS LLC, an investment and corporate advisory firm, since February 2003. Previously, Mr. Slater served in various executive positions with Jacobs Engineering Group Inc. (JEG) beginning in May 1980. Mr. Slater was employed as a consultant to the chief executive officer of JEG from January 2003 to October 2006 and prior to that, he served as Executive Vice President, Operations from March 1998 to December 2002. Mr. Slater presently serves as non-executive chairman of Bluebeam Software Inc., and as an independent director of Reliance Steel & Aluminum Co. and as trustee and member of the executive committee of the board of trustees of Claremont Graduate University.

Board Structure and Compensation of Directors

Upon the closing of this offering, we will have six directors, one of whom will satisfy the New York Stock Exchange and SEC requirements for independence of audit committee members. In compliance with New York Stock Exchange and SEC requirements for independence of the audit committee members, a second independent director will be appointed within 90 days of the effective date of the registration statement of which this prospectus forms a part, and a third independent director will be appointed within 12 months of the effective date of the registration statement.

Until such time as Halliburton ceases to own, directly or indirectly, a majority of our outstanding voting stock, all our directors will stand for election annually. Beginning at the time Halliburton ceases to beneficially own, directly or indirectly, a majority of our outstanding voting stock, our directors will be divided into three

108

classes serving staggered three-year terms. The initial determination of the directors who will comprise each of the three classes of directors will be made by our board of directors, as provided in our certificate of incorporation. Thereafter, at each annual meeting of stockholders, directors will be elected to succeed the class of directors whose terms have expired. Electing and removing directors on a staggered basis may discourage a third party from making a tender offer or otherwise attempting to obtain control of us, because it generally makes it more difficult for stockholders to replace a majority of our directors.

After this offering, Halliburton will continue to own more than 80% of our outstanding common stock and we will be considered a “controlled company” under the corporate governance rules of the New York Stock Exchange. As a controlled company, we are eligible for exemptions from some of the requirements of these rules, including the requirements (i) that a majority of our board of directors consists of independent directors, (ii) that we have a nominating and governance committee and a compensation committee, and that each such committee be composed entirely of independent directors and governed by a written charter addressing the committee’s purpose and responsibilities and (iii) for annual performance evaluations of the nominating and governance committee and the compensation committee. We intend to utilize some or all of these exemptions for so long as Halliburton or any other person or entity continues to own a majority of our outstanding voting stock. In the event that we cease to be a controlled company within the meaning of these rules, we will be required to comply with these provisions after the specified transition periods. For a description of Halliburton’s plans to dispose of our common stock that it owns following this offering, please read “Sole Stockholder.”

Directors who are also full-time officers or employees of our company or officers or employees of Halliburton will receive no additional compensation for serving as directors. All other directors will receive an annual retainer of $45,000. The audit committee chairman will receive an additional $7,500 annual retainer. The compensation committee chairman will receive an additional $5,000 annual retainer. Outside directors will also receive a fee of $1,500 for each board or board committee meeting attended in person and $500 for each board or board committee meeting attended by telephone, plus incurred expenses where appropriate. We expect that each of our outside directors will also receive annual grants of restricted stock units with an aggregate value of $75,000 as of the date of the grant. We expect the first grant will occur following the anticipated distribution by Halliburton of our common stock that it owns to its stockholders following this offering.

Our board will have authority to determine the awards made to outside directors under the KBR, Inc. 2006 Stock and Incentive Plan from time to time without the prior approval of our stockholders. For a description of this plan, please read “—KBR, Inc. 2006 Stock and Incentive Plan.”

The master separation agreement provides Halliburton with continuing rights to nominate board and committee members. Please read “Our Relationship With Halliburton—Master Separation Agreement—Corporate Governance.”

Board Committees

Our board of directors plans to have an audit committee, a compensation committee, an executive committee and a special committee following this offering. The independent director we plan to appoint prior to the closing of this offering will serve as the initial member of the audit committee and the compensation committee of our board of directors. Following the transition periods permitted under applicable New York Stock Exchange and SEC requirements for independence of audit committee members, we intend that all of the members of our audit committee and compensation committee will be independent.

The audit committee will review and report to the board of directors the scope and results of audits by our outside auditor and our internal auditing staff and review with the outside auditor the adequacy of our system of internal controls. It will review transactions between us and our directors and officers, our policies regarding those transactions and compliance with our business ethics and conflict of interest policies. The audit committee will also recommend to the board of directors a firm of certified public accountants to serve as our outside

109

auditor for each fiscal year, review the audit and other professional services rendered by the outside auditor and periodically review the independence of the outside auditor.

The compensation committee will review and recommend to the board of directors the compensation and benefits of our executive officers, establish and review general policies relating to our compensation and benefits and administer the compensation plans described below.

The executive committee will exercise the authority of the board of directors when the full board of directors is not in session in reviewing and approving the analysis, preparation and submission of significant project bids; managing the review, negotiation and implementation of significant project contracts; and reviewing our business and affairs. For so long as Halliburton owns a majority of our outstanding common stock, the executive committee will consist solely of Halliburton designees. If at anytime Halliburton owns less than a majority but at least 15% of our outstanding voting stock, Halliburton will be entitled to designate at least one Halliburton designee to the executive committee.

The special committee will exercise the authority of our board of directors with respect to FCPA Matters and our rights and obligations under the master separation agreement FCPA indemnity provisions and on other matters when a potential conflict of interest exists between us and Halliburton. The members of such special committee will in all material respects satisfy the independence standards of the New York Stock Exchange, as if those standards applied.

The master separation agreement provides Halliburton with certain continuing rights to nominate board committee members. Please read “Our Relationship With Halliburton—Master Separation Agreement—Corporate Governance.”

110

Security Ownership of Directors and Executive Officers

All of our outstanding common stock is currently owned by Halliburton and thus none of our officers, directors or director nominees own any of our common stock. The following table sets forth information as of October 15, 2006 with respect to the beneficial ownership of Halliburton common stock by each of our directors, director nominees and executive officers, and all of our directors, director nominees and executive officers as a group. To our knowledge, except as indicated in the footnotes to this table or as provided by applicable community property laws, the persons named in the table have sole investment and voting power with respect to the shares of common stock indicated.

Name of Beneficial Owner(1)	Number of Shares Beneficially Owned(2)(3)
William P. Utt	35,000
Cedric W. Burgher	20,000
John L. Rose	46,505
Bruce A. Stanski	72,875
Andrew D. Farley	47,403
Klaudia J. Brace	—
John W. Gann, Jr.	29,334
Albert O. Cornelison, Jr.	163,082
C. Christopher Gaut	461,068
Andrew R. Lane	238,457
Mark A. McCollum	74,708
Richard J. Slater	2,000
All directors, director nominees and executive officers as a group	1,190,432

(1) The address of each of Messrs. Utt, Burgher, Rose, Stanski, Farley, Gann and Slater and Ms. Brace is c/o KBR, Inc., 601 Jefferson Street, Suite 3400, Houston, Texas 77002. The address of each of Messrs. Cornelison, Gaut, Lane and McCollum is c/o Halliburton Company, 5 Houston Center, 1401 McKinney, Suite 2400, Houston, Texas 77010.

(2) Beneficial ownership means the sole or shared power to vote, or to direct the voting of, shares of Halliburton common stock, or investment power with respect to Halliburton common stock, or any combination of the foregoing. Each director and officer and the directors and officers as a group beneficially own less than 1% of the outstanding shares of Halliburton common stock.

(3) Included in the table are shares of Halliburton common stock that may be purchased pursuant to outstanding stock options within 60 days of October 15, 2006 held by Messrs. Burgher (5,000), Rose (10,853), Stanski (10,686), Farley (16,974), Gann (9,334), Cornelison (18,267), Gaut (279,254), Lane (25,934) and McCollum (21,666). Until the options are exercised, these individuals will neither have voting nor investment power over the underlying shares of Halliburton common stock but only have the right to acquire beneficial ownership of the shares through exercise of their respective options.

111

Executive Compensation

The following four tables provide information, based on salary and bonus compensation from Halliburton, regarding the compensation awarded to or earned during the year ended December 31, 2005 by the chief executive officer and the next four most highly compensated executive officers of KBR, who we refer to collectively in this prospectus as the “named executive officers.” Awards and options shown in the tables below were made under Halliburton benefit plans. Halliburton effected a two-for-one common stock split, in the form of a stock dividend, in July 2006. The share amounts and option exercise prices included in the tables below have been restated to present the amounts and exercise prices on a post-split basis.

Summary Compensation Table

		Annual Compensation			Long-Term Compensation
					Awards		Payouts
Name and Principal Position(1)	Year	Salary ($)	Bonus ($)(2)	Other Annual Compensation ($)(3)	Restricted Stock Awards ($)(4)	Securities Underlying Options/ SARs (#)	LTIP Payouts ($)(5)	All Other Compensation ($)(6)
Andrew R. Lane. Executive Vice President and Chief Operating Officer of Halliburton Company	2005 2004	650,000 365,015	845,000 300,000	—   __	2,219,474 1,566,812	40,000 53,840	180,000 N/A	232,538 119,300
Bruce A. Stanski Executive Vice President, Government and Infrastructure	2005	333,408	323,695	—	313,425	12,000	90,000	63,467
James H. Lehmann Senior Vice President, Legal	2005	272,000	264,000	—	313,425	12,000	45,020	58,084
Louis J. Pucher Senior Vice President, Energy and Chemicals	2005	329,600	320,000	—	313,425	12,000	168,000	16,870
Lawrence J. Pope Senior Vice President, Administration, KBR	2005	227,350	215,000	—	527,199	19,000	45,000	18,916

(1) William P. Utt became our President and Chief Executive Officer in March 2006, Cedric W. Burgher became our Senior Vice President and Chief Financial Officer in November 2005, John L. Rose became our Executive Vice President, Energy and Chemicals in June 2006 and Andrew D. Farley became our Senior Vice President and General Counsel in June 2006 and our Secretary in October 2006. Based on the terms of Messrs. Utt and Burgher’s respective employment agreements as described under “—Employment Agreements” and the current levels of compensation for Messrs. Rose and Farley, we currently anticipate that each of Messrs. Utt, Burgher, Rose and Farley will be identified as named executive officers in the proxy statement for our 2007 annual stockholders meeting. Andrew R. Lane served the function of our Chief Executive Officer in 2005, but he is no longer our Chief Executive Officer or an executive officer of KBR, and he is currently the Chief Operating Officer of Halliburton. On January 1, 2006, Mr. Pope became Vice President, Human Resources and Administration of Halliburton, and he is no longer one of our executive officers. Messrs. Lehmann and Pucher no longer hold the positions listed above and are no longer executive officers of KBR.

(2) The amounts disclosed include payments under the Halliburton Annual Performance Pay Plan. The awards were earned in 2005 and paid in 2006. In recognition of his performance in 2004 the Halliburton board of directors awarded Mr. Lane an additional bonus of $91,000. This award was paid in 2005.

(3) The dollar value of perquisites and other personal benefits for the named executive officers was less than the established reporting levels.

112

(4) In 2005, each of the above individuals were granted restricted shares under the Halliburton Company 1993 Stock and Incentive Plan (1993 Stock and Incentive Plan) with restrictions lapsing over 5 years. Mr. Lane was granted 50,000 restricted shares on February 15, 2005 in recognition of his promotion to Chief Operating Officer of Halliburton. Mr. Lane and Mr. Pope received 36,600 and 6,600 shares, respectively, on December 7, 2005. On February 17, 2005, Mr. Stanski, Mr. Lehmann, Mr. Pucher and Mr. Pope were each awarded 15,000 shares. Dividends are paid on the restricted shares. The total number and value of restricted shares held by each of the above individuals as of December 31, 2005 were as follows:

Name	Total Restricted Shares	Aggregate Market Value
Mr. Lane	196,862	$	6,098,784
Mr. Stanski	57,398	$	1,778,190
Mr. Lehmann	58,970	$	1,826,891
Mr. Pucher	80,734	$	2,501,139
Mr. Pope	61,072	$	1,892,011

In 2004, Mr. Lane was granted 93,400 restricted shares with restrictions lapsing over 5 years.

(5) Payouts from the Halliburton Performance Unit Program for the 2003 cycle that began on January 1, 2003 and ended on December 31, 2005.

(6) “All Other Compensation” includes the following accruals for or contributions to various plans for the fiscal year ended December 31, 2005: (i) Halliburton 401(k) plan matching contributions for Mr. Lane—$8,313 and Mr. Pope—$8,400 and KBR 401(k) plan matching contributions for Mr. Stanski—$6,468, Mr. Lehmann—$9,450 and Mr. Pucher—$6,554; (ii) a 4% Basic Contribution to the Halliburton 401(k) plan for Mr. Lane—$8,400 and Mr. Pope—$8,400 and 1% contribution to the KBR 401(k) for Mr. Stanski—$2,100, Mr. Lehmann—$2,100 and Mr. Pucher—$2,100; (iii) benefit restoration accruals for Mr. Lane—$35,200, Mr. Stanski—$6,787, Mr. Lehmann—$3,410, Mr. Pucher—$6,578 and Mr. Pope—$1,388; (iv) supplemental executive retirement plan contributions for Mr. Lane—$179,000; (v) above-market earnings on benefit restoration account for Mr. Lane—$1,625, Mr. Stanski—$426, Mr. Lehmann—$893, Mr. Pucher—$1,638 and Mr. Pope—$728. (vi) Mr. Stanski’s employment agreement provides for a compensation cost of living adjustment for Mr. Stanski while he is required to work in the Washington D.C. area, and he was paid $47,686 in 2005 for this adjustment. (vii) In 2005, Halliburton terminated a legacy deferred compensation program. Mr. Lehmann was a participant in this plan and received a payment of $42,218 covering his entire balance. There are $0 of additional payments due under this plan.

Halliburton Option Grants for Fiscal 2005

The following table shows all grants of options to acquire Halliburton common stock to the named executive officers during the year ended December 31, 2005.

Individual Grants(1)
	Number of Securities Underlying Options Granted (#)	% of Total Options Granted to Halliburton Employees in Fiscal Year	Exercise Price ($/Share)		Expiration Date	Grant Date Present Value $(2)
Name
Andrew R. Lane	40,000	1.43	32.39		12/7/2015	$	598,218
Bruce A. Stanski.	12,000	0.43	20.90		2/17/2015	$	115,214
James H. Lehmann	12,000	0.43	20.90		2/17/2015	$	115,214
Louis J. Pucher	12,000	0.43	20.90		2/17/2015	$	115,214
Lawrence J. Pope	12,000	0.43	20.90		2/17/2015	$	115,214
	7,000	0.25	32.39		12/7/2015	$	104,688
All Optionees	2,794,240	100	24.72	(3)		$	31,890,749

(1) All options to acquire Halliburton common stock granted under the 1993 Stock and Incentive Plan are granted at the fair market value of the Halliburton common stock on the grant date and generally expire ten

113

years from the grant date. During employment, options vest over a three year period, with one-third of the shares becoming exercisable on each of the first, second and third anniversaries of the grant date. The options granted to designated executives are transferable by gift to individuals and entities related to the optionee, subject to compliance with guidelines adopted by Halliburton’s Compensation Committee.

(2) These estimated hypothetical present values are based on a Black-Scholes option pricing model in accordance with United States generally accepted accounting principles. For the options granted on February 17, 2005, we used the following assumptions in estimating these values: expected option term, 5 years; risk-free rate of return, 4.3%; expected volatility, 53%; and expected dividend yield, 1.16%. For the options granted on December 7, 2005, we used the following assumptions in estimating these values: expected option term, 5 years; risk-free rate of return, 4.3%; expected volatility, 51%; and expected dividend yield, 0.8%.

(3) The exercise price shown is an average of the price of all options granted in 2005. Options expire on one or more of the following dates: January 24, 2015, February 1, 2015, February 17, 2015, March 3, 2015, March 8, 2015, March 28, 2015, March 31, 2015, April 7, 2015, April 12, 2015, April 27, 2015, June 9, 2015, June 22, 2015, July 11, 2015, October 3, 2015, October 7, 2015, November 7, 2015, November 14, 2015 and December 7, 2015.

Aggregated Halliburton Option Exercises in Fiscal 2005

and December 31, 2005 Option Values

The following table shows the number of options to acquire Halliburton common stock that were exercised by the named executive officers during the year ended December 31, 2005 and the number and value of unexercised options to acquire Halliburton common stock held by the named executive officers as of December 31, 2005.

	Shares Acquired on Exercise (#)	Value Realized ($)	Number of Securities Underlying Unexercised Options at Fiscal Year-End (Shares)		Value of Unexercised In-the-Money Options at Fiscal Year-End ($)(1)
Name			Exercisable	Unexercisable	Exercisable	Unexercisable
Andrew R. Lane	65,112	873,355	12,600	78,478	147,105	510,482
Bruce A. Stanski	37,064	367,259	—	22,786	—	296,050
James H. Lehmann	53,894	493,188	—	22,496	—	289,435
Louis J. Pucher	—	—	64,988	27,082	901,710	365,333
Lawrence J. Pope	8,100	135,394	30,582	30,852	392,062	313,692

⁽¹⁾ Based on the closing price of Halliburton common stock on the New York Stock Exchange on December 30, 2005 less the option exercise price, multiplied by the number of shares of common stock subject to the option.

Long-Term Incentive Compensation

Halliburton established a Performance Unit Program under the 1993 Stock and Incentive Plan in 2001 to provide selected key executives with incentive opportunities based on the level of achievement of pre-established corporate performance objectives over three-year performance cycles. Current KBR executives ceased to participate in performance unit cycles under the Halliburton Performance Unit Program beginning in 2005, but will continue to earn award amounts for performance cycles under previous awards. The purpose of the program is to reinforce Halliburton’s objectives for sustained long-term performance and value creation as well as reinforce strategic planning processes and balance short- and long-term decision making.

Performance measures for the three-year cycle that began January 1, 2005 combine relative and absolute components tied to Halliburton’s consolidated weighted average return on capital employed. A performance matrix combining both the actual achievement of pre-established return on capital employed levels (Absolute Goal) and Halliburton’s return on capital employed achievement level as compared to the comparator group (Relative Goal) is used to determine the percent of incentive opportunity achieved. The award is then calculated

114

by multiplying the percent of incentive opportunity achieved by the target award. Payment may be made in cash, stock or a combination of cash and stock at the discretion of Halliburton’s Compensation Committee. No incentive will be earned or payment made under the Halliburton Performance Unit Program for performance below the threshold level.

Halliburton Long-Term Incentive Plans—Awards in Fiscal 2005

The following table shows the awards made to the named executive officers during the year ended December 31, 2005 under Halliburton’s Performance Unit Program.

	Performance Category January 1, 2005 Salary ($)	Performance Or Other Period Until Maturation or Payout	Estimated Future Payouts Under Non-Stock Price-Based Plans
Name			Threshold ($)	Target ($)	Maximum ($)
Andrew R. Lane	650,000	2005-2007 Fiscal Years	373,750	747,500	1,495,000
Lawrence J. Pope	215,000	2005-2007 Fiscal Years	37,625	75,250	150,500

Annual Incentives

Officers and specific senior managers of KBR are eligible to participate in the Halliburton Annual Performance Pay Plan. With the exception of Lawrence Pope and Andrew Lane, who are now officers of Halliburton, the 2006 reward opportunities for our officers and certain of our senior managers will be measured by the performance of KBR not Halliburton. Such performance of KBR will be measured by the cash value added of KBR. Following the closing of this offering, employees of KBR will not be eligible for any new award opportunities under the Halliburton Annual Performance Pay Plan but will remain eligible to participate in any award opportunities that were available to them prior to the closing of this offering.

The Halliburton Annual Performance Pay Plan provides a means to link total compensation to the performance of KBR or Halliburton, as applicable, as measured by the respective cash value added. Cash value added measures the difference between after tax cash income and a capital charge, based upon Halliburton’s and KBR’s weighted average cost of capital, as applicable, to determine the amount of value in terms of cash flow added to Halliburton’s and KBR’s respective businesses.

At the beginning of the plan year, Halliburton established an award schedule that aligns given levels of cash value added performance beyond a threshold level with award opportunities. Award opportunities are established at target and maximum levels. The maximum amount any participant can receive under the Halliburton Annual Performance Pay Plan is capped at two times the target opportunity level. The level of achievement of annual cash value added performance determines the dollar amount of incentive compensation payable to participants.

Long-Term Incentives

Halliburton maintains the 1993 Stock and Incentive Plan which provides its employees, including employees and officers of KBR, with long-term incentives. The 1993 Stock and Incentive Plan provides for a variety of cash- and stock-based awards, including stock options, stock appreciation rights (SARs), restricted stock, restricted stock units, performance units and performance shares, among others. Except as otherwise disclosed herein, following the closing of this offering, none of our directors, officers and employees will be eligible for new awards under the 1993 Stock and Incentive Plan; however, they may continue to participate in the 1993 Stock and Incentive Plan with respect to awards made prior to the closing of this offering. Mr. Gaut, a KBR director and the executive vice president and chief financial officer of Halliburton, will continue to be eligible for awards under the 1993 Stock and Incentive Plan.

115

The Halliburton Performance Unit Program is a long-term program designed to provide key executives with specified incentive opportunities contingent on the level of achievement of pre-established corporate performance objectives. Please read “—Long-Term Incentive Compensation” for further discussion.

The named executive officers of KBR have received a mixture of stock options, restricted shares and performance units under the 1993 Stock and Incentive Plan. Specific senior managers and key employees have received awards of stock options and restricted shares but do not receive performance units. Current KBR executives ceased to participate in performance unit cycles under the Halliburton Performance Unit Program beginning in 2005, but will continue to earn award amounts for performance cycles under previous awards.

Supplemental Executive Retirement Plan

The Halliburton Supplemental Executive Retirement Plan was established to provide retirement benefits to key executives of Halliburton. Determinations as to who will receive an allocation for a particular plan year and the amount of the allocation are made in Halliburton’s sole discretion. Mr. Lane is the only KBR officer who received an allocation in 2005. No allocations will be made for 2006 or subsequent to the closing of this offering with respect to any of our directors, officers or employees. After the date that our employees cease to participate in the Halliburton Supplemental Executive Retirement Plan and subject to the approval of both the compensation committee of Halliburton’s board of directors and our board of directors, we expect that Halliburton will spin-off and that we will maintain the portion of the Halliburton Supplemental Executive Retirement Plan that covers our employees.

Other Benefits and Perquisites

The Halliburton Benefit Restoration Plan exists to provide a vehicle to restore qualified plan benefits which are reduced as a result of limitations imposed under the Internal Revenue Code of 1986, as amended, or due to participation in other company-sponsored plans. It also serves to defer compensation that would otherwise be treated as excessive employee remuneration within the meaning of Section 162(m) of the Internal Revenue Code. The Halliburton Benefit Restoration Plan is a nonqualified deferred compensation plan that accrues interest on contributions at the rate of 10% per annum. As of the closing date of this offering, any of our employees who participate in the Halliburton Benefit Restoration Plan will continue to participate in such plan until such time as determined by Halliburton and us by written notice at least 30 days prior to the designated date of termination, but in no event later than the date we cease to be a member of the Halliburton consolidated group. Halliburton also maintains the Halliburton Elective Deferral Plan to provide highly compensated employees with an opportunity to defer earned base salary and incentive compensation in order to help meet retirement and other future income needs. After the date that our employees cease to participate in the Halliburton Benefit Restoration Plan and the Halliburton Elective Deferral Plan, and subject to the approval of both the compensation committee of Halliburton’s board of directors and our board of directors, we expect that Halliburton will spin-off and that we will maintain the portions of the Halliburton Benefit Restoration Plan and the Halliburton Elective Deferral Plan that cover our employees.

A taxable benefit for executive financial planning is provided and ranges from $5,000 to a maximum of $15,000 per year. This benefit does not include tax return preparation. It is paid, only if used by the executive, on a reimbursable basis. A physical examination is also provided to eligible executives annually. We expect to provide these benefits to our executives following the closing date of this offering.

Halliburton Employee Stock Purchase Plan

Our employees are eligible to participate in the ESPP and will continue to be eligible to participate in the ESPP until January 1, 2007. Under the ESPP, eligible employees may have up to 10% of their earnings withheld, subject to some limitations, to be used to purchase shares of Halliburton common stock. Unless the board of directors of Halliburton shall determine otherwise, each six month offering period commences on January 1 and

116

July 1 of each year. The price at which Halliburton common stock may be purchased under the ESPP is equal to 85% of the lower of the fair market value of the common stock on the commencement date or last trading day of each offering period.

Anticipated Conversion of Halliburton Equity-Based Awards into KBR Equity-Based Awards

Subject to future action by the compensation committee of Halliburton’s board of directors and our board of directors, we expect that as of the first date that Halliburton ceases to own more than 20% of our outstanding common stock, which we refer to as the “plan divestiture date,” each equity award granted under Halliburton’s 1993 Stock and Incentive Plan that is outstanding as of the plan divestiture date and held by our employees, which we refer to as “Halliburton equity awards,” will be converted effective immediately after the plan divestiture date to an equity award covering our common stock, which we refer to as a “converted equity award.” Each converted equity award will have terms and conditions, as determined by the compensation committee of Halliburton’s board of directors and agreed to by our board of directors, that effectively maintain the intrinsic value of the Halliburton equity awards as of the plan divestiture date. We expect that the converted equity awards would be granted under a transitional stock adjustment plan that would be adopted prior to the plan divestiture date. We expect that awards under any such transitional stock adjustment plan would be limited to awards relating to the conversion of Halliburton equity awards into converted equity awards. As of July 31, 2006, our employees held outstanding vested stock options covering 3,436,970 shares of Halliburton common stock, outstanding unvested stock options covering 481,594 shares of Halliburton common stock, and 1,024,288 restricted shares of Halliburton common stock awarded in each case under Halliburton’s 1993 Stock and Incentive Plan. The number of shares of common stock to be outstanding after this offering as presented in this prospectus does not include any shares that may be issued under the equity awards that would be granted in the event the anticipated conversion pursuant to a transitional stock adjustment plan is approved by the compensation committee of Halliburton’s board of directors and our board of directors.

KBR, Inc. 2006 Stock and Incentive Plan

We plan to provide the stock and incentive plan described below for the benefit of our employees, officers and outside directors. This plan will be administered by our board of directors or our compensation committee.

Types of Awards. The plan provides for the grant of any or all of the following types of awards:

• stock options, including incentive stock options and non-qualified stock options;

• SARs, in tandem with stock options or freestanding;

• restricted stock;

• restricted stock units;

• performance awards; and

• stock value equivalent awards.

Awards may be made to the same person on more than one occasion and may be granted singly, in combination, or in tandem as determined by the compensation committee appointed by our board of directors.

Shares Subject to the Plan. We plan to reserve 10,000,000 shares of our common stock for purposes of the plan, of which no more than 3,500,000 shares may be issued in the form of restricted stock or restricted stock units or pursuant to performance awards. There will be a 500,000 share limit on the total number of shares which may be covered by awards made to a participant in any calendar year, including performance awards, stock options, restricted stock units and SARs. Repricing or the cancellation and reissuance of stock options or SARs is prohibited.

117

The plan provides for adjustments to the terms of outstanding grants and the shares reserved for future grants in the event of subdivisions or combinations of our common stock, stock dividends or stock splits. It also provides for adjustments to be determined by the compensation committee in the event of consolidations or mergers of our company with another corporation or entity, recapitalizations of our company or distributions to holders of our common stock of securities or property other than normal cash dividends or stock dividends. Shares are deemed issued under the plan only to the extent actually issued and delivered under an award, and to the extent an award lapses or the holder is paid in cash, the shares subject to the award will again become available under the plan.

In general, we may satisfy awards granted under the plan using shares of our authorized but unissued common stock or common stock previously issued that we have reacquired.

Mr. Utt’s employment agreement provides that he will receive a grant of restricted shares of our common stock with a fair market value of $2.2 million immediately following the closing of this offering. Such restricted stock will vest ratably on each of the first five anniversaries of the closing date of this offering.

In connection with this offering, and in order to provide incentive and retention for our employees going forward, we expect to make grants of stock options and restricted stock units under the plan to approximately 480 of our employees shortly after the closing of this offering. We expect that the fair market value of these awards, and the restricted stock to be awarded to Mr. Utt under the terms of his employment agreement, at the date of the grant will be up to $33.7 million. Subject to the terms of the plan, the allocation between award types, option exercise prices and vesting periods of these awards will be determined by our board of directors following the closing of this offering. We expect that approximately 60% of these awards will be granted in the form of restricted stock or restricted stock units and 40% will be granted in the form of stock options. We also anticipate that the awards will not vest or become exercisable, as applicable, for specified periods following the closing of this offering of at least one year as determined by our board of directors. The following table sets forth information regarding the anticipated allocation of these awards.

Name	Expected Maximum Fair Market Value of Awards
William P. Utt(1)	$	2,200,000
Cedric W. Burgher		580,000
John L. Rose		700,000
Bruce A. Stanski		700,000
Andrew D. Farley		580,000
Klaudia J. Brace		580,000
John W. Gann, Jr.		360,000
Albert O. Cornelison, Jr.		—
C. Christopher Gaut		—
Andrew R. Lane		—
Mark A. McCollum		—
Richard J. Slater		—
All directors, director nominees and executive officers as a group		5,700,000
All directors, director nominees, executive officers and other eligible employees as a group	$	33,650,000

(1) This amount includes the grant of $2.2 million of restricted stock provided for under Mr. Utt’s employment agreement.

Term. The plan will have a ten year term and new awards may not be granted under the plan following the tenth anniversary of the plan adoption date.

118

Administration. The compensation committee appointed by our board of directors will administer the plan. Our compensation committee will be appointed by, and will serve at the pleasure of, our board of directors. Subject to the terms of the plan, and to any approvals and other authority as our board of directors may reserve to itself from time to time, our compensation committee, consistent with the terms of the plan, will have authority to:

• select the individuals to receive awards;

• determine the timing, form, amount or value and term of grants and awards, and the conditions and restrictions, if any, subject to which grants and awards will be made and become payable under the plan;

• construe the plan and prescribe rules and regulations for the administration of the plan; and

• make any other determinations authorized under the plan as the compensation committee deems necessary or appropriate.

Eligibility. A broad group of our employees and employees of our affiliates will be eligible to participate in the plan. The selection of participants from eligible employees is within the discretion of the compensation committee. Outside directors of KBR are also eligible to participate in the plan.

Stock Options. Awards under the plan may be in the form of stock options to purchase shares of common stock. The compensation committee will determine the number of shares subject to the option, the manner and time of the option’s exercise, the conditions on exercisability and the exercise price per share of stock subject to the option. The term of an option may not exceed ten years. The exercise price of a stock option will not be less than the fair market value of the common stock on the date the option is granted. The compensation committee will designate each option as a non-qualified or an incentive stock option.

Stock Appreciation Rights. The plan also authorizes the compensation committee to grant stock appreciation rights either independent of, or in connection with, a stock option. The exercise price of a SAR will not be less than the fair market value of the common stock on the date the SAR is granted. If granted with a stock option, exercise of SARs will result in the surrender of the right to purchase the shares under the option as to which the SARs were exercised. Upon exercising a SAR, the holder receives for each share for which the SAR is exercised, an amount equal to the difference between the exercise price and the fair market value of the common stock on the date of exercise. Payment of that amount may be made in shares of common stock, cash, or a combination of cash and common stock, as determined by the compensation committee. The term of a SAR grant may not exceed ten years. No consideration is received by us for granting SARs.

Each grant of a SAR will be evidenced by an agreement that specifies the terms and conditions of the award, including the effect of death, disability, retirement or other termination of service on the exercisability of the SAR.

Restricted Stock and Restricted Stock Units. Stock awards may be granted consisting of restricted common stock or restricted stock units denominated in common stock. The compensation committee may establish rules and procedures for the crediting of dividend equivalents, if any, for restricted stock unit awards. Stock awards are subject to the 3,500,000 share limit on the total number of shares that may be issued in the form of restricted stock, restricted stock units, or performance awards. The compensation committee will determine the nature and extent of the restrictions on the awards, the duration of the restrictions, and any circumstance under which restricted shares will be forfeited. With a limited exception, the restriction period may not be less than three years from the date of grant.

Performance Awards. The plan will permit the compensation committee to grant performance awards to eligible individuals. Performance awards are awards that are contingent on the achievement of one or more performance measures. These awards are subject to the 3,500,000 share limit on the total number of shares that may be issued in the form of restricted stock, restricted stock units or performance awards. The cash value as of

119

the time of grant of any performance awards to any individual that are not denominated in common stock shall not exceed the maximum value established by our compensation committee.

The performance criteria that may be used by the compensation committee in granting performance awards consist of objective tests based on the following: earnings, cash value added performance, cash flow, stockholder return and/or value, customer satisfaction, operating profits (including EBITDA), revenue, net profits, financial return ratios, earnings per share, profit return and margins, stock price, market share, cost reduction goals, working capital and debt to capital ratio.

The compensation committee may select one criterion or multiple criteria for measuring performance. The measurement may be based on corporate, subsidiary or business unit performance, or based on comparative performance with other companies or other external measures of selected performance criteria. The compensation committee will also determine the length of time over which performance will be measured and the effect of an awardee’s death, disability, retirement or other termination of service during the performance period.

Stock Value Equivalent Awards. The plan will permit the compensation committee to grant stock value equivalent awards to eligible individuals. Stock value equivalent awards are rights to receive the fair market value of a specified number of shares of common stock, or the appreciation in the fair market value of the shares, over a specified period of time pursuant to a vesting schedule, all as determined by the compensation committee. Payment of the vested portion of a stock value equivalent award shall be made in cash, based on the fair market value of the common stock on the payment date. The compensation committee will also determine the effect of an awardee’s death, disability, retirement or other termination of service during the applicable period.

Amendment. Our board of directors may at any time terminate or amend the plan. However, our board of directors may not, without approval of the stockholders, amend the plan to effect a material revision of the plan, which:

• materially increases the benefits accruing to a holder under the plan;

• materially increases the aggregate number of securities that may be issued under the plan;

• materially modifies the requirements as to eligibility for participation in the plan;

• changes the types of awards available under the plan; or

• amends or deletes the provisions that prevent the compensation committee from amending the terms and conditions of an outstanding option or SARs to alter the exercise price.

No amendment or termination of the plan shall, without the consent of the optionee or participant, alter or impair rights under any options or other awards previously granted.

Change of Control. In the event of the acquisition by a party other than Halliburton of 20% or more of the outstanding shares of our common stock, unless an award document otherwise provides, as of the effective date of such “corporate change,” the following will occur automatically:

• any outstanding options and stock appreciation rights shall become immediately vested and fully exercisable;

• any restrictions on restricted stock awards or restricted stock unit awards shall immediately lapse;

• all performance measures upon which an outstanding performance award is contingent shall be deemed achieved and the holder shall receive a payment equal to the maximum amount of the award he or she would have been entitled to receive, prorated to the effective date of the “corporate change;” and

• any outstanding cash awards including, but not limited to, stock value equivalent awards shall immediately vest and be paid based on the vested value of the award;

120

provided, that the acquisition of shares of our common stock in connection with a distribution of our common stock to stockholders of Halliburton does not constitute a “corporate change.”

Policy Regarding Section 162(m) of the Internal Revenue Code

Section 162(m) of the Internal Revenue Code generally disallows a tax deduction to public companies for compensation paid to the chief executive officer or any of the four other most highly compensated officers to the extent the compensation exceeds $1 million in any year. Qualifying performance-based compensation is not subject to this sanction if certain requirements are met.

Our policy is to utilize available tax deductions whenever appropriate and consistent with our compensation philosophy. When designing and implementing executive compensation programs, we consider all relevant factors, including the availability of tax deductions with respect to compensation. Accordingly, we will attempt to preserve the federal tax deductibility of compensation in excess of $1 million a year to the extent doing so is consistent with the intended objectives of our executive compensation philosophy. However, we may from time to time pay compensation to our executive officers that may not be fully deductible.

The KBR, Inc. 2006 Stock and Incentive Plan enables qualification of stock options, stock appreciation rights and performance share awards as well as short-term and long-term cash performance plans under Section 162(m).

We believe that the interests of KBR and its shareholders are well served by the executive compensation programs currently in place. These programs encourage and promote KBR’s compensation objectives and permit the exercise of our discretion in the design and implementation of compensation packages. We will continue to review our executive compensation plans periodically to determine what changes, if any, should be made.

Employment Agreements

We have entered into employment agreements with Messrs. Utt, Burgher and Stanski that will continue in effect until terminated by either party and provide for base annual salaries of $625,000, $300,000 and $323,695, respectively, that may be increased in accordance with our general compensation policies. Mr. Utt’s employment agreement also calls for a one-time signing bonus of $75,000 plus a one-time bonus of $225,000 to be paid on the earlier of the closing date of this initial public offering or January 1, 2007. Mr. Stanski’s employment agreement provides for Mr. Stanski to receive a cost of living adjustment allowance of $46,305 per year during the time he is required to reside in the Washington, D.C. area. Each of Messrs. Utt, Burgher and Stanski is eligible to participate in Halliburton’s Annual Performance Pay Plan through the end of 2006 and thereafter would participate in any performance bonus arrangement that we establish.

In accordance with the terms of Mr. Utt’s employment agreement, he has received a grant of 30,000 restricted shares of Halliburton common stock under the 1993 Stock and Incentive Plan, as adjusted to give effect to Halliburton’s July 2006 two-for-one common stock split. For 2006, Mr. Utt will be afforded a reward opportunity of not less than 65% of his base salary if plan level performance objectives are achieved or not less than 130% of his base salary if the challenge level performance objectives are met. Mr. Utt’s employment agreement provides that if he is still employed under the agreement on the closing date of this initial public offering, then he will receive restricted shares of our common stock with a fair market value of $2.2 million immediately after the closing of this offering. Twenty percent of these restricted shares become vested on each of the first five anniversaries of the closing date of this offering.

Under the terms of Mr. Burgher’s employment agreement, he was granted 15,000 restricted shares of Halliburton common stock and an option to purchase 15,000 shares of Halliburton common stock under the 1993 Stock and Incentive Plan, in each case as adjusted to give effect to Halliburton’s July 2006 two-for-one common stock split. Mr. Burgher will also participate in our paid time off program and will accrue an equivalent of four weeks of vacation annually.

121

Under each of these employment agreements if Mr. Utt, Mr. Burgher or Mr. Stanski voluntarily terminates his employment other than for a “good reason” or due to death, permanent disability or retirement, or he is terminated by us for “cause,” he will receive (a) his pro rata base salary through the date of such termination and (b) any individual annual incentive compensation not yet paid but earned and payable under Halliburton’s or KBR’s Annual Performance Pay Plan for the year prior to the year of his termination of employment, but shall not be entitled to any annual incentive compensation for the year in which he terminates employment or any other payments or benefits by or on behalf of KBR except to those which may be payable pursuant to the terms of KBR’s or Halliburton’s employee benefit plans.

If Mr. Utt’s, Mr. Burgher’s or Mr. Stanski’s employment is terminated by us (except for “cause”) or by the employee for specific reasons such as removal from the positions described in their respective employment agreements, or the assignment to him of duties materially inconsistent with his position with us or any other material breach of the employment agreement (“good reason”), the employee will receive (a) a lump-sum cash severance benefit equal to one year’s base salary as in effect at termination for Messrs. Stanski and Burgher and a lump-sum cash severance benefit equal to two years’ base salary as in effect at termination for Mr. Utt, (b) either (i) a lump-sum cash payment equal to the value of the restricted shares on the date of termination of employment, which will automatically become forfeited or (ii) full vesting of outstanding restricted shares and (c) any individual incentive compensation earned for the year of his termination of employment, determined as if he has remained employed by us for the entire year.

Compensation Committee Interlocks and Insider Participation

None of our executive officers have served as members of a compensation committee (or if no committee performs that function, the board of directors) of any other entity that has an executive officer serving as a member of our board of directors.

122

SOLE STOCKHOLDER

Before this offering, all of the outstanding shares of our common stock were owned by Halliburton. After completion of this offering, Halliburton will own approximately 83% of our common stock, or 81% if the underwriters exercise their over-allotment option in full. Halliburton’s principal executive offices are located at 5 Houston Center, 1401 McKinney, Suite 2400, Houston, Texas 77010. Except for Halliburton, we are not aware of any person or group that will beneficially own more than five percent of the outstanding shares of our common stock following this offering. None of our executive officers or directors currently own any shares of our common stock. Please read “Management—Security Ownership of Directors and Executive Officers,” “—Board Structure and Compensation of Directors” and “—KBR, Inc. 2006 Stock and Incentive Plan” for a description of the ownership of Halliburton common stock owned by our directors and executive officers and for information about the stock options, restricted stock and restricted stock units that we expect to award to our directors, executive officers and employees following the closing of this offering.

Halliburton has advised us that it intends to dispose of our common stock that it owns following this offering as expeditiously as possible through a tax-free distribution to Halliburton’s stockholders. Halliburton has advised us that it has requested a ruling from the Internal Revenue Service that, among other things, no gain or loss will be recognized by Halliburton or its stockholders as a result of the distribution. Halliburton also intends to obtain an opinion of counsel related to the tax-free nature of the distribution. The determination of whether, and if so, when, to proceed with the distribution is entirely within the discretion of Halliburton. If Halliburton does not proceed with the distribution, it could elect to dispose of our common stock in a number of different types of transactions, including additional public offerings, open market sales, sales to one or more third parties or split-off offerings to Halliburton’s stockholders that would allow for the opportunity to exchange Halliburton shares for shares of our common stock or a combination of these transactions. Except for the “lock-up” period described under “Underwriting,” Halliburton is not subject to any contractual obligation to maintain its share ownership. Under the “lock-up” period restrictions, Halliburton has agreed that it will not dispose of our common stock that it owns or take other related actions, without the prior written consent of Credit Suisse Securities (USA) LLC, Goldman, Sachs & Co. and UBS Securities LLC, for a period of 180 days after the date of this prospectus, except that after 120 days after the date of this prospectus, Halliburton may dispose of our common stock that it owns by means of a distribution to its stockholders. For more information on the potential effect of the disposition of our common stock by Halliburton by means of the anticipated distribution or otherwise, please read “Risk Factors—Risks Related to Our Affiliation With Halliburton.”

123

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

Historically, Halliburton has provided various services and other general corporate support to us, including human resources, legal, information technology and accounting, and we have provided various corporate support services to Halliburton, including accounting, real estate and information technology. Halliburton and we will continue to provide certain of these services to each other on an interim basis under transition services agreements following this offering. Please read “Our Relationship With Halliburton—Transition Services Agreements.” Costs for information technology, including payroll processing services, which totaled $7 million, $20 million, $19 million and $22 million for the nine months ended September 30, 2006 and for the years ended December 31, 2005, 2004 and 2003, respectively, are allocated to KBR based on a combination of factors of Halliburton and KBR, including relative revenues, assets and payroll, and negotiation of the reasonableness of the charge. Costs for other services allocated to KBR were $17 million, $20 million, $20 million and $18 million for the nine months ended September 30, 2006 and for the years ended December 31, 2005, 2004 and 2003, respectively. Costs for these other services, including legal services and audit services, are primarily charged to KBR based on direct usage of the service. Costs allocated to KBR using a method other than direct usage are not significant individually or in the aggregate. We believe the allocation methods are reasonable. In addition, KBR leases office space to Halliburton at its Leatherhead, U.K. location.

Halliburton centrally develops, negotiates and administers our risk management process. The insurance program includes broad, all-risk coverage of worldwide property locations, excess worker’s compensation, general, automobile and employer liability, director’s and officer’s and fiduciary liability, global cargo coverage and other standard business coverages. Net expenses of $13 million, $17 million and $20 million have been allocated to us representing our share of these risk management coverages and related administrative costs for the nine months ended September 30, 2006 and the years ended December 31, 2005 and 2004, respectively. Some insurable risks, such as general liability, property damage and workers’ compensation are self-insured by Halliburton and KBR Holdings, LLC; however, Halliburton has umbrella insurance coverage for some risk exposures subject to specific limits. Except with respect to directors’ and officers’ insurance, we will continue to be covered under the Halliburton risk management program for an interim period. Please see “Our Relationship With Halliburton—Transition Services Agreements.”

We perform many of our projects through incorporated and unincorporated joint ventures. In addition to participating as a joint venture partner, we often provide engineering, procurement, construction, operations or maintenance services to the joint venture as a subcontractor. Where we provide services to a joint venture that we control and therefore consolidate for financial reporting purposes, we eliminate intercompany revenues and expenses on such transactions. In situations where we account for our interest in the joint venture under the equity method of accounting, we do not eliminate any portion of our revenues or expenses. We recognize the profit on our services provided to joint ventures that we consolidate and joint ventures that we record under the equity method of accounting primarily using the percentage-of-completion method. Total revenue from services provided to our unconsolidated joint ventures recorded in our consolidated statements of operations were $224 million, $483 million and $504 million for the years ended December 31, 2005, 2004 and 2003, respectively, and $299 million and $153 million for the nine months ended September 30, 2006 and 2005, respectively. Profit on transactions with our joint ventures recognized in our consolidated statements of operations were $23 million, $51 million and $56 million for the years ended December 31, 2005, 2004 and 2003, respectively, and $54 million and $23 million for the nine months ended September 30, 2006 and 2005, respectively.

In connection with certain projects, we are required to provide letters of credit, surety bonds or other financial and performance guarantees to our customers. Halliburton is the guarantor of the majority of these credit support instruments issued through December 2005 when we obtained our $850 million revolving credit facility. As of September 30, 2006, we had $724 million in letters of credit and financial guarantees outstanding of which $54 million was issued under our Revolving Credit Facility. Of the remaining $670 million, $647 million was issued under various facilities and are irrevocably and unconditionally guaranteed by Halliburton. $551 million of the total $724 million outstanding relate to our joint venture operations, including $159 million issued in connection with our Allenby & Connaught project. In addition, as of September 30, 2006, there were

124

$15 million of performance letters of credit issued in connection with the Barracuda-Caratinga project and $158 million related to various other projects. In addition, Halliburton has guaranteed surety bonds and provided direct guarantees primarily related to our payment and performance. These credit support instruments will remain outstanding following completion of this offering, and we will pay a quarterly carry charge to Halliburton for continuance of these instruments. We will agree to indemnify Halliburton for all losses in connection with the outstanding credit support instruments and any additional credit support instruments relating to our business for which Halliburton may become obligated following this offering. We expect to cancel these credit support instruments as we complete the underlying projects. Please read “Our Relationship With Halliburton—Master Separation Agreement—Credit Support Instruments.” Under certain reimbursement agreements, if we were unable to reimburse a bank under a paid letter of credit and the amount due is paid by Halliburton, we would be required to reimburse Halliburton for any amounts drawn on these letters of credit or guarantees in the future.

In October 2005, Halliburton capitalized $300 million of the amounts owed by us to Halliburton. In December 2005, we and Halliburton agreed to convert the balance of the amount owed by us to Halliburton into two subordinated intercompany notes with an aggregate principal balance of $774 million due December 31, 2010. In October 2006, we repaid $324 million in aggregate principal amount of the subordinated intercompany notes with available cash balances from sources permitted by the covenants under our revolving credit facility. Interest on each note accrues at the rate of 7.5% per annum and is payable in June and December of each year. These intercompany notes are subordinated to our $850 million revolving credit facility.

In December 2005, we and Halliburton entered into a cash management arrangement enabling us to continue our normal business activity of investing funds with or borrowings from Halliburton. Funds invested with Halliburton by us are evidenced by the Halliburton Cash Management Note, which is a demand promissory note, bearing interest per annum equal to the closing rate of overnight Federal funds rate determined on the first business day of each month. Funds borrowed from Halliburton are evidenced by the KBR Cash Management Note, which is a demand promissory note, bearing interest per annum equal to the six month Eurodollar rate plus 1.00%. At any given time, we will either have a note payable to or a note receivable from Halliburton pursuant to our cash management arrangement. The KBR Cash Management Note to Halliburton is subordinated to our $850 million revolving credit facility. As of September 30, 2006 and December 31, 2005, pursuant to our cash management arrangement, we had a note receivable from Halliburton of $732 million and $165 million, respectively. Additionally, as of September 30, 2006 and December 31, 2005, we had $84 million and $44 million, respectively, in amounts payable to Halliburton related to activity not covered by our cash management arrangement.

We conduct business with other Halliburton entities on a commercial basis, and we recognize revenues as services are rendered and costs as they are incurred. Amounts billed to us by Halliburton were primarily for services provided by Halliburton’s Energy Services Group on projects in the Middle East and were $0, $0, $18 million and $60 million for the nine months ended September 30, 2006 and for the years ended December 31, 2005, 2004 and 2003, respectively, and are included in cost of services in the consolidated statements of operations. Amounts we billed to Halliburton’s Energy Services Group were $1 million, $1 million, $4 million and $4 million for the nine months ended September 30, 2006 and for the years ended December 31, 2005, 2004 and 2003, respectively.

For purposes of governing certain ongoing relationships between us and Halliburton, we will enter into a master separation agreement and several ancillary agreements, including a tax sharing agreement, a registration rights agreement, two transition services agreements, an employee matters agreement and an intellectual property matters agreement, each of which is described in this prospectus under “Our Relationship With Halliburton.” The terms of these agreements were determined by Halliburton, and therefore their terms may be less favorable to us than the terms we could have obtained from an unaffiliated third party. In addition, while we are controlled by Halliburton, it is possible for Halliburton to cause us to amend these agreements on terms that may be less favorable to us than the current terms of the agreements.

125

OUR RELATIONSHIP WITH HALLIBURTON

We will enter into a master separation agreement with Halliburton that will provide for the separation of our assets and businesses from those of Halliburton. The master separation agreement will also contain agreements relating to the conduct of this offering and future transactions, and will govern the relationship between Halliburton and us subsequent to the separation and this offering. In addition, we will enter into several ancillary agreements with Halliburton, including a tax sharing agreement, a registration rights agreement, two transition services agreements, an employee matters agreement, and an intellectual property matters agreement. The terms of these agreements were determined by Halliburton. These agreements will continue in accordance with their terms after any distribution by Halliburton of our common stock to its stockholders. Summaries of the master separation agreement and the ancillary agreements are set forth below, and these agreements will be filed as exhibits to the registration statement of which this prospectus forms a part.

Master Separation Agreement

This Offering

The agreement requires us to use reasonable best efforts to satisfy certain conditions to the completion of this offering. Halliburton may, in its sole discretion, choose to terminate, abandon or amend any aspect of this offering at any time prior to completion of this offering, and we have agreed to take all actions directed by Halliburton in that regard. For a description of Halliburton’s ownership in us after completion of this offering, please read “Sole Stockholder.”

Potential Future Transactions

Concurrent with the execution and delivery of the master separation agreement, we will enter into a registration rights agreement with Halliburton, described below, pursuant to which we will grant to Halliburton certain registration rights for the registration and sale of shares of our common stock Halliburton will own following completion of this offering. We also will agree in the registration rights agreement to cooperate with registrations and related offerings of Halliburton’s and certain of its transferees’ shares. Please read “—Registration Rights Agreement.”

In addition to our agreements with Halliburton contained in the registration rights agreement, we have agreed in the master separation agreement that we and our affiliates, at our expense, will use reasonable best efforts to assist Halliburton in the transfer (whether in a public or private sale, exchange or other transaction) of all or any portion of its KBR common stock and to vest in the transferee all related rights and obligations that Halliburton assigns to it under the master separation agreement or any ancillary agreement.

Furthermore, we have agreed to cooperate, at our expense, with Halliburton to accomplish a tax-free distribution by Halliburton to its stockholders of shares of our common stock, and we have agreed to promptly take any and all actions necessary or desirable to effect any such distribution, including, without limitation, entering into a distribution agreement in form and substance acceptable to Halliburton. A form of distribution agreement will be attached to the master separation agreement and will address, among other things, the elimination of any remaining intercompany arrangements between us and Halliburton and our cash management arrangement with Halliburton, the conditions to a distribution and the mechanics of the distribution. The terms and conditions of any distribution agreement will supplement the provisions of the master separation agreement. The distribution may occur through a dividend, exchange or other transaction. Halliburton will determine, in its sole discretion, whether such distribution shall occur, the date of the distribution and the form, structure and all other terms of any transaction, exchange or offering to effect the distribution. A distribution may not occur at all. At any time prior to completion of the distribution, Halliburton may decide to abandon the distribution, or may modify or change the terms of the distribution, which could have the effect of accelerating or delaying the timing of the distribution.

Indemnification

General Indemnification and Mutual Release. The master separation agreement provides for cross-indemnities that generally will place the financial responsibility on us and our subsidiaries for all liabilities

126

associated with the current and historical KBR businesses and operations, and generally will place on Halliburton and its subsidiaries (other than us) the financial responsibility for liabilities associated with all of Halliburton’s other current and historical businesses and operations, in each case regardless of the time those liabilities arise. The master separation agreement also contains indemnification provisions under which we and Halliburton each indemnify the other with respect to breaches of the master separation agreement or any ancillary agreement.

In addition to our general indemnification obligations described above relating to the current and historical KBR business and operations, we will agree to indemnify Halliburton for liabilities under various outstanding and certain additional credit support instruments relating to our businesses and for liabilities under litigation matters related to our business. We will also agree to indemnify Halliburton against liabilities arising from misstatements or omissions in this prospectus or the registration statement of which it is a part, except for misstatements or omissions relating to information that Halliburton provided to us specifically for inclusion in this prospectus or the registration statement of which it forms a part. We will also agree to indemnify Halliburton for any misstatements or omissions in our subsequent SEC filings and for information we provide to Halliburton specifically for inclusion in Halliburton’s annual or quarterly reports following the completion of this offering.

In addition to Halliburton’s general indemnification obligations described above relating to the current and historical Halliburton business and operations, Halliburton will indemnify us for liabilities under litigation matters related to Halliburton’s business and for liabilities arising from misstatements or omissions with respect to information that Halliburton provided to us specifically for inclusion in this prospectus or the registration statement of which it forms a part.

For liabilities arising from events occurring on or before the separation of the companies at the time of this offering, the master separation agreement contains a general release. Under this provision, we will release Halliburton and its subsidiaries, successors and assigns, and Halliburton will release us and our subsidiaries, successors and assigns, from any liabilities arising from events between us and/or our subsidiaries on the one hand, and Halliburton and/or its subsidiaries (other than us) on the other hand, occurring on or before the separation of the companies at the time of this offering, including in connection with the activities to implement our separation from Halliburton, this offering and any distribution of our shares by Halliburton to its stockholders. The general release does not apply to liabilities allocated between the parties under the master separation agreement or any ancillary agreement or to specified ongoing contractual arrangements.

FCPA Indemnification. Halliburton has been cooperating with the SEC and DOJ investigations and with other investigations in France, Nigeria and Switzerland into the Bonny Island project in Rivers State, Nigeria. We are also aware that the Serious Frauds Office in the United Kingdom is conducting an investigation relating to the activities of TSKJ. Halliburton’s Board of Directors has appointed a committee of independent directors to oversee and direct the FCPA investigations. Halliburton, acting through its committee of independent directors, will continue to oversee and direct the investigations after the offering, and a special committee of our directors that are independent of Halliburton and us will monitor the continuing investigations directed by Halliburton.

Halliburton will agree to indemnify us and any of our greater than 50%-owned subsidiaries as of the date of the master separation agreement for fines or other monetary penalties or direct monetary damages, including disgorgement, as a result of a claim made or assessed by a governmental authority of the United States, the United Kingdom, France, Nigeria, Switzerland or Algeria, or a settlement thereof, relating to alleged or actual violations occurring prior to the date of the master separation agreement of the FCPA or particular, analogous applicable foreign statutes and regulations identified in the master separation agreement by us or our current or former directors, officers, employees, agents, representatives or subsidiaries in connection with the construction and subsequent expansion by TSKJ of a natural gas liquefaction complex and related facilities at Bonny Island or in connection with any other project, whether located inside or outside of Nigeria, including without limitation the use of agents in connection with such projects, identified by a governmental authority of the United States, the United Kingdom, France, Nigeria, Switzerland or Algeria in connection with the current investigations in those jurisdictions. The Halliburton indemnity would not apply to any fines or other monetary penalties or direct monetary damages, including disgorgement, assessed by governmental authorities in jurisdictions other than the United States, the United Kingdom, France, Nigeria, Switzerland or Algeria, or a settlement thereof, or assessed

127

against entities such as TSKJ or Brown & Root-Condor Spa in which we do not have an interest greater than 50%. With respect to any greater than 50%-owned subsidiary of ours that is not directly or indirectly wholly owned, the Halliburton indemnity is limited to the proportionate share of any fines or other monetary penalties or direct monetary damages, including disgorgement, equal to KBR’s ownership interest in such subsidiary as of the date of the master separation agreement.

The Halliburton indemnity will not cover, and we will be responsible for, all other losses in connection with the FCPA investigations. These other losses could include, but are not limited to, our costs, losses or expenses relating to:

• any monitor required by or agreed to with a governmental authority appointed to review future practices for compliance with FCPA law and any other actions required by governmental authorities;

• third party claims against us, which would include any claims against us by persons other than governmental authorities;

• special, indirect, derivative or consequential damages, which are typically damages other than actual damages, such as lost profits;

• claims by directors, officers, employees, affiliates, advisors, attorneys, agents, debt holders or other interest holders or constituents of us and our subsidiaries in their capacity as such, including any indemnity claims by individuals and claims for breach of contract;

• damage to our business or reputation;

• adverse effect on our cash flow, assets, goodwill, results of operations, business, prospects, profits or business value, whether present or future;

• threatened or actual suspension or debarment from bidding or continued activity under government contracts (please read “Risk Factors—Risks Relating to Investigations” for further information); and

• alleged or actual adverse consequences in obtaining, continuing or terminating financing for current or future construction projects in which we are involved or for which we intend to submit bids.

With respect to third party claims, we understand that the government of Nigeria gave notice in 2004 to the magistrate overseeing the investigation in France of a civil claim as an injured party in that proceeding. We are not aware of any further developments with respect to this claim.

We have agreed with Halliburton that Halliburton in its sole discretion will continue to control the investigation, defense and/or settlement negotiations regarding the FCPA investigations to which Halliburton’s indemnification is applicable. We have the right to assume control of the investigation, defense and/or settlement negotiations regarding these FCPA investigations. However, in such case, Halliburton may terminate the indemnity with respect to FCPA fines, penalties and damages described above. Furthermore, Halliburton may terminate the indemnity if we refuse to agree to a settlement of these FCPA investigations negotiated and presented by Halliburton to us or if we enter into a settlement of these FCPA investigations without Halliburton’s consent. In addition, Halliburton may terminate the indemnity if we materially breach our obligation to consistently implement and maintain, for five years following our separation from Halliburton, currently adopted business practices and standards relating to the use of foreign agents. We have agreed with Halliburton that no settlement by us of any claims relating to the FCPA investigations to which Halliburton’s indemnification is applicable effected without the prior written consent of Halliburton will be binding on Halliburton. We also have agreed with Halliburton that no settlement by Halliburton of any claims relating to these FCPA investigations that is effected without our prior written consent will be binding on us. Notwithstanding the foregoing, a minority-owned KBR subsidiary as of the date of the master separation agreement may control the investigation, defense and/or settlement of these FCPA investigations solely with respect to such subsidiary, and may agree to a settlement of claims relating to these FCPA investigations solely with respect to such subsidiary without the prior written consent of Halliburton, and any such control or agreement to a settlement shall not allow Halliburton to

128

terminate its indemnity of us and our greater than 50%-owned subsidiaries with respect to FCPA fines, penalties and damages, including disgorgement, described above.

We have agreed, at all times during the term of the master separation agreement and whether or not we decide to assume control over the investigation, defense and/or settlement negotiations regarding the FCPA investigations to which the Halliburton indemnity applies, to assist, at Halliburton’s expense, with Halliburton’s full cooperation with any governmental authority in Halliburton’s investigation and defense of FCPA Matters. Our ongoing obligation to cooperate with Halliburton’s defense will require us to, among other things, at Halliburton’s request:

• make disclosures to Halliburton and governmental authorities regarding the activities of KBR, Halliburton and the current and former directors, officers, employees, agents, distributors and affiliates of KBR and Halliburton relating to these FCPA investigations;

• make available documents, records or other tangible evidence and electronic data in our possession, custody or control relating to these FCPA investigations and to preserve, maintain and retain such evidence;

• provide access to our documents and records in our possession, custody or control relating to these FCPA investigations and use reasonable best efforts to provide access to our documents and records in the custody or control of our current and former directors, officers, employees, agents, distributors, attorneys and affiliates;

• use reasonable best efforts to make available any of our current and former directors, officers, employees, agents, distributors, attorneys and affiliates who may have been involved in the activities under investigation and whose cooperation is requested by Halliburton or any governmental authority; to recommend that such persons cooperate fully with these FCPA investigations or any prosecution of individuals or entities; and to take appropriate disciplinary action with respect to those persons who do not cooperate or cease to cooperate fully;

• provide testimony and other information deemed necessary by Halliburton to authenticate information to be admitted into evidence in any criminal or other proceeding;

• use reasonable best efforts to provide access to our outside accounting and legal consultants whose work includes or relates to these FCPA investigations and their records, reports and documents relating thereto; and

• refrain from asserting a claim of attorney-client or work-product privilege as to certain documents related to these FCPA investigations or related to transactions or events underlying these FCPA investigations.

We have agreed to inform and disclose promptly to Halliburton any developments, communications or negotiations between us, on the one hand, and any governmental authority or third party, on the other hand, with respect to these FCPA investigations, except as prohibited by law or legal restraint. Halliburton may terminate its indemnification relating to FCPA Matters upon a material breach by us of our cooperation obligations.

Until such time, if ever, that we exercise our right to assume control over the investigation, defense and/or settlement of the FCPA investigations to which the Halliburton indemnity applies, Halliburton, at its sole expense, will bear all legal and non-legal fees, expenses and other costs incurred on behalf of Halliburton and us in the investigation, defense and/or settlement of these matters (other than indemnification and advancement of expenses for our current and former employees under contract or charter or bylaw requirements). Thereafter, Halliburton and we will each be responsible for our own fees, expenses and other costs.

We and Halliburton have agreed to provide to each other, upon request, information relating to the FCPA investigations to which the Halliburton indemnity applies. Until such time, if ever, that we exercise our right to assume control over the investigation, defense and/or settlement of these FCPA investigations, the attorneys, accountants, consultants or other advisors of the Halliburton board of directors or any special committee of

129

independent directors thereof will, from time to time and upon reasonable request, brief our board of directors or any special committee of independent directors thereof formed for purposes of monitoring these FCPA investigations concerning the status of or issues arising under or relating to Halliburton’s investigation of the FCPA Matters and its defense and/or settlement of FCPA Matters. We also have agreed with Halliburton that each party is subject to the duty of good faith and fair dealing in the performance of such party’s rights and obligations under the master separation agreement.

A special committee of our board of directors, composed of members independent of Halliburton and us, will monitor, at our cost, the FCPA investigations by the SEC and the DOJ and other governments and governmental agencies, Halliburton’s investigation, defense and/or settlement thereof, and our cooperation with Halliburton. These directors will have access to separate advisors and counsel to assist in their monitoring, the cost of which will be borne by us. Any decision to take control over the investigation, defense and/or settlement, to refuse to agree to a settlement of FCPA Matters negotiated by Halliburton or to discontinue cooperation with Halliburton would be made by this independent committee.

Enforceability of Halliburton FCPA Indemnification. Under the indemnity with Halliburton with respect to FCPA Matters, our share of any liabilities for fines or other monetary penalties or direct monetary damages, including disgorgement, as a result of governmental claims or assessments relating to FCPA Matters would be funded by Halliburton and would not be borne by us or our public stockholders. Our indemnification from Halliburton for FCPA Matters may not be enforceable as a result of being against governmental policy. We believe that the proposed Halliburton indemnification does not contravene the terms of any statutes, rules, regulations, or policies on indemnity for securities law violations promulgated by the SEC or Congress, and we will vigorously defend the enforceability of the indemnification. However, the SEC, the DOJ and/or a court of competent jurisdiction may not agree that the indemnification from Halliburton is enforceable. Please read “Risk Factors—Risks Relating to Investigations—Our indemnification from Halliburton for FCPA Matters may not be enforceable as a result of being against governmental policy” for additional information.

There are risks and uncertainties concerning the FCPA investigations and Halliburton’s indemnity which you should consider carefully before deciding to invest in our common stock. Please read “Risk Factors—Risks Relating to Investigations” and “Risk Factors—Risks Related to Our Affiliation With Halliburton.”

Barracuda-Caratinga Indemnification. Halliburton will agree to indemnify us and any of our greater than 50%-owned subsidiaries as of the date of the master separation agreement for all out-of-pocket cash costs and expenses, or cash settlements or cash arbitration awards in lieu thereof, we may incur after the effective date of the master separation agreement as a result of the replacement of the subsea flow-line bolts installed in connection with the Barracuda-Caratinga project, which we refer to as “B-C Matters.” The Halliburton indemnity will not cover, and we will be responsible for, all other losses in connection with the Barracuda-Caratinga project. These other losses include, but are not limited to, warranty claims on the Barracuda-Caratinga project, damage claims as a result of any failure on the Barracuda-Caratinga vessels and other losses relating to certain third party claims, losses that are special, indirect, derivative or consequential in nature, losses relating to alleged or actual damage to our business or reputation, losses or adverse effect on our cash flow, assets, goodwill, results of operations, business, prospects, profits or business value, whether present or future, or alleged or actual adverse consequences in obtaining, continuing or terminating of financing for current or future projects.

We will at our cost continue to control the defense, counterclaim and/or settlement of B-C Matters, but Halliburton will have discretion to determine whether to agree to any settlement or other resolution of these matters. Halliburton has the right to assume control over the defense, counterclaim and/or settlement of B-C Matters at any time. If Halliburton assumes control over the defense, counterclaim and/or settlement of B-C Matters, and we refuse a settlement proposed by Halliburton, Halliburton may terminate the indemnity relating to B-C Matters. We have agreed to inform and disclose promptly to Halliburton any developments, communications or negotiations between us, on the one hand, and Petrobras and its affiliates or any third party, on the other hand, with respect to B-C Matters, except as prohibited by law or legal restraint. Halliburton may terminate the indemnity relating to B-C Matters upon a material breach by us of our obligations to cooperate with Halliburton or upon our entry into a settlement of any claims relating to B-C Matters without Halliburton’s consent.

130

We have agreed at our cost to disclose to Halliburton any developments, negotiation or communication with respect to B-C Matters. We will be entitled to retain the cash proceeds of any arbitration award entered in our favor or in favor of Halliburton, or any cash settlement or compromise in lieu thereof (other than with respect to recovery of Halliburton’s attorneys’ fees or recovery of cash costs and expenses advanced to us by Halliburton pursuant to Halliburton’s indemnity for B-C Matters). We have agreed with Halliburton that no settlement by us of any claims relating to B-C Matters effected without the prior written consent of Halliburton will be binding on Halliburton. We have also agreed with Halliburton that no settlement by Halliburton of any claims relating to B-C Matters that is effected without our prior written consent will be binding on us.

Until such time, if ever, that Halliburton exercises its right to assume control over the defense, counterclaim and/or settlement of B-C Matters, we, at our sole expense, will bear all legal and non-legal expenses incurred on behalf of Halliburton and us in the defense, counterclaim and/or settlement of B-C Matters.

There are risks and uncertainties concerning the Barracuda-Caratinga project which you should consider carefully before deciding to invest in our common stock. Please read “Risk Factors—Risks Related to Our Customers and Contracts—We are involved in a dispute with Petrobras with respect to responsibility for the failure of subsea flow-line bolts on the Barracuda-Caratinga project.”

Bidding Practices Investigations

The master separation agreement provides that both Halliburton and we will use our respective reasonable best efforts to assist each other in fully cooperating with ongoing bidding practices investigations, as described more fully in “Business—Legal Proceedings—Bidding Practices Investigations” above, and the defense and/or settlement of any claims made by governmental authorities relating to or arising out of such investigations, although Halliburton’s indemnity to us does not apply to liabilities, if any, for fines, monetary damages or other potential losses arising out of the bidding practices investigations. We and Halliburton will agree, for the term of the master separation agreement and with respect to the bidding practices investigations, to provide each other with access to relevant information, to preserve, maintain and retain relevant documents and records, to make available and encourage the cooperation of personnel and to inform each other of relevant developments, communications or negotiations.

Corporate Governance

The master separation agreement also contains several provisions regarding our corporate governance that apply for so long as Halliburton owns specified percentages of our common stock. We will use our reasonable best efforts to avail ourselves of exemptions from certain corporate governance requirements of the New York Stock Exchange while Halliburton owns a majority of our outstanding voting stock. Please read “Risk Factors—Risks Related to Our Affiliation With Halliburton—We will be a ‘controlled company’ under the rules of the New York Stock Exchange and, as a result, we will qualify for, and intend to rely on, exemptions from some of the corporate governance requirements of the New York Stock Exchange. Accordingly, our stockholders will not have as many corporate governance protections as stockholders of some other publicly traded companies.” As permitted under these exemptions, we have agreed that, so long as Halliburton owns a majority of our voting stock, Halliburton will have the right to:

• designate for nomination by our board of directors, or a nominating committee of the board, a majority of the members of the board, including our chairman; and

• designate for appointment by the board of directors at least a majority of the members of any committee of our board of directors (other than the audit committee or a special committee of independent directors).

If Halliburton’s beneficial ownership of our common stock is reduced to a level of at least 15% but less than a majority of our outstanding voting stock, Halliburton will have the right to:

• designate for nomination a number of directors proportionate to its voting power; and

131

• designate for appointment by the board of directors at least one member of any committee of our board of directors, to the extent permitted by law or stock exchange requirements (other than the audit committee or a special committee of independent directors).

We have also agreed to use our reasonable best efforts to cause Halliburton’s nominees to be elected.

Pursuant to the master separation agreement, for so long as Halliburton beneficially owns a majority of our outstanding voting stock, our board of directors will have an executive committee consisting solely of Halliburton designees. If Halliburton’s beneficial ownership is reduced to less than a majority but at least 15% of our outstanding voting stock, Halliburton will be entitled to designate at least one Halliburton designee to the executive committee. The executive committee will exercise the authority of the board of directors when the full board of directors is not in session in reviewing and approving the analysis, preparation and submission of significant project bids; managing the review, negotiation and implementation of significant project contracts; and reviewing our business and affairs. In addition, as long as Halliburton beneficially owns a majority of our outstanding voting stock, Halliburton’s board of directors will review and approve all of our projects that have an estimated value in excess of $250 million.

We have agreed in the master separation agreement that, until the earlier to occur of a distribution by Halliburton to its stockholders of its stock in us or the date that Halliburton ceases to control us for U.S. tax purposes, we will not, without Halliburton’s prior written consent, issue any stock, or any securities, options, warrants or rights convertible into or exercisable or exchangeable for our stock, if such issuance would cause Halliburton to fail to control us within the meaning of Section 368(c) of the Internal Revenue Code, cause Halliburton to fail to satisfy the stock ownership requirements of Section 1504(a)(2) of the Internal Revenue Code with respect to us, or cause a change of control under the provisions of Section 355(e) of the Internal Revenue Code. We have also agreed that, until the earliest to occur of a distribution by Halliburton to its stockholders of its stock in us or the date that Halliburton ceases to control us for U.S. tax purposes, we will refrain from issuing any of our stock (or any securities, options, warrants or rights convertible into or exercisable of exchangeable for our stock) in settlement of any award pursuant to any stock option or other executive or employee benefit or compensation plan maintained by us, including without limitation any restricted stock unit, phantom stock, option or stock appreciation right.

We have also agreed that for so long as Halliburton owns 15% or more of our outstanding voting stock, we will not make discretionary changes to our accounting principles and practices, and we will not select a different accounting firm than Halliburton’s, which is currently KPMG LLP, to serve as our independent registered public accountants.

We have agreed to grant to Halliburton a continuing subscription right to purchase from us, at the times set forth in the master separation agreement:

• such number of shares of our voting stock as is necessary to allow Halliburton to maintain its then-current voting percentage; and

• such number of shares of our non-voting stock as is necessary to allow Halliburton to maintain its then-current ownership percentage (or 80% of the shares of each new class of non-voting stock that we may issue in the future).

The subscription right terminates, with respect to our voting stock, if Halliburton owns less than 80% of our outstanding voting stock at any time and, with respect to our non-voting stock, if Halliburton owns less than 80% of our non-voting stock at any time. The subscription right does not apply with respect to, among other things, certain issuances of shares by us pursuant to any stock option or other employee benefit plan to the extent the issuance would not result in Halliburton’s loss of control over us within the meaning of Section 368(c) of the Internal Revenue Code, Halliburton’s failure to satisfy stock ownership requirements of Section 1504(a)(2) of the Internal Revenue Code with respect to us, or a change of control under the provisions of Section 355(e) of the Internal Revenue Code.

132

Halliburton may transfer all or any portion of its contractual corporate governance rights described above to a transferee from Halliburton which holds at least 15% of our outstanding voting stock.

We have agreed that, for so long as Halliburton beneficially owns a majority of our outstanding voting stock, we will consistently implement and maintain Halliburton’s business practices and standards with respect to internal controls and the Halliburton Code of Business Conduct.

Halliburton has also agreed, for so long as Halliburton owns at least 20% or more of our outstanding voting stock, to renounce, to the fullest extent permitted by applicable law, any and all rights it may have with respect to each investment, commercial activity or other opportunity that is a “restricted opportunity” (as such term is defined in our certificate of incorporation). Please read “Description of Capital Stock—Transactions and Corporate Opportunities.”

Certain of the corporate governance provisions of the master separation agreement described above could have the effect of delaying or preventing a change of control or changes in our management that a stockholder might consider favorable. Please read “Risk Factors—Risks Related to Our Affiliation With Halliburton—We will be controlled by Halliburton as long as it owns a majority of our outstanding voting stock, and you will be unable to affect the outcome of stockholder voting during that time.”

Credit Support Instruments

In the ordinary course of our business, we enter into letters of credit, surety bonds, performance guarantees, financial guarantees and other credit support instruments. Prior to our separation from Halliburton, Halliburton and certain of its affiliates agreed to be primary or secondary obligors on most of our currently outstanding credit support instruments. We and Halliburton have agreed that these credit support instruments will remain in full force and effect until the earlier of: (1) the expiration of such instrument in accordance with its terms or the release of such instrument by our customer, or (2) the termination of the project contract to which such instrument relates or the termination of our obligations under the contract.

In addition, we and Halliburton have agreed that until December 31, 2009, Halliburton will provide or cause to be provided additional guarantees and indemnification or reimbursement commitments, or extensions of existing guarantees and indemnification or reimbursement commitments, for our benefit in connection with (a) letters of credit necessary to comply with our EBIC contract, our Allenby & Connaught contract and all other contracts that were in place as of December 15, 2005; (b) surety bonds issued to support new task orders pursuant to the Allenby & Connaught contract, two existing job order contracts for our G&I segment and all other contracts that were in place as of December 15, 2005; and (c) performance guarantees in support of these contracts.

We have agreed to use our reasonable best efforts to attempt to release or replace Halliburton’s liability under the outstanding credit support instruments and any additional credit support instruments for which Halliburton may become liable following this offering for which such release or replacement is reasonably available. For so long as Halliburton or its affiliates remain liable with respect to any credit support instrument, we have agreed to pay the underlying obligation as and when it becomes due. We will agree to indemnify Halliburton for all liabilities in connection with our outstanding credit support instruments and any additional credit support instruments relating to our business for which Halliburton may become obligated following this offering. Furthermore, we have agreed to pay a carry charge for continuance of Halliburton’s obligations with respect to our letters of credit and surety bonds. For so long as any letter of credit for which Halliburton may be obligated remains outstanding prior to December 31, 2009, we will pay to Halliburton a quarterly carry charge for continuance of the letters of credit equal to the sum of: (i) 0.40% per annum of the then outstanding aggregate principal amount of all letters of credit for such quarter meeting the definition of “Performance Letters of Credit” or “Commercial Letters of Credit” (as such terms are defined by our revolving credit agreement), and (ii) 0.80% per annum of the then outstanding aggregate principal amount of all letters of credit constituting financial letters of credit for such quarter. Thereafter, following December 31, 2009, these quarterly carry charges for letters of

133

credit will increase to 0.90% per annum and 1.65% per annum, respectively. For so long as any surety bond for which Halliburton may be obligated remains outstanding prior to December 31, 2009, we will pay to Halliburton a quarterly carry charge for continuance of the surety bonds equal to 0.25% per annum of the then outstanding aggregate principal amount of such surety bonds for such quarter. Thereafter, following December 31, 2009, the quarterly carry charge for continuance of surety bonds increases to 0.50% per annum.

The master separation agreement provides that, except in connection with the existing credit support instruments, any additional credit support instruments relating to our business described above for which Halliburton may become obligated, or as otherwise contemplated by our cash management arrangement with Halliburton and our intercompany notes with Halliburton, Halliburton will have no obligation to, but may at its sole discretion, provide or continue any credit support to, or advance any funds to or on behalf of, us following the completion of this offering.

Dispute Resolution

The master separation agreement contains provisions that govern the resolution of disputes, controversies or claims that may arise between us and Halliburton under the master separation agreement and the related ancillary agreements, or between us and Halliburton for a period of ten years after completion of this offering relating to our commercial or economic relationship to Halliburton. These provisions contemplate that efforts will be made to resolve disputes by escalation of the matter to senior management representatives of us and Halliburton who have not previously been directly engaged in the dispute. If such efforts are not successful, either we or Halliburton may submit the dispute to final, binding arbitration.

Expenses

Except as otherwise provided in the master separation agreement, the ancillary agreements or any other agreement between us and Halliburton relating to the separation or this offering, Halliburton will pay all out-of-pocket costs and expenses incurred in connection with the separation of our business from Halliburton, this offering, and any future distribution of KBR shares to Halliburton’s stockholders, and in connection with preparing the master separation agreement and the ancillary agreements. We will pay all underwriting fees, discounts and commissions and other direct costs incurred in connection with this offering. Please read “Underwriting.”

Other Agreements

The master separation agreement requires us to apply the proceeds of the offering in the manner described under “Use of Proceeds.” The master separation agreement also provides that we will continue to perform certain contracts relating to Halliburton’s energy services group and that Halliburton will continue to perform certain contracts relating to our business, with the benefits, liabilities and costs of such performance to be for the account of, respectively, Halliburton and us. The master separation agreement also contains provisions relating to, among other matters, confidentiality and the exchange of information, provision of financial information and assistance with respect to financial matters, preservation of legal privileges and the production of witnesses, cooperation with respect to the investigation, litigation, defense and/or settlement of certain litigation, and a one-year mutual agreement to refrain from soliciting for employment the current employees of us or Halliburton, as applicable.

Tax Sharing Agreement

We will enter into a tax sharing agreement with Halliburton to govern the allocation of U.S. income tax liabilities and to set forth agreements with respect to other tax matters. Under the Internal Revenue Code, we will cease to be a member of the Halliburton consolidated group (a deconsolidation) if at any time Halliburton owns less than 80% of the vote or 80% of the value of our outstanding capital stock, whether by issuance of additional shares by us, by Halliburton’s sale of our stock, by Halliburton’s spin-off distributions of our stock, by Halliburton’s split-off offerings of our stock or by a combination of these transactions.

134

Halliburton will be responsible for filing any U.S. income tax returns required to be filed for any company or group of companies of the Halliburton consolidated group through the date of the deconsolidation. Halliburton will also be responsible for paying the taxes related to the returns it is responsible for filing. We will pay Halliburton our allocable share of such taxes. We are obligated to pay Halliburton for the utilization of net operating losses, if any, generated by Halliburton prior to the deconsolidation to offset our consolidated federal income tax liability.

Halliburton will determine all tax elections for tax periods during which we are a member of the Halliburton consolidated group consistent with past practice. We will prepare and file all tax returns required to be filed by us and pay all taxes related to such returns for all tax periods after we cease to be a member of the Halliburton consolidated group.

Generally, if there are tax adjustments related to us arising after the deconsolidation date, which relate to a tax return filed for a pre-deconsolidation period, we will be responsible for any increased taxes and we will receive the benefit of any tax refunds. We have agreed to cooperate with and assist Halliburton in any tax audits, litigation or appeals that involve, directly or indirectly, tax returns filed for pre-deconsolidation periods and to provide Halliburton with information related to such periods. We and Halliburton will agree to indemnify each other for any tax liabilities resulting from the failure to pay any amounts due under the terms of the tax sharing agreement.

We and Halliburton have agreed that, except as described in the following paragraph, any and all taxes arising from our deconsolidation with the Halliburton consolidated group will be the responsibility of Halliburton. We have also agreed that we will elect to not carry back net operating losses we generate in our tax years after deconsolidation to tax years when we were part of the Halliburton consolidated group. We may utilize such net operating losses in our tax years after deconsolidation (subject to the applicable carryforward limitation periods) but only to the extent of our income in such tax years.

If Halliburton distributes our stock to its stockholders, we and Halliburton will be required to comply with representations that are made to Halliburton’s tax counsel in connection with the tax opinion that we expect to be issued to Halliburton regarding the tax-free nature of the distribution of our stock by Halliburton to Halliburton stockholders. In addition, we and Halliburton will be required to comply with representations that are made to the Internal Revenue Service in connection with Halliburton’s request for a private letter ruling with respect to the distribution. Further, we have agreed not to enter into transactions for two years after the distribution date that would result in a more than immaterial possibility of a change of control of our company pursuant to a plan unless a ruling is obtained from the Internal Revenue Service or an opinion is obtained from a nationally recognized law firm that the transaction will not affect the tax-free nature of the distribution. For these purposes, certain transactions are deemed to create a more than immaterial possibility of a change of control of our company pursuant to a plan, and thus require such a ruling or opinion, including, without limitation, the merger of KBR with or into any other corporation, stock issuances (regardless of size) other than in connection with KBR employee incentive plans, or the redemption or repurchase of any of our capital stock (other than in connection with future employee benefit plans or pursuant to a future market purchase program involving 5% or less of our publicly traded stock). If we take any action which results in the distribution becoming a taxable transaction, we will be required to indemnify Halliburton for any and all taxes incurred by Halliburton or any of its affiliates, on an after-tax basis, resulting from such actions.

Depending on the facts and circumstances, if Halliburton distributes our stock to its stockholders, the distribution may be taxable to Halliburton if we undergo a 50% or greater change in stock ownership within two years after any distribution. Under the tax sharing agreement, Halliburton is entitled to reimbursement of any tax costs incurred by Halliburton as a result of a change in control of our company after any distribution. Halliburton would be entitled to such reimbursement even in the absence of any specific action by us, and even if actions of Halliburton (or any of its officers, directors or authorized representatives) contributed to a change in control of our company. Actions by a third party after any distribution causing a 50% or greater change in our stock ownership could also cause the distribution by Halliburton to be taxable and require reimbursement by us.

135

Registration Rights Agreement

The shares of our common stock held by Halliburton after this offering will be deemed “restricted securities” as defined in Rule 144. Accordingly, Halliburton may only sell a limited number of shares of our common stock into the public markets without registration under the Securities Act. We will enter into a registration rights agreement with Halliburton under which, at the request of Halliburton, we will use our best efforts to register shares of our common stock that are held by Halliburton after the closing of this offering, or subsequently acquired, for public sale under the Securities Act. As long as Halliburton owns a majority of our outstanding voting stock, there is no limit to the number of registrations that Halliburton may request. Once Halliburton owns less than a majority of the voting power of our outstanding voting stock, Halliburton can request a total of three additional registrations for so long as Halliburton owns at least 10% of the outstanding shares of our common stock.

If Halliburton transfers more than 10% of our outstanding shares of common stock to a transferee, Halliburton may transfer all or a portion of its rights under the agreement, except that a transferee that acquires a majority of our outstanding common stock can only request two additional registrations after it owns less than a majority of our outstanding common stock, and a transferee of less than a majority of our outstanding common stock can only request either one or two registrations, depending on the percentage of our outstanding common stock it acquires. The transfer of rights under the agreement to a transferee will not limit the number of registrations Halliburton may request. There is no limit on the number of registrations a transferee may demand from us so long as the transferee and its affiliates beneficially own a majority of the outstanding shares of our common stock.

Under the registration rights agreement, we will also provide Halliburton and its permitted transferees with “piggy-back” rights to include their shares in future registrations by us of our common stock under the Securities Act. There is no limit on the number of these “piggy-back” registrations in which Halliburton and its permitted transferees may request their shares be included. The rights under this agreement will terminate once Halliburton or a permitted transferee is able to dispose of all of its shares of our common stock within a ninety-day period pursuant to the exemption from registration provided under Rule 144 of the Securities Act.

We have agreed to cooperate in these registrations and related offerings. We and Halliburton have agreed to restrictions on the ability of each party to sell securities following registrations conducted by us or at the request of Halliburton. All expenses payable in connection with such registrations will be paid by us, except that Halliburton or a permitted transferee, as applicable, will pay all underwriting discounts and commissions applicable to the sale of its shares of our common stock and the fees and expenses of its separate advisors and legal counsel.

Transition Services Agreements

We will enter into a transition services agreement with Halliburton under which Halliburton will provide to us, on an interim basis, various corporate support services. These services will consist generally of the services that have been provided to KBR on an intercompany basis prior to this offering. These services relate to, among other things:

• communications;

• human resources;

• real estate services;

• certain investment fund trusts;

• tax;

• internal audit services;

• international;

136

• travel;

• consulting;

• risk management;

• information technology;

• accounting;

• legal; and

• government services.

For up to 90 days following the completion of this offering, Halliburton and KBR may agree on additional services to be included in the transition services agreement. Halliburton will be obligated to provide those additional services we request that were inadvertently or unintentionally omitted from the transition services agreement and that were (1) provided by Halliburton to us immediately prior to the completion of this offering or (2) were included in the Halliburton 2006 budget for intercompany services. Halliburton, in its sole discretion, may decline to provide any other services.

Halliburton will provide services to us with the same general degree of care, at the same general level and at the same general degree of accuracy and responsiveness, as when the services were performed prior to the separation of our companies.

We will pay fees to Halliburton for the services rendered based on the type and amount of services. The fees will be determined on a basis generally intended to approximate the fully allocated direct and indirect costs of providing and discontinuing the services, without any profit.

Halliburton is obligated to provide services to us for the time periods contemplated by the transition services agreement or until we discontinue a particular service. We may discontinue any service upon 30 days prior written notice. We have agreed to terminate the transition services as soon as reasonably practical. The transition services agreement will terminate when KBR has terminated all services thereunder.

We and Halliburton have agreed in the transition services agreement that each party will be responsible for, and will indemnify the other party with respect to, a party’s own losses for property damage or personal injury, except to the extent that such losses are caused by the gross negligence or willful misconduct of the other party.

In addition, we will enter into a transition services agreement with Halliburton under which we will provide to Halliburton, on an interim basis, certain corporate support services relating to information technology and accounting. The terms and conditions on which we will provide services to Halliburton under this transition services agreement are the same as or substantially similar to those of the transition services agreement pertaining to services Halliburton will provide to us.

The transition services agreements also provide that, after such time as Halliburton ceases to provide us with access to certain software applications under the transition services agreements, Halliburton will assign, license or sublicense to us certain specified software applications, unless we otherwise obtain access to or replace such software. Where necessary, Halliburton will use reasonable best efforts to obtain the consent of the original licensor prior to any assignment or sublicensing, but Halliburton will not be in breach of the agreement if such consent cannot be obtained. With respect to software owned by Halliburton, Halliburton will grant us a non-exclusive, non-transferable, royalty-free license to use the software for our internal use. Any license granted will be perpetual (in the case of software owned by Halliburton), and any sublicense granted will be co-terminous with the original license (in the case of software licensed by Halliburton). We will not be permitted to distribute, publish, transfer or sublicense the software to third parties or exploit the software commercially other than as permitted by the agreement. We will agree to assign, license or sublicense other specified software applications to Halliburton on substantially similar terms as those described above.

137

Employee Matters Agreement

We will enter into an employee matters agreement with Halliburton to allocate liabilities and responsibilities relating to our current and former employees and their participation in certain benefit plans maintained by Halliburton or a subsidiary of Halliburton.

No duplicate benefits will be provided to our employees under our plans and Halliburton plans. Generally, our employees’ prior service with Halliburton will be considered as service with us for purposes of our plans.

Many of our employees currently participate in retirement and welfare plans sponsored by us, and our employees will continue to participate in such plans after the closing of this offering in accordance with the terms of those plans. However, some of our employees participate in or have benefits under plans maintained by Halliburton. We have agreed to cooperate with Halliburton with regard to the administration, audit, reporting and provision of participant information in connection with Halliburton plans in which our employees participate or are entitled to benefits. Further, we have agreed to cooperate with Halliburton to separate plans and related trusts in which both our employees and employees of Halliburton participate or are entitled to benefits. If participation is not terminated earlier, our employees will generally cease participation in all Halliburton plans as of the date we cease to be a member of the Halliburton consolidated group (the deconsolidation date). Nothing in the employee matters agreement requires us to adopt, terminate or continue to maintain any of our benefit plans.

After the closing of this offering, some of our employees may continue on an interim basis to accrue benefits and/or interest under certain plans maintained by Halliburton, including: (1) the Halliburton Benefit Restoration Plan and (2) the Halliburton 2002 Employee Stock Purchase Plan, (3) the Halliburton Supplemental Executive Retirement Plan, (4) the Dresser Industries Deferred Compensation Plan, and, with respect to any awards outstanding as of the closing date of this offering, (5) the Halliburton 1993 Stock and Incentive Plan and (6) the Halliburton Annual Performance Pay Plan. We have agreed with Halliburton to reimburse Halliburton in full for such post-closing accruals and plan expenses corresponding to our employees’ participation in the Halliburton plans. However, Halliburton will cause its appropriate subsidiary to continue to retain responsibility for retiree medical benefits for certain of our former employees who are eligible for retiree medical benefits under a retiree medical program previously sponsored by Dresser Industries, Inc. and maintained by Halliburton following their 1998 merger, and we are not responsible for reimbursing Halliburton or its subsidiaries for these retiree medical benefits. We retain responsibility for retiree medial benefits, to the extent applicable, for all other former employees and for all of our current employees. To the extent that any of our employees are eligible for a performance bonus based on performance criteria relating to both Halliburton and us, we will pay the entire bonus and Halliburton will reimburse us for the pro-rata portion of such bonus that corresponds to such employee’s time of service for Halliburton. We have also agreed to establish a non-qualified deferred compensation plan designed to assume all obligations and liabilities associated with the benefits our active employees have under the Dresser Industries Deferred Compensation Plan as of the date Halliburton distributes our shares of common stock that it owns to its stockholders.

Certain of our employees hold restricted stock of Halliburton, options to acquire stock of Halliburton or performance units with respect to stock of Halliburton under Halliburton’s 1993 Stock and Incentive Plan. Our employees will continue to hold these equity awards after the closing of this offering. Our employees will be considered terminated for purposes of the Halliburton 1993 Stock and Incentive Plan if and when Halliburton owns less than 20% of our outstanding voting stock, and upon such termination, our employees’ rights to these equity awards will be determined based on the Halliburton 1993 Stock and Incentive Plan, as amended, and the relevant award agreements which may result in forfeiture of awards and limitations on the period to exercise options, and we expect these equity awards will be converted into awards relating to KBR common stock. For more information, please read “Management—Anticipated Conversion of Halliburton Equity-Based Awards into KBR Equity-Based Awards.” To the extent we are eligible to take a deduction corresponding to our employee’s recognition of income with respect to awards of Halliburton stock, we have agreed to pay to Halliburton the amount of the deduction.

With some exceptions, we will indemnify Halliburton for benefit plan and employment liabilities that are the subject of the employee matters agreement and that arise from any acts or omissions of our employees or

138

agents or breach of the employee matters agreement. Halliburton will similarly indemnify us for acts or omissions of its employees or agents or their breach of the employee matters agreement. We will also indemnify Halliburton in the case that Halliburton becomes liable in connection with certain foreign pension plans which we maintain for our current and former employees.

Intellectual Property Matters Agreement

We will enter into an intellectual property matters agreement with Halliburton. Under this agreement, the existing intellectual property owned by us, including patents, patent applications, copyrights, trade secrets and know-how, will remain our assets after the completion of this offering. We will grant Halliburton a non-exclusive, royalty-free, worldwide license under our existing patents and patent applications (including those claiming certain field upgrade, coal gasification or riser technology) in the fields of business and operations of Halliburton’s current business, certain field processing, coal gasification and riser fields of use, and all other fields of use not included in our fields of use. The foregoing licenses as to coal gasification technology are subject to our agreements with Southern Company Services, Inc. and the United States Department of Energy. In turn, Halliburton will grant us a non-exclusive, royalty-free, worldwide license under the existing patents and patent applications owned by Halliburton in the fields of use of our current business, certain field processing, coal gasification and riser fields of use, and certain other specified fields of use. Both we and Halliburton will retain the right to use, on a royalty-free and non-exclusive basis and in our respective fields of use, certain of the other party’s existing intellectual property (including copyrights, trade secrets, technology and know-how but excluding patents, which are subject to other specific provisions) to the extent used in, and necessary for, the conduct of our respective current businesses. Such intellectual property may be sublicensed in each party’s respective fields of use to certain customers. Halliburton may sublicense only to such customers who are oil and gas producing companies or coal producing and processing companies, and KBR may sublicense only to such customers who are oil and gas producing companies, refining or industrial processing companies or customers of its Government and Infrastructure segment prior to the offering date (other than those who provide upstream oilfield services). Each party’s licenses to patents and other intellectual property described above are limited by that party’s confidentiality and non-use obligations under this agreement. Either party may request a sublicense in its respective fields of use to third-party patents currently licensed to the other party to the extent the original license agreement (and, if applicable, KBR’s agreements with Southern Company Services, Inc. and the United States Department of Energy) permits such a sublicense and on the most favorable terms permitted by such license. Halliburton’s use or sublicensing of certain of our technologies will, in certain circumstances, require Halliburton to pay us commercially reasonable fees at rates and on terms that are consistent with our practices at the time. At the offering date, we must cease using all Halliburton trademarks, but Halliburton may continue to use the term “Kellogg,” “KBR” or “Kellogg Brown & Root” as part of the name of one Halliburton entity that will serve as a holding company and will not directly provide any goods or services.

139

CERTAIN FEDERAL TAX MATTERS RELATED TO OUR SEPARATION FROM HALLIBURTON

Under the Internal Revenue Code, two corporations may form a consolidated group if one corporation owns stock representing at least 80% of the voting power and value of the outstanding capital stock of the other corporation. Because Halliburton currently owns 100% of our common stock, we and Halliburton are members of the same consolidated group. As members of the same consolidated group, we file a consolidated federal income tax return with Halliburton. This allows Halliburton to offset its federal taxable income with our tax losses, if any. After this offering, we and Halliburton will continue to file a consolidated federal income tax return.

Halliburton has advised us that it intends to dispose of our common stock that it owns following this offering as expeditiously as possible through a tax-free distribution to Halliburton’s stockholders. Halliburton has advised us that it has requested a ruling from the Internal Revenue Service that, among other things, no gain or loss will be recognized by Halliburton or its stockholders as a result of the distribution. Halliburton also intends to obtain an opinion of counsel related to the tax-free nature of the distribution.

The determination of whether, and if so, when, to proceed with the distribution is entirely within the discretion of Halliburton. If Halliburton does not proceed with the distribution, it could elect to dispose of our common stock in a number of different types of transactions, including additional public offerings, open market sales, sales to one or more third parties or split-off offerings to Halliburton’s stockholders that would allow for the opportunity to exchange Halliburton shares for shares of our common stock or a combination of these transactions.

If Halliburton distributes our stock to its stockholders, we and Halliburton will be required to comply with representations that are made to Halliburton’s counsel in connection with the counsel’s opinion and with representations that are made to the Internal Revenue Service in connection with the ruling request. Further, we have agreed not to enter into transactions for two years after the distribution date that would result in a more than immaterial possibility of a change of control of our company pursuant to a plan unless a ruling is obtained from the Internal Revenue Service or an opinion is obtained from a nationally recognized law firm that the transaction will not affect the tax-free nature of the distribution. For these purposes, certain transactions are deemed to create a more than immaterial possibility of a change of control of our company pursuant to a plan, and thus require such a ruling or opinion, including, without limitation, the merger of KBR with or into any other corporation, stock issuances (regardless of size) other than in connection with KBR employee incentive plans, or the redemption or repurchase of any of our capital stock (other than in connection with future employee benefit plans or pursuant to a future market purchase program involving 5% or less of our publicly traded stock).

If we breach any representations with respect to the opinion or ruling request, take any action that causes such representations to be untrue or engage in transactions after the distribution that cause the spin-off to be taxable, we will be required to indemnify Halliburton for any and all taxes incurred by Halliburton or any of its affiliates resulting from the failure of the spin-off to qualify as a tax-free transaction as provided in the tax sharing agreement. The amounts of any indemnification payments would be substantial, and we likely would not have sufficient financial resources to achieve our growth strategy after making such payments.

Depending on the facts and circumstances, if Halliburton distributes our stock to its stockholders, the distribution may be taxable to Halliburton if we undergo a 50% or greater change in stock ownership within two years after any distribution. Under the tax sharing agreement we will enter into with Halliburton, Halliburton is entitled to reimbursement of any tax costs incurred by Halliburton as a result of a change in control of our company after any distribution. Halliburton would be entitled to such reimbursement even in the absence of any specific action by us, and even if actions of Halliburton (or any of its officers, directors or authorized representatives) contributed to a change in control of our company. These costs may be so great that they delay or prevent a strategic acquisition, a change in control of our company or an attractive business opportunity. Actions by a third party after any distribution causing a 50% or greater change in our stock ownership could also cause the distribution by Halliburton to be taxable and require reimbursement by us.

140

After the distribution of our common stock by Halliburton to its stockholders or any other transaction in which Halliburton disposes of enough of our stock to cause a deconsolidation, we will cease to be a member of the Halliburton consolidated tax group. This separation will have both current and future income tax implications to us. The event of deconsolidation itself will result in the triggering of deferred intercompany gains, if any. We would recognize taxable income related to any such gains; however, we do not expect that such gains would have a material impact on our net income and cash flow.

Subsequent to the distribution or other disposition that causes a deconsolidation, there will then exist two separate groups for tax purposes, the Halliburton group and our group. Each group will file separate consolidated federal income tax returns, and Halliburton will not be able to use our tax losses, if any. We have agreed that we will elect not to carry back net operating losses we generate in our tax years after deconsolidation to tax years when we were part of the Halliburton consolidated group. We may be able to utilize such net operating losses in our group’s tax years after deconsolidation (subject to the applicable carryforward limitation periods) but only to the extent of our group’s income in such tax years.

In addition to the current income tax consequences triggered by the act of deconsolidation discussed above, our separation from the Halliburton consolidated tax group will change our overall future income tax posture. As a result, we could be limited in our future ability to effectively use future tax deductions and credits. We intend to undertake appropriate measures after deconsolidation in order to mitigate any adverse tax effect of no longer being a part of the Halliburton consolidated tax group.

141

DESCRIPTION OF CAPITAL STOCK

General

The following descriptions are summaries of material terms of our common stock, preferred stock, certificate of incorporation and bylaws, copies of which will be filed as exhibits to the registration statement of which this prospectus is a part.

Our authorized capital stock consists of 300,000,000 shares of common stock, par value $0.001 per share, and 50,000,000 shares of preferred stock, par value $0.001 per share. Immediately following the offering, 163,467,000 shares of common stock, or 167,643,000 shares if the underwriters exercise their over-allotment option in full, will be outstanding, and there will be 0 outstanding shares of preferred stock.

Prior to this offering, there has been no public market for our common stock. Our common stock has been approved for listing on the New York Stock Exchange under the symbol “KBR.”

We have agreed in the master separation agreement that we will not, without Halliburton’s prior consent, issue any stock, or any securities, options, warrants or rights convertible into or exercisable or exchangeable for our stock, if such issuance would cause Halliburton to fail to control us within the meaning of Section 368(c) of the Internal Revenue Code, cause Halliburton to fail to satisfy the stock ownership requirements of Section 1504(a)(2) of the Internal Revenue Code with respect to us, or cause a change of control under the provisions of Section 355(e) of the Internal Revenue Code. For a description of this and other rights and obligations we have agreed with Halliburton concerning our capital stock, please read “Our Relationship With Halliburton—Master Separation Agreement.”

Common Stock

Each share of common stock entitles the holder to one vote on all matters submitted to a vote of stockholders, including the election of directors. There are no cumulative voting rights. Accordingly, holders of a majority of the total votes entitled to vote in an election of directors will be able to elect all of the directors standing for election. Subject to preferences that may be applicable to any future outstanding preferred stock, the holders of common stock are entitled to dividends when, as, and if declared by the board of directors out of funds legally available for that purpose. If we are liquidated, dissolved or wound up, the holders of then outstanding common stock will be entitled to a pro rata share in any distribution to stockholders, but only after satisfaction of all of our liabilities and of the prior rights of any then outstanding series of our preferred stock. Except for the subscription right granted to Halliburton under the master separation agreement and described under “Our Relationship With Halliburton—Master Separation Agreement—Corporate Governance,” the common stock has no preemptive or conversion rights or other subscription rights. There are no redemption or sinking fund provisions applicable to the common stock. All outstanding shares of our common stock are fully paid and nonassessable.

Preferred Stock

General

Our board of directors has the authority, without stockholder approval, to issue shares of preferred stock from time to time in one or more series, and to fix the number of shares and terms of each such series. The board may determine the designation and other terms of each series, including any of the following:

• dividend rates;

• whether dividends will be cumulative or non-cumulative;

• redemption rights;

• liquidation rights;

142

• sinking fund provisions;

• conversion or exchange rights;

• voting rights; and

• any other designations, powers, preferences or rights of any such series of preferred stock.

The issuance of preferred stock, while providing us with flexibility in connection with possible acquisitions and other transactions, could adversely affect the voting power of holders of our common stock. It could also affect the likelihood that holders of our common stock will receive dividend payments and payments upon liquidation. We have no present plans to issue any preferred stock.

The issuance of shares of preferred stock, or the issuance of rights to purchase shares of preferred stock, could be used to discourage an attempt to obtain control of our company. For example, if, in the exercise of its fiduciary obligations, our board of directors were to determine that a takeover proposal was not in the best interest of our stockholders, the board could authorize the issuance of a series of preferred stock containing class voting rights that would enable the holder or holders of this series to prevent a change of control transaction or make it more difficult. Alternatively, a change of control transaction deemed by the board to be in the best interest of our stockholders could be facilitated by issuing a series of preferred stock having sufficient voting rights to provide a required percentage vote of the stockholders.

The subscription right granted to Halliburton under the master separation agreement and described under “Our Relationship With Halliburton—Master Separation Agreement—Corporate Governance” would include preferred stock.

Charter and Bylaw Provisions

Election and Removal of Directors

Our board of directors will be comprised of between one and fifteen directors. The number of directors shall initially be seven members upon the closing of this offering pursuant to the terms of the master separation agreement; and, thereafter the number will be fixed from time to time by resolution of the board.

Until such time as Halliburton ceases to beneficially own, directly or indirectly, stock representing at least a majority of our outstanding voting stock (the “Trigger Date”), all our directors will stand for election annually. Beginning at the time Halliburton ceases to beneficially own, directly or indirectly, a majority of our outstanding voting stock, our directors will be divided into three classes serving staggered three-year terms. The initial determination of the directors who will comprise each of the three classes of directors will be made by our board of directors, as provided in our certificate of incorporation. Thereafter, at each annual meeting of stockholders, directors will be elected to succeed the class of directors whose terms have expired.

Electing and removing directors on a staggered basis may discourage a third party from making a tender offer or otherwise attempting to obtain control of us, because it generally makes it more difficult for stockholders to replace a majority of the directors. In addition, effective upon the Trigger Date, no director may be removed except for cause, and directors may be removed for cause only by an affirmative vote of shares representing a majority of the votes then entitled to be cast by the holders of our voting stock voting together as a single class.

Any vacancy occurring on the board of directors and any newly created directorship may only be filled by the affirmative vote of a majority of the remaining directors in office.

The master separation agreement provides Halliburton with continuing rights to nominate board and committee members for so long as Halliburton holds at least 15% of our common stock. Please read “Our Relationship With Halliburton—Master Separation Agreement—Corporate Governance.”

143

Stockholder Meetings

Our certificate of incorporation and bylaws provide that after the Trigger Date, special meetings of our stockholders may be called only by the chairman of our board of directors, our president and chief executive officer or a majority of our directors. In addition, until the Trigger Date, stockholders representing in the aggregate at least a majority of the voting power of our then outstanding shares of capital stock have the right to call a special meeting. Our certificate of incorporation and our bylaws specifically deny any power of any other person to call a special meeting.

Stockholder Action by Written Consent

Prior to the Trigger Date, stockholders will be entitled to act by written consent without a meeting or notice and, therefore, Halliburton will be able to take action requiring approval of our stockholders by written consent and without the affirmative vote of our other stockholders. Effective upon the Trigger Date, stockholders will not be able to act by written consent without a meeting.

Amendment of Our Certificate of Incorporation

The affirmative vote of holders of at least a majority of our outstanding voting stock is required to amend provisions of our certificate of incorporation.

Amendment of Our Bylaws

Our bylaws may generally be altered, amended or repealed, and new bylaws may be adopted, with:

• the affirmative vote of a majority of directors present at any regular or special meeting of the board of directors called for that purpose; or

• the affirmative vote of at least a majority of our outstanding voting stock present in person or by proxy and entitled to vote thereon.

Other Limitations on Stockholder Actions

Our bylaws also impose some procedural requirements on stockholders who wish to:

• make nominations in the election of directors;

• propose that a director be removed;

• propose any repeal or change in our bylaws; or

• propose any other business to be brought before an annual or special meeting of stockholders.

Under these procedural requirements, in order to bring a proposal before a meeting of stockholders, a stockholder must deliver timely notice of a proposal pertaining to a proper subject for presentation at the meeting to our corporate secretary along with the following:

• a description of the business or nomination to be brought before the meeting and the reasons for conducting such business at the meeting;

• the stockholder’s name and address;

• the number of shares beneficially owned by the stockholder and evidence of such ownership;

• the names and addresses of all persons with whom the stockholder is acting in concert and a description of all arrangements and understandings with those persons; and

• the number of shares such persons beneficially own.

144

To be timely, a stockholder must generally deliver notice:

• in connection with an annual meeting of stockholders, not less than 90 nor more than 120 days prior to the date on which the annual meeting of stockholders was held in the immediately preceding year, but in the event that the date of the annual meeting has changed by more than 30 days before or more than 70 days after the anniversary date of the preceding annual meeting of stockholders, a stockholder notice will be timely if received by us not earlier than the close of business on the 120th day prior to the annual meeting and not later than the 90th day prior to such annual meeting or the 10th day following the day on which we first publicly announce the date of the annual meeting; or

• in connection with the election of a director at a special meeting of stockholders, not earlier than 120 days prior to the date of the special meeting and not later than the close of business on the 90th day prior to the date of the special meeting or the 10th day following the day on which a notice of the date of the special meeting was publicly announced.

These notice requirements shall be deemed to be satisfied if the stockholder has notified us of the stockholder’s intention to present a proposal at any annual meeting in compliance with applicable rules promulgated under the Exchange Act and the stockholder proposal has been included in our proxy statement.

For purposes of the first annual meeting of stockholders following this offering, the first anniversary date of the preceding year’s annual meeting shall be deemed to be May 1, 2007.

In order to submit a nomination for our board of directors, a stockholder must also submit any information with respect to the nominee that we would be required to include in a proxy statement, as well as some other information. If a stockholder fails to follow the required procedures, the stockholder’s proposal or nominee will be ineligible and will not be voted on by our stockholders.

Limitation on Liability of Directors

Our certificate of incorporation provides that no director will be personally liable to us or our stockholders for monetary damages for breach of fiduciary duties as a director, except as required by applicable law, as in effect from time to time. Currently, Delaware law provides that liability may not be so limited for the following:

• any breach of the director’s duty of loyalty to our company or our stockholders;

• any act or omission not in good faith or which involved intentional misconduct or a knowing violation of law;

• unlawful payments of dividends or unlawful stock repurchases or redemptions as provided in Section 174 of the Delaware General Corporation Law; and

• any transaction from which the director derived an improper personal benefit.

Our bylaws provide that, to the fullest extent permitted by law, we will indemnify any officer or director of our company against all damages, claims and liabilities arising out of the fact that the person is or was our director or officer, or served any other enterprise at our request as a director, officer, employee, agent or fiduciary. We will reimburse the expenses of the indemnified person, including attorneys’ fees, incurred by a person indemnified by this provision when we receive an undertaking to repay such amounts if it is ultimately determined that the person is not entitled to be indemnified by us. Amending this provision will not reduce our indemnification obligations relating to actions taken before an amendment.

In addition to these provisions in our certificate of incorporation and bylaws and under Delaware law, our directors and officers are covered by directors and officers insurance.

145

Anti-Takeover Effects of Some Provisions

Some provisions of our certificate of incorporation and bylaws described above under “—Election and Removal of Directors,” “—Stockholder Meetings,” “—Stockholder Action by Written Consent,” and “—Other Limitations on Stockholder Actions” could make the following more difficult:

• acquisition of control of us by means of a proxy contest or otherwise; or

• removal of our incumbent officers and directors.

These provisions, as well as our ability to issue preferred stock, are designed to discourage coercive takeover practices and inadequate takeover bids. These provisions are also designed to encourage persons seeking to acquire control of us to first negotiate with our board of directors. We believe that the benefits of increased protection give us the potential ability to negotiate with the proponent of an unfriendly or unsolicited proposal to acquire or restructure us, and that the benefits of this increased protection outweigh the disadvantages of discouraging those proposals, because negotiation of those proposals could result in an improvement of their terms. However, it is possible that these provisions could make it more difficult to accomplish transactions which stockholders may otherwise deem to be in their best interests.

Transactions and Corporate Opportunities

Our certificate of incorporation includes provisions that regulate and define the conduct of specified aspects of the business and affairs of our company. These provisions serve to determine and delineate the respective rights and duties of our company and some of our directors and officers, and the rights of Halliburton, in anticipation of the following:

• directors, officers and/or employees of Halliburton serving as our directors and/or officers;

• Halliburton engaging in lines of business that are the same as, or similar to, our lines of business;

• Halliburton having an interest in the same, similar or related areas of corporate opportunity as we have; and

• we and Halliburton engaging in material business transactions, including transactions pursuant to the various agreements related to our separation from Halliburton described elsewhere in this prospectus.

We may enter into agreements with Halliburton to engage in any transaction. We may also enter into agreements with Halliburton to compete or not to compete with each other, including agreements to allocate, or to cause our and its respective directors, officers and employees to allocate, opportunities between Halliburton and us. Our certificate of incorporation provides that no such agreement will be considered contrary to any fiduciary duty of Halliburton, as a controlling or significant stockholder of our company, or of a director, officer or employee of our company or Halliburton, if any of the following conditions are satisfied:

• the agreement was entered into before we ceased to be a wholly owned subsidiary of Halliburton and continued in effect after this time,

• the agreement or transaction was approved, after being made aware of the material facts as to the agreement or transaction, by:

• our board, by affirmative vote of a majority of directors who are not interested persons,

• a committee of our board consisting of members who are not interested persons, by affirmative vote of a majority of those members, or

• one or more of our officers or employees who is not an interested person and who was authorized by our board or a board committee as specified above or, in the case of an employee, to whom authority has been delegated by an officer to whom the authority to approve such an action has been so delegated,

146

• the agreement or transaction was fair to us as of the time it was entered into, or

• the agreement or transaction was approved by the affirmative vote of a majority of the shares of capital stock entitled to vote and which do vote on the agreement or transaction, excluding Halliburton and any interested person in respect of such agreement or transaction.

Under our certificate of incorporation, neither Halliburton nor any of our directors, officers or employees who are also directors, officers or employees of Halliburton are under any fiduciary duty to us to refrain from acting on our behalf or on behalf of Halliburton in respect of any such agreement or transaction. These provisions are generally subject to the corporate opportunity obligations described below with which Halliburton and our officers and directors who are also Halliburton’s directors, officers or employees must comply.

Section 122(17) of the Delaware General Corporation Law provides that a Delaware corporation has the power to renounce, in its certificate of incorporation or by action if its board of directors, any interest or expectancy of the corporation in, or in being offered an opportunity to participate in, specified business opportunities or specified classes or categories of business opportunities that are presented to the corporation or to its officers, directors or stockholders. Our certificate of incorporation provides that, to the fullest extent permitted by applicable law, we will not have any right, interest or expectancy with respect to any particular investment or activity that, in each case, is not a “restricted opportunity,” that is undertaken by Halliburton, or any affiliated company or successor of Halliburton, or any director, officer, or employee of such persons. Similarly, our certificate of incorporation provides that, to the fullest extent permitted by applicable law, Halliburton, or any affiliated company or successor of Halliburton, or any director, officer or employee of such persons shall have no obligation to refrain from competing against us except for “restricted opportunities.” “Restricted opportunity” is defined in our certificate of incorporation to mean a transaction, matter or opportunity offered to a director, officer or employee of Halliburton in writing solely and expressly by virtue of such person being our director, officer or employee. Halliburton will agree in the master separation agreement to renounce, to the fullest extent permitted by applicable law, any and all rights it may have with respect to each investment, commercial activity or other opportunity that is a “restricted opportunity” until Halliburton first ceases to beneficially own at least 20% or more of our outstanding voting stock.

The provisions of our certificate of incorporation summarized above in “—Transactions and Corporate Opportunities” will have no further effect when Halliburton first ceases to beneficially own 20% or more of our outstanding voting stock. However, provisions with respect to (i) any contract, agreement, arrangement or transaction (or the amendment, modification or termination thereof) between us and Halliburton that was entered into before such time or any transaction entered into in the performance of any such contract, agreement, arrangement or transaction (or the amendment, modification or termination thereof), whether entered into before or after such time or (ii) any transaction entered into between us and Halliburton or the allocation of any opportunity between us and Halliburton before such time, will continue to be effective.

By becoming a stockholder in our company, you will be deemed to have notice of and consented to these provisions of our certificate of incorporation.

Delaware Business Combination Statute

Effective immediately after such time that no person or group is the beneficial owner of a majority of our outstanding voting stock, we will become subject to Section 203 of the Delaware General Corporation Law.

Section 203 provides that, subject to specified exceptions, an interested stockholder of a Delaware corporation is not permitted to engage in any business combination, including mergers or consolidations or acquisitions of additional shares of the corporation, with the corporation for a three-year period following the time that stockholder became an interested stockholder, unless one of the following conditions is met:

• prior to the time the stockholder became an interested stockholder, the board of directors approved either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder;

147

• upon consummation of the transaction which resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, other than statutorily excluded shares; or

• on or subsequent to the time the stockholder became an interested stockholder, the business combination is approved by the board of directors and authorized at an annual or special meeting of stockholders by the affirmative vote of at least 66 ²/3% of the outstanding voting stock which is not owned by the interested stockholder.

Except as otherwise set forth in Section 203, “interested stockholder” means:

• any person that is the owner of 15% or more of the outstanding voting stock of the corporation, or is an affiliate or associate of the corporation and was the owner of 15% or more of the outstanding voting stock of the corporation at any time within three years immediately prior to the date of determination; and

• the affiliates and associates of any such person.

If we ever become subject to Section 203, it may be more difficult for a person who is an interested stockholder to effect various business combinations with us for the applicable three-year period. Section 203, if it becomes applicable, also may have the effect of preventing changes in our management. It is possible that Section 203, if it becomes applicable, could make it more difficult to accomplish transactions which our stockholders may otherwise deem to be in their best interests. The provisions of Section 203, if it becomes applicable, may cause persons interested in acquiring us to negotiate in advance with our board of directors. Because we are not currently subject to Section 203, Halliburton, as a significant stockholder, may find it easier to sell its interest to a third party because Section 203 would not apply to the third party.

Listing of Common Stock

Our common stock has been approved for listing on the New York Stock Exchange under the symbol “KBR.”

Transfer Agent and Registrar

The transfer agent and registrar for our common stock is Mellon Investor Services LLC.

148

SHARES ELIGIBLE FOR FUTURE SALE

Prior to this offering, there has been no public market for our common stock. The market price of our common stock could drop because of sales of a large number of shares in the open market following this offering or the perception that those sales may occur. These factors also could make it more difficult for us to raise capital through future offerings of common stock.

After this offering, we will have 167,643,000 shares of our common stock outstanding, assuming the underwriters exercise their over-allotment option in full. All of the shares of our common stock sold in this offering will be freely tradable without restriction or further registration under the Securities Act, except for any shares that may be acquired by one of our affiliates, as that term is defined in Rule 144 under the Securities Act. Affiliates are individuals or entities that directly, or indirectly through one or more intermediaries, control, are controlled by, or are under common control with, us and may include our directors and officers as well as our significant stockholders.

All of the shares outstanding upon completion of the offering, other than the shares sold in the offering, are deemed “restricted securities” as defined in Rule 144, and may not be sold other than through registration under the Securities Act or under an exemption from registration, such as the one provided by Rule 144. Halliburton has registration rights with respect to the shares of our common stock it owns. Please read “Our Relationship With Halliburton—Registration Rights Agreement.”

In general, but subject to the “lock-up” agreements described below, beginning 90 days after the date of the prospectus, a stockholder subject to Rule 144 who has owned common stock of an issuer for at least one year may, within any three-month period, sell up to the greater of:

• 1% of the total number of shares of common stock then outstanding; and

• the average weekly trading volume of the common stock on the open market during the four calendar weeks preceding the filing with the SEC of the stockholder’s required notice of sale.

Rule 144 requires stockholders to aggregate their sales with other affiliated stockholders for purposes of complying with this volume limitation. Sales under Rule 144 are also subject to other requirements regarding the manner of sale, notice and availability of current public information about us. A stockholder who has owned common stock for at least two years, and who has not been an affiliate of the issuer for at least 90 days, may sell common stock free from the manner of sale, public information, volume limitation and notice requirements of Rule 144.

We, Halliburton and each of KBR’s executive officers and directors have agreed not to sell shares of our common stock or take other related actions, without the prior written consent of Credit Suisse Securities (USA) LLC, Goldman, Sachs & Co. and UBS Securities LLC, for a period of 180 days after the date of this prospectus, subject to the following exceptions: (i) Halliburton will be permitted to distribute our common stock that it owns to its stockholders after 120 days after the date of this prospectus, (ii) we will be permitted to grant securities and security-based awards under the 2006 KBR, Inc. Stock and Incentive Plan after the closing of this offering to our outside directors as described under “Management—Board Structure and Compensation of Directors” and to our employees as set forth in the table under “Management—KBR, Inc. 2006 Stock and Incentive Plan,” and (iii) we will be permitted to grant securities and security-based awards in connection with the anticipated conversion of Halliburton equity awards held by our employees that have been granted under Halliburton’s 1993 Stock and Incentive Plan into equity awards relating to our common stock as described under “Management—Anticipated Conversion of Halliburton Equity-Based Awards into KBR Equity-Based Awards.” Please read “Underwriting.” These “lock-up” agreements will cover all of the outstanding shares of our common stock upon completion of the offering, other than the shares sold in the offering. Credit Suisse Securities (USA) LLC, Goldman, Sachs & Co. and UBS Securities LLC have no current intent or arrangement to release any shares subject to these “lock-up” agreements. The release of any “lock-up” will be considered on a case-by-case basis. In considering whether to release any shares, Credit Suisse Securities (USA) LLC, Goldman, Sachs & Co. and UBS Securities LLC would consider, among other factors, the particular circumstances surrounding the request, including the length of time

149

before the “lock-up” expires, the number of shares requested to be released, the reasons for the request, the possible impact on the market for our common stock, the trading price and historical trading volumes of our common stock and whether the holder of our shares requesting the release is an officer, director or other affiliate of our company or Halliburton or is KBR or Halliburton.

Following the completion of the offering, we expect to make grants of stock options, restricted stock and/or restricted stock units under our 2006 KBR, Inc. Stock and Incentive Plan to approximately 480 of our employees. We expect that the fair market value of our common stock underlying these awards at the date of the grant will be up to $33.7 million. For more information, please read “Management—KBR, Inc. 2006 Stock and Incentive Plan.” We intend to file a registration statement on Form S-8 under the Securities Act to register shares of common stock reserved for issuance under that plan. This registration will permit the resale of these shares by nonaffiliates in the public market without restriction under the Securities Act, once the shares underlying these grants vest or become exercisable and upon the completion of the “lock-up” period described above. Shares registered under the Form S-8 registration statement held by affiliates will be subject to Rule 144 volume limitations.

150

MATERIAL UNITED STATES FEDERAL TAX CONSIDERATIONS FOR NON-U.S. HOLDERS

Scope of the Discussion

The following discussion summarizes the material U.S. tax considerations for non-U.S. holders (as defined below) of holding and disposing of our common stock. This discussion is based upon existing U.S. tax law, including legislation, regulations, administrative rulings and court decisions, as in effect on the date of this prospectus, all of which are subject to change, possibly with retroactive effect.

For purposes of this discussion:

• a “non-U.S. holder” is any holder of our common stock that is other than (1) an individual citizen or resident of the U.S., (2) a corporation or any other entity taxable as a corporation created or organized in or under the laws of the U.S. or of a state of the U.S. or the District of Columbia, (3) a trust (i) in respect of which a U.S. court is able to exercise primary supervision over the administration of the trust and one or more U.S. persons have the authority to control all substantive decisions of the trust or (ii) that was in existence on August 20, 1996 and validly elected to continue to be treated as a domestic trust, (4) an estate that is subject to U.S. tax on its worldwide income from all sources or (5) a partnership or any other entity taxable as a partnership; and

• the term “U.S. tax” means U.S. federal income tax under the Internal Revenue Code.

The discussion assumes that holders hold our common stock as capital assets. Other tax consequences not discussed herein may apply to holders who are subject to special treatment under U.S. federal income or estate tax law, such as:

• tax-exempt organizations;

• financial institutions, insurance companies and broker-dealers;

• holders who hold our common stock as part of a hedge, straddle, wash sale, synthetic security, conversion transaction or other integrated investment comprised of our common stock and one or more other investments;

• mutual funds;

• traders in securities who elect to apply a mark-to-market method of accounting;

• holders who acquired our common stock in compensatory transactions;

• holders who are subject to the alternative minimum tax; or

• holders who are or have previously been engaged in the conduct of a trade or business in the U.S. or who have ceased to be U.S. citizens or to be taxed as resident aliens.

In the case of a stockholder that is a partnership, determinations as to tax consequences will generally be made at the partner level, but other special considerations not described herein may apply. This discussion is generally limited to U.S. tax considerations and does not address tax considerations under other law.

This summary is not a substitute for an individual analysis of the tax consequences of holding or disposing of our common stock. Investors considering the purchase of our common stock are urged to consult a tax advisor as to the tax consequences of holding or disposing of our common stock, including any consequences arising from their particular facts and circumstances, any federal estate or gift tax consequences and any tax consequences arising under state, local or foreign law.

151

Material U.S. Federal Tax Consequences to Non-U.S. Holders of Holding and Disposing of Our Common Stock

Distributions on Common Stock

A distribution to a non-U.S. holder with respect to our common stock will be (i) first, a dividend to the extent of KBR’s current or accumulated earnings and profits, as determined under general U.S. tax principles, (ii) second, a non-taxable recovery of basis in that common stock, causing a reduction in the holder’s adjusted basis of the shares of our common stock to the extent thereof (thereby increasing the amount of gain, or decreasing the amount of loss, to be recognized by the holder on a subsequent disposition of our common stock), and (iii) finally, an amount that is received by the holder in exchange for our common stock.

Dividends paid to a non-U.S. holder that are not effectively connected with the non-U.S. holder’s conduct of a U.S. trade or business will be subject to U.S. federal withholding tax at a 30% rate, or if a tax treaty applies, a lower rate specified by the treaty. Non-U.S. holders should consult their tax advisors regarding their entitlement to benefits under a relevant income tax treaty. Dividends that are effectively connected with a non-U.S. holder’s conduct of a trade or business in the U.S. and, if an income tax treaty applies, are attributable to a permanent establishment in the U.S., are taxed on a net income basis at the regular graduated rates and in the manner applicable to U.S. persons. In that case, we will not have to withhold U.S. federal withholding tax if the non-U.S. holder complies with applicable certification and disclosure requirements. In addition, a “branch profits tax” may be imposed at a 30% rate, or a lower rate under an applicable income tax treaty, on dividends received by a foreign corporation that are effectively connected with its conduct of a trade or business in the U.S.

A non-U.S. holder that claims the benefit of an applicable income tax treaty generally will be required to satisfy applicable certification and other requirements. However,

• in the case of our common stock held by a foreign partnership, the certification requirement will generally be applied to the partners of the partnership and the partnership will be required to provide certain information;

• in the case of our common stock held by a foreign trust, the certification requirement will generally be applied to the trust or the beneficial owners of the trust depending on whether the trust is a “foreign complex trust,” “foreign simple trust” or “foreign grantor trust” as defined in the U.S. Treasury Regulations; and

• look-through rules will apply for tiered partnerships, foreign simple trusts and foreign grantor trusts.

A holder that is a foreign partnership or a foreign trust is urged to consult its own tax advisor regarding its status under these U.S. Treasury Regulations and the certification requirements applicable to it.

A non-U.S. holder that is eligible for a reduced rate of U.S. federal withholding tax under an income tax treaty may obtain a refund or credit of any excess amounts withheld by timely filing an appropriate claim for refund with the Internal Revenue Service.

Sales or Dispositions of KBR Common Stock

A non-U.S. holder generally will not be subject to U.S. tax on gain recognized on a disposition of a share of our common stock unless:

• the gain is effectively connected with the non-U.S. holder’s conduct of a trade or business in the U.S. and, if an income tax treaty applies, is attributable to a permanent establishment maintained by the non-U.S. holder in the U.S.; in these cases, the gain will be taxed on a net income basis at the rates and in the manner applicable to U.S. persons, and if the non-U.S. holder is a foreign corporation, the branch profits tax described above may also apply;

152

• the non-U.S. holder is an individual who is present in the U.S. for 183 days or more in the taxable year of the disposition and meets other requirements; or

• we are or have been a “United States real property holding corporation” for U.S. tax purposes at any time during the shorter of the five-year period ending on the date of disposition or the period that the non-U.S. holder held our common stock.

Generally, a corporation is a United States real property holding corporation if the fair market value of its United States real property interests equals or exceeds 50% of the sum of the fair market value of its worldwide real property interests and its other assets used or held for use in a trade or business. The tax relating to stock in a United States real property holding corporation generally will not apply to a non-U.S. holder whose holdings, direct and indirect, at all times during the applicable period, constituted 5% or less of our common stock, provided that our common stock was regularly traded on an established securities market. We believe that we currently are not, and do not expect to become, a United States real property holding corporation for U.S. tax purposes. We also expect our common stock to be regularly traded on an established securities market.

Information Reporting and Backup Withholding

Dividends paid to a non-U.S. holder may be subject to information reporting and U.S. backup withholding. A non-U.S. holder will be exempt from backup withholding if such non-U.S. holder properly provides a Form W-8BEN certifying that such stockholder is a non-U.S. holder or otherwise meets documentary evidence requirements for establishing that such stockholder is a non-U.S. holder or otherwise qualifies for an exemption.

The gross proceeds from the disposition of our common stock may be subject to information reporting and backup withholding. If a non-U.S. holder sells our common stock outside the U.S. through a non-U.S. office of a non-U.S. broker and the sales proceeds are paid to such stockholder outside the U.S., then the U.S. backup withholding and information reporting requirements generally will not apply to that payment. However, U.S. information reporting will generally apply to a payment of sale proceeds, even if that payment is made outside the U.S., if a non-U.S. holder sells our common stock through a non-U.S. office of a broker that:

• is a U.S. person for U.S. tax purposes;

• derives 50% or more of its gross income in specific periods from the conduct of a trade or business in the U.S.;

• is a “controlled foreign corporation” for U.S. tax purposes; or

• is a foreign partnership, if at any time during its tax year:

• one or more of its partners are U.S. persons who in the aggregate hold more than 50% of the income or capital interests in the partnership; or

• the foreign partnership is engaged in a U.S. trade or business,

unless the broker has documentary evidence in its files that the non-U.S. holder is a non-U.S. person and certain other conditions are met, or the non-U.S. holder otherwise establishes an exemption. In such circumstances, backup withholding will not apply unless the broker has actual knowledge that the seller is not a non-U.S. holder.

If a non-U.S. holder receives payments of the proceeds of a sale of our common stock to or through a U.S. office of a broker, the payment is subject to both U.S. backup withholding and information reporting unless such non-U.S. holder properly provides a Form W-8BEN certifying that such stockholder is a non-U.S. person or otherwise establishes an exemption.

A non-U.S. holder generally may obtain a refund of any amounts withheld under the backup withholding rules that exceed such stockholder’s U.S. tax liability by timely filing a properly completed claim for refund with the Internal Revenue Service.

153

U.S. Federal Estate Tax

Shares of our common stock owned or treated as owned by an individual who is not a citizen or resident of the United States (as defined for United States federal estate tax purposes) at the time of death will be included in the individual’s gross estate for U.S. federal estate tax purposes, unless an applicable estate tax or other treaty provides otherwise, and therefore may be subject to U.S. federal estate tax.

Investors considering the purchase of our common stock are urged to consult their own tax advisors as to the specific tax consequences of holding our common stock, including tax return reporting requirements, the applicability and effect of U.S. federal, state, local and other applicable tax laws, and the effect of any proposed changes in the tax laws.

154

UNDERWRITING

Under the terms and subject to the conditions contained in an underwriting agreement dated                     , 2006, we have agreed to sell to the underwriters named below, for whom Credit Suisse Securities (USA) LLC, Goldman, Sachs & Co. and UBS Securities LLC are acting as representatives, the following respective numbers of shares of common stock:

Underwriter	Number of Shares
Credit Suisse Securities (USA) LLC
Goldman, Sachs & Co.
UBS Securities LLC
Citigroup Global Markets Inc.
HSBC Securities (USA) Inc.
Lehman Brothers Inc.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
Scotia Capital (USA) Inc.
Wachovia Capital Markets, LLC
D.A. Davidson & Co.
Pickering Energy Partners, Inc.
Simmons & Company International
Total	27,840,000

The underwriting agreement provides that the underwriters are obligated to purchase all the shares of common stock in the offering if any are purchased, other than those shares covered by the over-allotment option described below. The underwriting agreement also provides that if an underwriter defaults the purchase commitments of non-defaulting underwriters may be increased or the offering may be terminated.

We have granted to the underwriters a 30-day option to purchase on a pro rata basis up to 4,176,000 additional shares at the initial public offering price less the underwriting discounts and commissions. The option may be exercised only to cover any over-allotments of common stock.

The underwriters propose to offer the shares of common stock initially at the public offering price on the cover page of this prospectus and to selling group members at that price less a selling concession of $             per share. After the initial public offering, the representatives may change the public offering price and concession.

The following table summarizes the compensation and estimated expenses we will pay:

	Per Share		Total
	Without Over-allotment	With Over-allotment	Without Over-allotment	With Over-allotment
Underwriting Discounts and Commissions paid by us	$	$	$	$
Expenses payable by us	$	$	$	$

The representatives have informed us that the underwriters do not expect sales to accounts over which the underwriters have discretionary authority to exceed 5% of the shares of common stock being offered.

We have agreed that we will not offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, or file with the SEC a registration statement under the Securities Act (other than a registration

155

statement on Form S-8) relating to, any shares of our common stock or securities convertible into or exchangeable or exercisable for any shares of our common stock, or publicly disclose the intention to make any offer, sale, pledge, disposition or filing, without the prior written consent of Credit Suisse Securities (USA) LLC, Goldman, Sachs & Co. and UBS Securities LLC for a period of 180 days after the date of this prospectus, except for (i) securities or security-based awards under the 2006 KBR, Inc. Stock and Incentive Plan that are expected to be granted to our outside directors as described under “Management—Board Structure and Compensation of Directors” and to employees after the closing of this offering as set forth in the table under “Management—KBR, Inc. 2006 Stock and Incentive Plan,” and (ii) securities or security-based awards that may be granted in connection with the anticipated conversion of Halliburton equity awards held by our employees that have been granted under Halliburton’s 1993 Stock and Incentive Plan into equity awards relating to our common stock as described under “Management—Anticipated Conversion of Halliburton Equity-Based Awards into KBR Equity-Based Awards.” However, in the event that either (1) during the last 17 days of the “lock-up” period, we release earnings results or material news or a material event relating to us occurs or (2) prior to the expiration of the “lock-up” period, we announce that we will release earnings results during the 16-day period beginning on the last day of the “lock-up” period, then in either case the expiration of the “lock-up” will be extended until the expiration of the 18-day period beginning on the date of the release of the earnings results or the occurrence of the material news or event, as applicable, unless Credit Suisse Securities (USA) LLC, Goldman, Sachs & Co. and UBS Securities LLC waive, in writing, such an extension.

Halliburton and each of our executive officers and directors have agreed that they will not offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, any shares of our common stock or securities convertible into or exchangeable or exercisable for any shares of our common stock, enter into a transaction that would have the same effect, or enter into any swap, hedge or other arrangement that transfers, in whole or in part, any of the economic consequences of ownership of our common stock, whether any of these transactions are to be settled by delivery of our common stock or other securities, in cash or otherwise, or publicly disclose the intention to make any offer, sale, pledge or disposition, or to enter into any transaction, swap, hedge or other arrangement, without, in each case, the prior written consent of Credit Suisse Securities (USA) LLC, Goldman, Sachs & Co. and UBS Securities LLC for a period of 180 days after the date of this prospectus, except that Halliburton will be permitted to distribute our common stock that it owns to its stockholders after 120 days after the date of this prospectus. However, in the event that either (1) during the last 17 days of the “lock-up” period, we release earnings results or material news or a material event relating to us occurs or (2) prior to the expiration of the “lock-up” period, we announce that we will release earnings results during the 16-day period beginning on the last day of the “lock-up” period, then in either case the expiration of the “lock-up” will be extended until the expiration of the 18-day period beginning on the date of the release of the earnings results or the occurrence of the material news or event, as applicable, unless Credit Suisse Securities (USA) LLC, Goldman, Sachs & Co. and UBS Securities LLC waive, in writing, such an extension.

We have agreed to indemnify the underwriters against liabilities under the Securities Act, or contribute to payments that the underwriters may be required to make in that respect.

Our shares of common stock have been approved for listing on the New York Stock Exchange. In connection with the listing of the common stock on the New York Stock Exchange, the underwriters will undertake to sell round lots of 100 shares or more to a minimum of 2,000 beneficial owners.

The underwriters have, from time to time, performed, and may in the future perform, various investment and commercial banking, financial advisory and other services for us and Halliburton for which they have been paid, or will be paid, customary fees. Affiliates of Credit Suisse Securities (USA) LLC, Lehman Brothers Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Scotia Capital (USA) Inc. and Wachovia Capital Markets, LLC are lenders, and Goldman, Sachs & Co. was previously a lender, under our $850 million revolving credit facility. In addition, with respect to our $850 million revolving credit facility, UBS Securities LLC is the syndication agent and a co-lead arranger, Citigroup Global Capital Markets Inc. and one of its affiliates are the paying agent and a co-administrative agent and a co-lead arranger and HSBC Securities (USA) Inc. and one of its affiliates are a co-administrative agent and a co-lead arranger.

Prior to this offering, there has been no public market for our common stock. The initial public offering price has been determined by a negotiation between Halliburton, us and the representatives and will not

156

necessarily reflect the market price of our common stock following the offering. The principal factors that were considered in determining the public offering price included:

• the information presented in this prospectus and otherwise available to the underwriters;

• market conditions for initial public offerings;

• the history of and prospects for the industry in which we compete;

• the ability of our management;

• the prospects for our future earnings;

• the present state of our development and our current financial condition;

• the recent market prices of, and the demand for, publicly traded common stock of generally comparable companies; and

• the general condition of the securities markets at the time of this offering.

156.1

In connection with the offering, the underwriters may engage in stabilizing transactions, over-allotment transactions, syndicate covering transactions and penalty bids in accordance with Regulation M under the Securities Exchange Act of 1934, as amended.

• Stabilizing transactions permit bids to purchase the underlying security so long as the stabilizing bids do not exceed a specified maximum.

• Over-allotment involves sales by the underwriters of shares in excess of the number of shares the underwriters are obligated to purchase, which creates a syndicate short position. The short position may be either a covered short position or a naked short position. In a covered short position, the number of shares of common stock over-allotted by the underwriters is not greater than the number of shares that they may purchase in the over-allotment option. In a naked short position, the number of shares of common stock involved is greater than the number of shares in the over-allotment option. The underwriters may close out any covered short position by either exercising their over-allotment option and/or purchasing shares of common stock in the open market.

• Syndicate covering transactions involve purchases of the common stock in the open market after the distribution has been completed in order to cover syndicate short positions. In determining the source of shares of common stock to close out the short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase shares through the over-allotment option. If the underwriters sell more shares of common stock than could be covered by the over-allotment option, a naked short position, the position can only be closed out by buying shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there could be downward pressure on the price of the shares of common stock in the open market after pricing that could adversely affect investors who purchase in the offering.

• Penalty bids permit the representatives to reclaim a selling concession from a syndicate member when the common stock originally sold by the syndicate member is purchased in a stabilizing or syndicate covering transaction to cover syndicate short positions.

These stabilizing transactions, syndicate covering transactions and penalty bids may have the effect of raising or maintaining the market price of our common stock or preventing or retarding a decline in the market price of the common stock. As a result the price of our common stock may be higher than the price that might otherwise exist in the open market. These transactions may be effected on the New York Stock Exchange or otherwise and, if commenced, may be discontinued at any time.

A prospectus in electronic format may be made available on the web sites maintained by one or more of the underwriters, or selling group members, if any, participating in this offering and one or more of the underwriters participating in this offering may distribute prospectuses electronically. The representatives may agree to allocate a number of shares to underwriters and selling group members for sale to their online brokerage account holders. Internet distributions will be allocated by the underwriters and selling group members that will make internet distributions on the same basis as other allocations.

157

SELLING RESTRICTIONS

The shares of common stock are offered for sale in those jurisdictions in the United States, Europe, Asia and elsewhere where it is lawful to make such offers. Other than with respect to the public offering of the shares of common stock listed on the New York Stock Exchange, no action has been or will be taken in any country or jurisdiction by us or the underwriters that would permit a public offering of the shares of common stock, or possession or distribution of any offering material in relation thereto, in any country or jurisdiction where action for that purpose is required. Accordingly, the shares of common stock may not be offered or sold, directly or indirectly, and neither this prospectus nor any other offering material or advertisements in connection with the shares of common stock may be distributed or published, in or from any country or jurisdiction, except in compliance with any applicable rules and regulations of any such country or jurisdiction. This prospectus does not constitute an offer to sell or a solicitation of an offer to purchase in any jurisdiction where such offer or solicitation would be unlawful.

European Economic Area

In relation to each Member State of the European Economic Area which has implemented the Prospectus Directive (each, a “Relevant Member State”), with effect from and including the date on which the Prospectus Directive is implemented in that Relevant Member State (the “Relevant Implementation Date”), the shares of common stock will not be offered to the public in that Relevant Member State prior to the publication of a prospectus in relation to the common stock which has been approved by the competent authority in that Relevant Member State or, where appropriate, approved in another Relevant Member State and notified to the competent authority in that Relevant Member State, all in accordance with the Prospectus Directive, except that, with effect from and including the Relevant Implementation Date, the shares of common stock may be offered to the public in that Relevant Member State at any time:

(a) to legal entities which are authorized or regulated to operate in the financial markets or, if not so authorized or regulated, whose corporate purpose is solely to invest in securities;

(b) to any legal entity which has two or more of (1) an average of at least 250 employees during the last financial year; (2) a total balance sheet of more than €43,000,000 and (3) an annual net turnover of more than €50,000,000, as shown in its last annual or consolidated accounts;

(c) to fewer than 100 natural or legal persons (other than qualified investors as defined in the Prospectus Directive) subject to obtaining the prior consent of the manager for any such offer; or

(d) in any other circumstances which do not require the publication by us of a prospectus pursuant to Article 3 of the Prospectus Directive.

For the purposes of this provision, the expression “offered to the public” in relation to any common stock in any Relevant Member State means the communication in any form and by any means of sufficient information on the terms of the offer and the common stock to be offered so as to enable an investor to decide to purchase or subscribe the common stock, as the same may be varied in that Member State by any measure implementing the Prospectus Directive in that Member State and the expression “Prospectus Directive” means Directive 2003/71/EC and includes any relevant implementing measure in each Relevant Member State.

United Kingdom

Each of the underwriters:

(a) has only communicated or caused to be communicated and will only communicate or cause to be communicated an invitation or inducement to engage in investment activity (within the meaning of Section 21 of the Financial Services and Markets Act 2000 (as amended) (“FSMA”)) to persons who have professional experience in matters relating to investments falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 or in circumstances in which Section 21 of FSMA does not apply to us; and

158

(b) has complied with, and will comply with all applicable provisions of FSMA with respect to anything done by it in relation to the shares of common stock in, from or otherwise involving the United Kingdom.

Germany

Each person who is in possession of this prospectus is aware of the fact that no German sales prospectus (Verkaufsprospekt) within the meaning of the Securities Sales Prospectus Act (Wertpapier-Verkaufsprospektgesetz, the “Act”) of the Federal Republic of Germany has been or will be published with respect to shares of our common stock. In particular, our shares of common stock have not and will not be offered to the public (offentliches Angebot) within the meaning of the Act, otherwise than in accordance with the Act and all other applicable legal and regulatory requirements.

France

The shares of common stock are being issued and sold outside the Republic of France and, in connection with their initial distribution, have not been offered or sold and will not be offered or sold, directly or indirectly, to the public in the Republic of France. This prospectus or any other offering material relating to the shares of common stock has not been distributed and will not be distributed or caused to be distributed to the public in the Republic of France. Such offers, sales and distributions have been and will be made in the Republic of France only to qualified investors (investisseurs qualifiés) in accordance with Article L.411-2 of the Monetary and Financial Code and decrét no. 98-880 dated 1st October, 1998.

Switzerland

The shares of common stock have not been offered or sold, and will not be offered or sold, to any investors in Switzerland other than on a non-public basis. This prospectus does not constitute an issuance prospectus within the meaning of Articles 652a or 1156 of the Swiss Federal Code of Obligations (Schweizerisches Obligationenrect) or a listing prospectus within the meaning of Article 32 of the Listing Rules of the Swiss exchange. The shares of common stock may not be offered or distributed on a professional basis in or from Switzerland and neither this prospectus nor any other offering material relating to shares of our common stock may be publicly issued in connection with any such offer or distribution. Neither this offering nor the common stock has been or will be approved by any Swiss regulatory authority. In particular, the shares are not and will not be registered with or supervised by the Swiss Banking Commission, and investors may not claim protection under the Swiss Investment Fund Act.

The Netherlands

Shares of our common stock may not be offered, sold, transferred or delivered in or from The Netherlands as part of their initial distribution or at any time thereafter, directly or indirectly, other than to individuals or legal entities situated in The Netherlands who or which trade or invest in securities in the conduct of a business or profession (which includes banks, securities intermediaries (including dealers and brokers), insurance companies, pension funds, collective investment institutions, central governments, large international and supranational organizations, other institutional investors and other parties, including treasury departments of commercial enterprises, which as an ancillary activity regularly invest in securities; hereinafter, “Professional Investors”), provided that in the offer, prospectus and in any other documents or advertisements in which a forthcoming offering of shares of our common stock is publicly announced (whether electronically or otherwise) in The Netherlands it is stated that such offer is and will be exclusively made to such Professional Investors. Individual or legal entities who are not Professional Investors may not participate in the offering of our shares of common stock, and this prospectus or any other offering material relating to shares of our common stock may not be considered an offer or the prospect of an offer to sell or exchange shares of our common stock.

159

Japan

Shares of our common stock have not been and will not be offered or sold, directly or indirectly, in Japan or to, or for the benefit of, any Japanese person or to others, for re-offering or resale, directly or indirectly, in Japan or to any Japanese person, except in each case pursuant to an exemption from the registration requirements of, and otherwise in compliance with, the Securities and Exchange Law of Japan and any other applicable laws and regulations of Japan. For purposes of this paragraph, “Japanese person” means any person resident in Japan, including any corporation or other entity organized under the laws of Japan.

Hong Kong

The underwriters and each of their affiliates have not (i) offered or sold, and will not offer or sell, in Hong Kong, by means of any document, shares of our common stock other than (a) to “professional investors” as defined in the Securities and Futures Ordinance (Cap. 571) of Hong Kong and any rules made under that Ordinance or (b) in other circumstances which do not result in the document being a “prospectus” as defined in the Companies Ordinance (Cap. 32) of Hong Kong or which do not constitute an offer to the public within the meaning of that Ordinance or (ii) issued or had in its possession for the purposes of issue, and will not issue or have in its possession for the purposes of issue, whether in Hong Kong or elsewhere any advertisement, invitation or document relating to our common stock which is directed at, or the contents of which are likely to be accessed or read by, the public in Hong Kong (except if permitted to do so under the securities laws of Hong Kong) other than with respect to our securities which are or are intended to be disposed of only to persons outside Hong Kong or only to “professional investors” as defined in the Securities and Futures Ordinance and any rules made under that Ordinance. The contents of this document have not been reviewed by any regulatory authority in Hong Kong. You are advised to exercise caution in relation to the offer. If you are in any doubt about any of the contents of this document, you should obtain independent professional advice.

Singapore

This prospectus or any other offering material relating to shares of our common stock has not been and will not be registered as a prospectus with the Monetary Authority of Singapore, and the shares of common stock will be offered in Singapore pursuant to exemptions under Section 274 and Section 275 of the Securities and Futures Act, Chapter 289 of Singapore (the “Securities and Futures Act”). Accordingly, this prospectus and any other document or material relating to the offer or sale, or invitation for subscription or purchase, of the shares of our common stock may not be circulated or distributed, nor may the shares of our common stock be offered or sold, or be the subject of an invitation for subscription or purchase, whether directly or indirectly, to the public or any member of the public in Singapore other than (a) to an institutional investor or other person specified in Section 274 of the Securities and Futures Act, (b) to a relevant person, or any person pursuant to Section 275(1A), and in accordance with the conditions specified in Section 275 of the Securities and Futures Act; or (c) otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the Securities and Futures Act.

Where the shares of common stock are subscribed or purchased under Section 275 by a relevant person which is: (a) a corporation (which is not an accredited investor) the sole business of which is to hold investments and the entire share capital of which is owned by one or more individuals, each of whom is an accredited investor; or (b) a trust (where the trustee is not an accredited investor) whose sole purpose is to hold investments and each beneficiary is an accredited investor, shares, debentures and units of shares and debentures of that corporation or the beneficiaries’ rights and interest in that trust shall not be transferable for 6 months after that corporation or that trust has acquired the shares under Section 275 except: (1) to an institutional investor under Section 274 of the Securities and Futures Act or to a relevant person, or any person pursuant to Section 275(1A), and in accordance with the conditions, specified in Section 275 of the Securities and Futures Act; (2) where no consideration is given for the transfer; or (3) by operation of law.

160

NOTICE TO CANADIAN RESIDENTS

Resale Restrictions

The distribution of our common stock in Canada is being made only on a private placement basis exempt from the requirement that we prepare and file a prospectus with the securities regulatory authorities in each province where trades of common stock are made. Any resale of our common stock in Canada must be made under applicable securities laws which will vary depending on the relevant jurisdiction, and which may require resales to be made under available statutory exemptions or under a discretionary exemption granted by the applicable Canadian securities regulatory authority. Purchasers are advised to seek legal advice prior to any resale of our common stock.

Representations of Purchasers

By purchasing our common stock in Canada and accepting a purchase confirmation, a purchaser is representing to us and the dealer from whom the purchase confirmation is received that:

• the purchaser is entitled under applicable provincial securities laws to purchase the common stock without the benefit of a prospectus qualified under those securities laws;

• where required by law, that the purchaser is purchasing as principal and not as agent;

• the purchaser has reviewed the text above under “—Resale Restrictions;” and

• the purchaser acknowledges and consents to the provision of specified information concerning its purchase of the common stock to the regulatory authority that by law is entitled to collect the information.

Further details concerning the legal authority for this information is available on request.

Rights of Action—Ontario Purchasers Only

Under Ontario securities legislation, certain purchasers who purchase a security offered by this prospectus during the period of distribution will have a statutory right of action for damages, or while still the owner of the common stock, for rescission against us in the event that this prospectus contains a misrepresentation without regard to whether the purchaser relied on the misrepresentation. The right of action for damages is exercisable not later than the earlier of 180 days from the date the purchaser first had knowledge of the facts giving rise to the cause of action and three years from the date on which payment is made for the common stock. The right of action for rescission is exercisable not later than 180 days from the date on which payment is made for the common stock. If a purchaser elects to exercise the right of action for rescission, the purchaser will have no right of action for damages against us. In no case will the amount recoverable in any action exceed the price at which the common stock was offered to the purchaser and if the purchaser is shown to have purchased the securities with knowledge of the misrepresentation, we will have no liability. In the case of an action for damages, we will not be liable for all or any portion of the damages that are proven to not represent the depreciation in value of the common stock as a result of the misrepresentation relied upon. These rights are in addition to, and without derogation from, any other rights or remedies available at law to an Ontario purchaser. The foregoing is a summary of the rights available to an Ontario purchaser. Ontario purchasers should refer to the complete text of the relevant statutory provisions.

Enforcement of Legal Rights

All of our directors and officers as well as the experts named herein may be located outside of Canada and, as a result, it may not be possible for Canadian purchasers to effect service of process within Canada upon us or those persons. All or a substantial portion of our assets and the assets of those persons may be located outside of

161

Canada and, as a result, it may not be possible to satisfy a judgment against us or those persons in Canada or to enforce a judgment obtained in Canadian courts against us or those persons outside of Canada.

Taxation and Eligibility for Investment

Canadian purchasers of our common stock should consult their own legal and tax advisors with respect to the tax consequences of an investment in our common stock in their particular circumstances and about the eligibility of our common stock for investment by the purchaser under relevant Canadian legislation.

162

LEGAL MATTERS

The validity of the shares of common stock offered hereby will be passed upon for us by Baker Botts L.L.P., Houston, Texas. The validity of the shares of common stock offered hereby will be passed upon for the underwriters by Simpson Thacher & Bartlett LLP, New York, New York.

EXPERTS

The consolidated financial statements and schedule of KBR Holdings, LLC and subsidiaries at December 31, 2005 and 2004, and for each of the years in the three-year period ended December 31, 2005, have been included in this prospectus and the registration statement in reliance upon the report of KPMG LLP, independent registered public accounting firm, appearing elsewhere herein, and upon the authority of such firm as experts in accounting and auditing.

The financial statement of KBR, Inc. as of March 21, 2006 has been included in this prospectus and the registration statement in reliance upon the report of KPMG LLP, independent registered public accounting firm, appearing elsewhere herein, and upon the authority of such firm as experts in accounting and auditing.

WHERE YOU CAN FIND MORE INFORMATION

We have filed with the SEC a registration statement on Form S-1 under the Securities Act with respect to the shares of common stock offered by this prospectus. In this prospectus we refer to that registration statement, together with all amendments, exhibits and schedules to that registration statement, as “the registration statement.”

As is permitted by the rules and regulations of the SEC, this prospectus, which is part of the registration statement, omits some information, exhibits, schedules and undertakings set forth in the registration statement. For further information with respect to us, and the securities offered by this prospectus, please refer to the registration statement.

Following this offering, we will be required to file current, quarterly and annual reports, proxy and information statements and other information with the SEC. You may read and copy those reports, proxy and information statements and other information at the public reference facility maintained by the SEC at 100 F Street, N.E., Washington, D.C. 20549. Copies of this material may also be obtained from the Public Reference Room of the SEC at 100 F Street, N.E., Washington, D.C. 20549 at prescribed rates. Information on the operation of the Public Reference Room may be obtained by calling the SEC at (800) 732-0330. The SEC maintains a web site at http://www.sec.gov that contains reports, proxy and information statements and other information regarding registrants that make electronic filings with the SEC using its EDGAR system.

163

INDEX TO FINANCIAL STATEMENTS

KBR Holdings, LLC and subsidiaries

Financial Statements:
Report of Independent Registered Public Accounting Firm	F-2
Consolidated Statements of Operations for the Years Ended December 31, 2005, 2004 and 2003 and for the nine months ended September 30, 2006 and 2005 (unaudited)	F-3
Consolidated Balance Sheets as of December 31, 2005 and 2004 and as of September 30, 2006 (unaudited)	F-4
Consolidated Statements of Member’s Equity for the Years Ended December 31, 2005, 2004 and 2003 and for the nine months ended September 30, 2006 and 2005 (unaudited)	F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 2005, 2004 and 2003 and for the nine months ended September 30, 2006 and 2005 (unaudited)	F-6
Notes to Consolidated Financial Statements	F-7

KBR, Inc.

Financial Statement:
Report of Independent Registered Public Accounting Firm	F-61
Balance Sheet as of March 21, 2006 and as of September 30, 2006 (unaudited)	F-62
Note to Balance Sheet	F-63

F-1

Report of Independent Registered Public Accounting Firm

The Member and Board of Directors

KBR Holdings, LLC:

We have audited the accompanying consolidated balance sheets of KBR Holdings, LLC and subsidiaries as of December 31, 2005 and 2004, and the related consolidated statements of operations, member’s equity, and cash flows for each of the years in the three-year period ended December 31, 2005. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of KBR Holdings, LLC as of December 31, 2005 and 2004, and the results of its operations and its cash flow for each of the years in the three-year period ended December 31, 2005 in conformity with U.S. generally accepted accounting principles.

/s/ KPMG LLP

Houston, Texas

April 11, 2006, except as to Note 4, which

    is as of September 20, 2006, and except as to Note 2,

    which is as of October 30, 2006

F-2

KBR Holdings, LLC

Consolidated Statements of Operations

(In millions, except for per share data)

	Years ended December 31									Nine months ended September 30
	2005			2004			2003			2006			2005
										(unaudited)
Revenue:
Services	$	10,206		$	11,960		$	8,810		$	7,171		$	7,476
Equity in earnings (losses) of unconsolidated affiliates, net		(60	)		(54	)		53			(47	)		(54	)
Total revenue		10,146			11,906			8,863			7,124			7,422
Operating costs and expenses:
Cost of services		9,716			12,171			8,849			6,932			7,102
General and administrative		85			92			82			73			65
Gain on sale of assets		(110	)		—			(4	)		(6	)		(93	)
Total operating costs and expenses		9,691			12,263			8,927			6,999			7,074
Operating income (loss)		455			(357	)		(64	)		125			348
Interest expense – related party		(24	)		(15	)		(36	)		(35	)		(16	)
Interest income (expense), net		(4	)		2			(2	)		11			(2	)
Foreign currency gains (losses), net – related party		3			(18	)		(12	)		—			3
Foreign currency gains (losses), net		4			5			10			(14	)		(3	)
Other, net		(1	)		(2	)		(1	)		—			(1	)
Income (loss) from continuing operations before income taxes and minority interest		433			(385	)		(105	)		87			329
Benefit (provision) for income taxes		(182	)		96			(11	)		(64	)		(138	)
Minority interest in net (income) loss of subsidiaries		(41	)		(25	)		(26	)		15			(29	)
Income (loss) from continuing operations	$	210		$	(314	)	$	(142	)	$	38		$	162
Income from discontinued operations, net of tax provision of $(14), $(6), $(6), $(48) and $(11)		30			11			9			87			22
Net income (loss)	$	240		$	(303	)	$	(133	)	$	125		$	184
Basic and diluted income (loss) per share:
Continuing operations	$	1.54		$	(2.31	)	$	(1.04	)	$	0.28		$	1.19
Discontinued operations		0.22			0.08			0.06			0.64			0.16
Net Income (loss)	$	1.76		$	(2.23	)	$	(0.98	)	$	0.92		$	1.35
Basic and diluted weighted average shares outstanding		136			136			136			136			136

See accompanying notes to consolidated financial statements.

F-3

KBR Holdings, LLC

Consolidated Balance Sheets

(In millions)

	December 31						September 30
	2005			2004			2006
							(unaudited)
Assets
Current assets:
Cash and equivalents	$	394		$	234		$	1,022
Receivables:
Notes and accounts receivable (less allowance for bad debts of $51, $52 and $38)		1,118			1,340			896
Unbilled work on uncompleted contracts		1,429			1,734			1,157
Total receivables		2,547			3,074			2,053
Deferred income taxes		99			79			111
Due from parent, net		121			—			648
Other current assets		209			207			236
Current assets related to discontinued operations		140			138			—
Total current assets		3,510			3,732			4,070
Property, plant, and equipment, net of accumulated depreciation of $305, $363 and $344		444			467			481
Goodwill		285			288			288
Equity in and advances to related companies		277			323			281
Noncurrent deferred income taxes		124			116			56
Unbilled work on uncompleted contracts		195			175			193
Other assets		280			323			373
Noncurrent assets related to discontinued operations		67			63			—
Total assets	$	5,182		$	5,487		$	5,742
Liabilities, Minority Interest and Member’s Equity
Current liabilities:
Accounts payable	$	1,444		$	1,899		$	1,209
Advance billings on uncompleted contracts		657			547			1,059
Reserve for estimated losses on uncompleted contracts		43			137			166
Accrued employee compensation and benefits		255			128			300
Asbestos-and silica-related liability		—			44			—
Current maturities of long-term debt		16			18			18
Other current liabilities		96			152			164
Current liabilities related to discontinued operations		55			42			—
Total current liabilities		2,566			2,967			2,916
Due to parent, net		—			1,188			—
Note payable to parent		774			—			774
Employee compensation and benefits		268			203			279
Long-term debt		18			42			7
Other liabilities		121			135			176
Noncurrent liabilities related to discontinued operations		10			6			—
Noncurrent deferred tax liability		26			19			25
Total liabilities		3,783			4,560			4,177
Minority interest in consolidated subsidiaries		143			115			112
Member’s equity and accumulated other comprehensive loss:
Common stock, $0.00000073 par value, 135,627,000 shares authorized, issued and outstanding		—			—			—
Member’s equity		1,384			—			1,542
Accumulated other comprehensive loss		(128	)		(10	)		(89	)
Parent net investment		—			822			—
Total member’s equity and accumulated other comprehensive loss		1,256			812			1,453
Total liabilities, minority interest and member’s equity and accumulated other comprehensive loss	$	5,182		$	5,487		$	5,742

See accompanying notes to consolidated financial statements.

F-4

KBR Holdings, LLC

Consolidated Statements of Member’s Equity

(In millions)

	December 31									September 30
	2005			2004			2003			2006			2005
										(unaudited)
Balance at January 1,	$	812		$	944		$	1,133		$	1,256		$	812
Contribution from parent and other activities		300			—			—			33			—
Settlement of taxes with parent		22			37			(56	)		—			—
Comprehensive income (loss):
Net income (loss)		240			(303	)		(133	)		125			184
Other comprehensive income (loss), net of tax (provision):
Cumulative translation adjustments		(46	)		32			74			26			(26	)
Pension liability adjustments, net of taxes of $(19), $41 and $(26)		(44	)		97			(83	)		—			—
Other comprehensive gains (losses) on derivatives:
Unrealized gains (losses) on derivatives		(21	)		39			6			17			(21	)
Reclassification adjustments to net income (loss)		(21	)		(26	)		3			2			(7	)
Income tax benefit (provision) on derivatives		14			(8	)		—			(6	)		2
Total comprehensive income (loss)		122			(169	)		(133	)		164			132
Balance at December 31 and September 30,	$	1,256		$	812		$	944		$	1,453		$	944

See accompanying notes to consolidated financial statements.

F-5

KBR Holdings, LLC

Consolidated Statements of Cash Flows

(In millions)

	Years ended December 31									Nine months ended September 30
	2005			2004			2003			2006			2005
										(unaudited)
Cash flows from operating activities:
Net income (loss)	$	240		$	(303	)	$	(133	)	$	125		$	184
Adjustments to reconcile net income (loss) to net cash from operations:
Depreciation and amortization		56			52			51			32			44
Distributions from related companies, net of equity in earnings (losses)		40			1			24			(1	)		50
Deferred income taxes		3			26			28			1			37
Gain on sale of assets, net		(110	)		—			(4	)		(126	)		(105	)
Impairment of equity method investments		—			—			—			68			3
Other		(18	)		68			30			(4	)		(18	)
Changes in operating assets and liabilities:
Receivables		203			(101	)		(524	)		208			218
Unbilled work on uncompleted contracts		272			(50	)		(1,026	)		291			398
Accounts payable		(420	)		450			740			(247	)		(671	)
Advance billings on uncompleted contracts		120			(175	)		71			373			65
Accrued employee compensation and benefits		125			(1	)		17			50			(8	)
Other assets		(35	)		26			(388	)		(114	)		(5	)
Other liabilities		51			(54	)		215			263			(52	)
Total cash flows provided by (used in) operating activities		527			(61	)		(899	)		919			140
Cash flows from investing activities:
Capital expenditures		(76	)		(74	)		(63	)		(50	)		(50	)
Sales of property, plant and equipment		26			14			16			7			20
Dispositions (acquisitions) of businesses, net of cash disposed		87			(22	)		10			276			87
Other investing activities		(17	)		(3	)		(22	)		—			14
Total cash flows provided by (used in) investing activities		20			(85	)		(59	)		233			71
Cash flows from financing activities:
Payments from (to) related party, net		(350	)		(42	)		478			(527	)		(74	)
Proceeds from long-term borrowings		—			—			—			8			—
Payments on long-term borrowings		(21	)		(19	)		(5	)		(21	)		(13	)
Other financing activities		(4	)		(22	)		(20	)		(5	)		(3	)
Total cash flows provided by (used in) financing activities		(375	)		(83	)		453			(545	)		(90	)
Effect of exchange rate changes on cash		(12	)		24			86			21			(2	)
Increase (decrease) in cash and cash equivalents		160			(205	)		(419	)		628			119
Cash and equivalents at beginning of period		234			439			858			394			234
Cash and equivalents at end of period	$	394		$	234		$	439		$	1,022		$	353
Supplemental disclosure of cash flow information:
Cash payments during the year for:
Interest paid to third party	$	12		$	8		$	5		$	9		$	9
Income taxes	$	79		$	44		$	47		$	40		$	60
Noncash financing activities
Contribution from parent and other activities	$	300		$	—		$	—		$	33		$	—

See accompanying notes to consolidated financial statements.

F-6

KBR Holdings, LLC

Notes to Consolidated Financial Statements

Note 1. Description of KBR Holdings, LLC Business

KBR Holdings, LLC (KBR Holdings, LLC and its subsidiaries, collectively, KBR Holdings) is an indirect wholly owned subsidiary of Halliburton Company (Halliburton) and a global engineering, construction and services company supporting the energy, petrochemicals, government services and civil infrastructure sectors. We offer our wide range of services through our two business segments, Energy and Chemicals (E&C) and Government and Infrastructure (G&I).

Energy and Chemicals. Our E&C segment designs and constructs energy and petrochemical projects, including large, technically complex projects in remote locations around the world. Our expertise includes onshore oil and gas production facilities, offshore oil and gas production facilities, including platforms, floating production and subsea facilities (which we refer to collectively as our offshore projects), onshore and offshore pipelines, liquefied natural gas (LNG) and gas-to-liquids (GTL) gas monetization facilities (which we refer to collectively as our gas monetization projects), refineries, petrochemical plants and synthesis gas (Syngas). We provide a complete range of engineering, procurement, construction, facility commissioning and start-up (EPC-CS) services, as well as program and project management, consulting and technology services.

Government and Infrastructure. Our G&I segment delivers on-demand support services across the full military mission cycle from contingency logistics and field support to operations and maintenance on military bases. In the civil infrastructure market, we operate in diverse sectors, including transportation, waste and water treatment, and facilities maintenance. We provide program and project management, contingency logistics, operations and maintenance, construction management, engineering, and other services to military and civilian branches of governments and private customers worldwide. A significant portion of our G&I segment’s current operations relate to the support of United States government operations in the Middle East, which we refer to as our Middle East operations. We are also the majority owner of Devonport Management Limited (DML), which owns and operates Devonport Royal Dockyard, Western Europe’s largest naval dockyard complex. Our DML shipyard operations are primarily engaged in refueling nuclear submarines and performing maintenance on surface vessels for the U.K. Ministry of Defence as well as limited commercial projects.

Note 2. Basis of Presentation

These consolidated financial statements are prepared in connection with the proposed initial public offering of common stock of KBR, Inc. (“KBR”), which was incorporated in Delaware in March 2006 as an indirect wholly owned subsidiary of Halliburton Company. At or before the closing of the initial public offering, KBR will own KBR Holdings. The initial public offering of KBR common stock is the first step in Halliburton’s previously announced plans to divest its interest in KBR Holdings.

Effective June 30, 2005 for accounting purposes, DII Industries, LLC (DII) created a newly formed, wholly owned subsidiary, KBR Holdings, LLC, with 100 shares of common stock and contributed to it KBR Group Holdings, LLC and Kellogg Brown & Root, Inc. Prior to such restructuring, KBR Group Holdings, LLC and Kellogg Brown & Root, Inc. were subsidiaries of DII whose ultimate parent is Halliburton. The transaction was accounted for using the historic cost basis of accounting. Accordingly, the financial statements for periods prior to December 31, 2005 are presented on a combined basis and include the historical operations of KBR Group Holdings, LLC, Kellogg Brown & Root LLC (formerly Kellogg Brown & Root, Inc.) and their subsidiaries. The financial statements as of December 31, 2005 and for subsequent periods represent the consolidated operations of KBR Holdings. The accompanying financial statements are hereinafter referred to as the Consolidated Financial Statements and include all engineering, construction and related services of KBR Group Holdings, LLC, Kellogg Brown & Root LLC and their subsidiaries.

F-7

Prior to October 30, 2006, the existing ownership interest of the member of KBR Holdings, LLC was represented by 100 shares. On October 30, 2006, the sole member of KBR Holdings, LLC effected a 1,356,270-for-one split of KBR Holdings, LLC’s outstanding shares. Share and per share data of KBR Holdings, LLC for all periods presented herein have been adjusted to reflect the share split.

Our consolidated financial statements include the accounts of majority-owned, controlled subsidiaries and variable interest entities where we are the primary beneficiary (see Note 19). The equity method is used to

7.1

account for investments in affiliates in which we have the ability to exert significant influence over the affiliates’ operating and financial policies. The cost method is used when we do not have the ability to exert significant influence. All material intercompany accounts and transactions are eliminated.

Our revenue includes both equity in the earnings of unconsolidated affiliates as well as revenue from the sales of services into the joint ventures. We often participate on larger projects as a joint venture partner and also provide services to the venture as a subcontractor. The amount included in our revenue represents total project revenue, including equity in the earnings from joint ventures and revenue from services provided to joint ventures.

Our consolidated financial statements reflect all costs of doing business, including those incurred by Halliburton on KBR Holdings’ behalf. Such costs have been charged to KBR Holdings in accordance with Staff Accounting Bulletin (SAB) No. 55, “Allocation of Expenses and Related Disclosure in Financial Statements of Subsidiaries, Divisions or Lesser Business Components of Another Entity.”

The interim consolidated balance sheet as of September 30, 2006 and the consolidated statements of operations, the consolidated statements of cash flow and the consolidated statements of member’s equity for the nine months ended September 30, 2006 and 2005 and the related Notes to consolidated financial statements are unaudited. These unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. In the opinion of management, the unaudited interim consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and include all adjustments necessary to present fairly the financial position and results of operations for the respective interim periods. Interim financial results are not necessarily indicative of the results to be expected for an annual period. Certain prior period amounts have been reclassified to conform to the current period presentation.

Note 3. Significant Accounting Policies

Use of estimates

Our financial statements are prepared in conformity with accounting principles generally accepted in the United States, requiring us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. Ultimate results could differ from those estimates.

Revenue recognition

Engineering and construction contracts. Revenue from contracts to provide construction, engineering, design, or similar services is reported on the percentage-of-completion method of accounting. Progress is generally based upon physical progress, man-hours, or costs incurred, depending on the type of job. All known or anticipated losses on contracts are provided for when they become evident. Claims and change orders that are in the process of being negotiated with customers for extra work or changes in the scope of work are included in revenue when collection is deemed probable.

Accounting for government contracts. Most of the services provided to the United States government are governed by cost-reimbursable contracts. Services under our LogCAP, RIO, PCO Oil South, and Balkans support contracts are examples of these types of arrangements. Generally, these contracts contain both a base fee (a fixed profit percentage applied to our actual costs to complete the work) and an award fee (a variable profit percentage applied to definitized costs, which is subject to our customer’s discretion and tied to the specific performance measures defined in the contract, such as adherence to schedule, health and safety, quality of work, responsiveness, cost performance and business management).

Base fee revenue is recorded at the time services are performed, based upon actual project costs incurred, and includes a reimbursement fee for general, administrative, and overhead costs. The general, administrative, and overhead cost reimbursement fees are estimated periodically in accordance with government contract

F-8

accounting regulations and may change based on actual costs incurred or based upon the volume of work performed. Revenue is reduced for our estimate of costs that may be categorized as disputed or unallowable as a result of cost overruns or the audit process.

Award fees are generally evaluated and granted periodically by our customer. For contracts entered into prior to June 30, 2003, all award fees are recognized during the term of the contract based on our estimate of amounts to be awarded. Once award fees are granted and task orders underlying the work are definitized, we adjust our estimate of award fees to actual amounts earned. Our estimates are often based on our past award experience for similar types of work.

For contracts containing multiple deliverables entered into subsequent to June 30, 2003 (such as PCO Oil South), we analyze each activity within the contract to ensure that we adhere to the separation guidelines of Emerging Issues Task Force Issue (EITF) No. 00-21, “Revenue Arrangements with Multiple Deliverables,” and the revenue recognition guidelines of SAB No. 104, “Revenue Recognition.” For service-only contracts, and service elements of multiple deliverable arrangements, award fees are recognized only when definitized and awarded by the customer. Award fees on government construction contracts are recognized during the term of the contract based on our estimate of the amount of fees to be awarded.

Accounting for pre-contract costs

Pre-contract costs incurred in anticipation of a specific contract award are deferred when the costs can be directly associated with a specific anticipated contract and their recoverability from that contract is probable. Pre-contract costs related to unsuccessful bids are written off no later than the period we are informed that we are not awarded the specific contract. Costs related to one-time activities such as introducing a new product or service, conducting business in a new territory, conducting business with a new class of customer, or commencing new operations are expensed when incurred.

Legal expenses

We expense legal costs in the period in which such costs are incurred.

Cash and equivalents

We consider all highly liquid investments with an original maturity of three months or less to be cash equivalents. Cash and equivalents include cash from advanced payments related to contracts in progress held by ourselves or our joint ventures that we consolidate for accounting purposes. The use of these cash balances are limited to the specific projects or joint venture activities and are not available for other projects, general cash needs or distribution to us without approval of the board of directors of the respective joint venture or subsidiary. At September 30, 2006 and at December 31, 2005 and 2004, cash and equivalents included approximately $562 million (unaudited), $223 million and $58 million, respectively, in cash from advanced payments held by ourselves or our joint ventures that we consolidate for accounting purposes.

Allowance for bad debts

We establish an allowance for bad debts through a review of several factors including historical collection experience, current aging status of the customer accounts, financial condition of our customers, and whether the receivables involve retentions.

Goodwill and other intangibles

The reported amounts of goodwill for each reporting unit and intangible assets are reviewed for impairment at least annually and more frequently when negative conditions such as significant current or projected operating losses exist. The annual impairment test for goodwill is a two-step process and involves comparing the estimated

F-9

fair value of each reporting unit to the reporting unit’s carrying value, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered impaired, and the second step of the impairment test is unnecessary. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test would be performed to measure the amount of impairment loss to be recorded, if any. Our annual impairment tests resulted in no goodwill or intangible asset impairment.

Patents and other intangibles totaled $54 million (unaudited), $54 million and $55 million at September 30, 2006 and at December 31, 2005 and 2004, respectively, and are included in “Other assets” on the consolidated balance sheets. Patents and other intangibles are amortized over their estimated useful lives of up to 15 years. Related accumulated amortization was $31 million (unaudited), $29 million and $27 million at September 30, 2006 and at December 31, 2005 and 2004, respectively. Patent and other intangible amortization expense was $2 million (unaudited), $3 million, $3 million and $6 million for the nine months ended September 30, 2006 and for the years ended December 31, 2005, 2004 and 2003, respectively.

Evaluating impairment of long-lived assets

When events or changes in circumstances indicate that long-lived assets other than goodwill may be impaired, an evaluation is performed. For an asset classified as held for use, the estimated future undiscounted cash flow associated with the asset are compared to the asset’s carrying amount to determine if a write-down to fair value is required. When an asset is classified as held for sale, the asset’s book value is evaluated and adjusted to the lower of its carrying amount or fair value less cost to sell. In addition, depreciation or amortization is ceased while it is classified as held for sale.

Impairment of Equity Method Investments

KBR Holdings evaluates its equity method investment for impairment when events or changes in circumstances indicate, in management’s judgment, that the carrying value of such investment may have experienced an other-than-temporary decline in value. When evidence of loss in value has occurred, management compares the estimated fair value of the investment to the carrying value of the investment to determine whether an impairment has occurred. Management assesses the fair value of its equity method investment using commonly accepted techniques, and may use more than one method, including, but not limited to, recent third party comparable sales, internally developed discounted cash flow analysis and analysis from outside advisors. If the estimated fair value is less than the carrying value and management considers the decline in value to be other than temporary, the excess of the carrying value over the estimated fair value is recognized in the financial statements as an impairment.

Income taxes

Income tax expense for KBR Holdings is calculated on a pro rata basis. Under this method, income tax expense is determined based on KBR Holdings operations and their contributions to income tax expense of the Halliburton consolidated group.

KBR Holdings is currently included in the consolidated U.S. federal income tax return of Halliburton. Additionally, many subsidiaries and divisions of Halliburton are subject to consolidation, group relief or similar provisions of tax law in foreign jurisdictions that allow for sharing of tax attributes with other Halliburton affiliates. For purposes of determining income tax expense, it is assumed that KBR Holdings will continue to file on this combined basis.

Deferred tax assets and liabilities are recognized for the expected future tax consequences of events that have been recognized in the financial statements or tax returns. A valuation allowance is provided for deferred tax assets if it is more likely than not that these items will not be realized.

F-10

In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. We consider the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, we believe it is more likely than not that we will realize the benefits of these deductible differences, net of the existing valuation allowances.

KBR Holdings is a party to a tax sharing agreement with Halliburton. The tax sharing agreement provides, in part, for settlement of utilized tax attributes on a consolidated basis. Therefore, intercompany settlements due to the utilized attributes are only established to the extent that the attributes decreased the tax liability of an affiliate in any given jurisdiction. The adjustment to reflect the difference between the tax provision/benefit calculated as described above and the amount settled with Halliburton pursuant to the tax sharing agreement is recorded to equity.

Derivative instruments

At times, we enter into derivative financial transactions to hedge existing or projected exposures to changing foreign currency exchange rates. We do not enter into derivative transactions for speculative or trading purposes. We recognize all derivatives on the balance sheet at fair value. Derivatives that are not accounted for as hedges under Statement of Financial Accounting Standard (SFAS) No. 133 “Accounting for Derivative Instruments and Hedging Activities” are adjusted to fair value and reflected through the results of operations. If the derivative is designated as a hedge, depending on the nature of the hedge, changes in the fair value of derivatives are either offset against the change in fair value of the hedged assets, liabilities or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings.

The ineffective portion of a derivative’s change in fair value is recognized in earnings. Recognized gains or losses on derivatives entered into to manage foreign exchange risk are included in foreign currency gains and losses in the consolidated statements of operations.

Concentration of credit risk

Revenue from the United States government, which was derived almost entirely from our G&I segment, totaled $4.4 billion (unaudited), or 62% of consolidated revenue, for the nine months ended September 30, 2006, $6.6 billion, or 65% of consolidated revenue, in 2005, $8.0 billion, or 67% of consolidated revenue, in 2004, and $4.2 billion, or 47% of consolidated revenue, in 2003. Revenue from the government of the United Kingdom totaled $758 million (unaudited), or 11% of consolidated revenue, for the nine months ended September 30, 2006. No other customers represented 10% or more of consolidated revenues.

Our receivables are generally not collateralized. At September 30, 2006, 62% (unaudited) of our total receivables are related to our United States government contracts. At December 31, 2005, 72% of our total receivables are related to our United States government contracts, primarily for projects in the Middle East. Receivables from the United States government at December 31, 2004 represented 71% of our total receivables.

Foreign currency translation

Our foreign entities for which the functional currency is the United States dollar translate monetary assets and liabilities at year-end exchange rates, and non-monetary items are translated at historical rates. Income and expense accounts are translated at the average rates in effect during the year, except for depreciation and expenses associated with non-monetary balance sheet accounts which are translated at historical rates. Foreign currency transaction gains or losses are recognized in income in the year of occurrence. Our foreign entities for

F-11

which the functional currency is not the United States dollar translate net assets at year-end rates and income and expense accounts at average exchange rates. Adjustments resulting from these translations are reflected in accumulated other comprehensive income in member’s equity.

Stock-based compensation

Halliburton has stock-based employee compensation plans in which certain KBR Holdings employees participate. We account for these plans, prior to December 31, 2005, under the recognition and measurement principles of Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations. No cost for stock options granted is reflected in net income, prior to December 31, 2005, as all options granted under these plans have an exercise price equal to the market value of the underlying common stock on the date of grant. In addition, no cost for Halliburton’s Employee Stock Purchase Plan (ESPP) is reflected in net income because it is not considered a compensatory plan.

The fair value of options at the date of grant was estimated using the Black-Scholes option pricing model. The weighted average assumptions and resulting fair values of options granted are as follows:

	Assumptions							Weighted Average Fair Value of Options Granted
	Risk-Free Interest Rate		Expected Dividend Yield		Expected Life (in years)	Expected Volatility
2005	4.3	%	0.8	%	5	51	%	$	9.97
2004	3.7	%	1.3	%	5	54	%	$	6.65
2003	3.2	%	1.9	%	5	59	%	$	5.42

Included in the pro forma compensation table below is the fair value of the ESPP shares. The fair value of these shares was estimated using the Black-Scholes option pricing model with the following assumptions for 2005.

	Offering Period
	January 1 to June 30			July 1 to December 31
Expected term (in years)		0.5			0.5
Expected volatility		26.93	%		30.46	%
Expected dividend yield		1.16	%		0.73	%
Risk-free interest rate		3.15	%		3.89	%
Weighted average grant-date fair value per share	$	4.15		$	5.50

The following table illustrates the effect on operations if we had applied the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” to stock-based employee compensation.

	Years ended December 31									Nine months ended September 30
Millions of dollars, except for per share data	2005			2004			2003			2005
										(unaudited)
Net income (loss), as reported	$	240		$	(303	)	$	(133	)	$	184
Total stock-based employee compensation expense determined under fair value based method for all awards (except restricted stock), net of related tax effects		(7	)		(8	)		(9	)		(5	)
Net income (loss), pro forma	$	233		$	(311	)	$	(142	)	$	179
Net income (loss) per share:
As reported	$	1.76		$	(2.23	)	$	(0.98	)	$	1.35
Pro forma	$	1.71		$	(2.29	)	$	(1.04	)	$	1.32

Halliburton also maintains a restricted stock program wherein the fair market value of the stock on the date of issuance is amortized and ratably charged to income over the period during which the restrictions lapse. KBR Holdings’ related expense, net of tax, reflected in net income as reported was $5 million in 2005, 2004, and 2003.

F-12

Effective January 1, 2006, we adopted the provision of Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standard No. 123 (revised 2004), “Share Based Payment” (SFAS No. 123(R)), using the modified prospective application. Accordingly, we will recognize compensation expense for all newly granted awards and awards modified, repurchased, or cancelled after January 1, 2006. Compensation expense for the unvested portion of awards that were outstanding as of January 1, 2006 will be recognized ratably over the remaining vesting period based on the fair value at date of grant as calculated using the Black-Scholes option pricing model. Compensation expense related to the unvested portion of these awards will be consistent with compensation expense included in our pro forma disclosure under SFAS No. 123. We will recognize compensation expense using the Black-Scholes pricing model for Halliburton’s ESPP beginning with the January 1, 2006 purchase period. See Note 17 for further detail on stock incentive plans, including 2006 interim financial information.

Note 4. Correction of prior period results

In connection with a review of our consolidated 50%-owned GTL project in Escravos, Nigeria, which is part of our E&C segment, we identified increases in the overall estimated cost to complete the project. As a result, during the second quarter of 2006, we identified a $148 million charge, before income taxes and minority interest. We determined that $16 million of the $148 million charge was based on information available to us but not reported as of March 31, 2006. Of the $16 million related to the prior periods, $9 million was related to the quarter ended March 31, 2006 and $7 million was related to the quarter ended December 31, 2005. We have restated our financial statements for the quarter ended March 31, 2006 to include the $9 million charge ($2.9 million after minority interest and tax) as well as for other unrelated, individually insignificant adjustments that subsequently became known to us. The $9 million adjustment related to Escravos had the effect of reducing income (loss) from continuing operations before income taxes and minority interest by $9 million, increasing benefit (provision) for income taxes by $1.6 million, increasing minority interest in net income of subsidiaries by $2.9 million (net of tax of $1.6 million), and reducing net income by $2.9 million for the quarter ended March 31, 2006. These other adjustments had the effect of reducing pretax income and net income by $2 million and $5 million for the quarter ended March 31, 2006, respectively. We recorded the remaining $7 million charge ($2.3 million after minority interest and income taxes) in the quarter ended June 30, 2006, since the amounts were not material to 2005 or 2006 based on our 2006 projections.

The estimated cost increases identified on this four-plus-year project in the second quarter of 2006 were $400 million which resulted in the $148 million charge. These cost increases were caused primarily by schedule delays related to civil unrest and security on the Escravos River, changes in the scope of the overall project, engineering and construction changes due to necessary front-end engineering design changes and increases in procurement cost due to project delays. The increased costs were identified as a result of our first check estimate process.

Of the $400 million increase in estimated project costs, higher forecasted engineering, procurement and project management hours increased costs by $63 million due to changes in the scope of the overall project and necessary front-end engineering design changes. Equipment and materials costs increased by $110 million due to changes in the scope of the overall project and the increased inflation cost caused by delays. Site construction costs increased by $227 million due to design changes, additional security costs due to civil unrest on the Escravos River and additional inflation caused by delays. The increases in the estimated future project costs were partially offset by estimated revenues associated with unapproved change orders of $200 million and the elimination of unrecognized profit of $52 million resulting in a $148 million loss on the project.

In addition to the above, we adjusted our member’s equity and other balance sheet accounts as of January 1, 2003 to reflect a correction to DML’s initial purchase price allocation from a 1997 acquisition. DML’s original purchase price allocation did not adequately record the prepaid pension asset that existed at the acquisition date. The corrected allocation of purchase price to the pension asset also had the effect of increasing negative goodwill. The resulting negative goodwill would have been reversed in 2002 upon the adoption of SFAS 141, “Business Combinations”, and reflected in “cumulative effect of change in an accounting principle, net”. Accordingly, our

F-13

January 1, 2003 consolidated balance sheet has been adjusted to increase member’s equity by $34 million, to increase prepaid pension asset by $72 million, to decrease property, plant, and equipment by $2 million, to decrease deferred taxes by $12 million and to increase minority interest by $24 million. Currency translation adjustments on the above resulted in increased equity at December 31, 2005, 2004 and 2003 of $9 million, $17 million and $8 million, respectively. We do not believe these adjustments have a material impact on balances previously reported.

We also reclassified deferred income taxes of $53 million and $58 million from current to non-current for the years ended December 31, 2005 and 2004, respectively.

The following table reflects the originally reported and restated amounts for the three months ended March 31, 2006 and as of March 31, 2006, respectively:

	Three months ended March 31, 2006
Millions of dollars, except for per share data	Restated			As previously reported
Services revenue	$	2,270		$	2,281
Equity in (losses) earnings of unconsolidated affiliates, net(a)		(24	)		—
Total revenues		2,246			2,281
Cost of services		2,169			2,195
Total operating costs and expenses		2,186			2,212
Operating income		60			69
Income (loss) from continuing operations before income taxes and minority interest		51			60
Minority interest in net income of subsidiaries		(5	)		(7	)
Income (loss) from continuing operations		20			27
Net income		26			33
Income per share:
Continuing operations	$	0.15		$	0.20
Net income	$	0.19		$	0.24

(a) Includes a reclassification of the $26 million impairment charge related to the Alice Springs-Darwin railroad project in Australia that was originally included in cost of services (see Note 19).

	At March 31, 2006
Millions of dollars	Restated			As previously reported
Assets:
Deferred income taxes	$	83		$	33
Total current assets		3,417			3,367
Property, plant, and equipment, net		455			457
Equity in and advances to related companies		275			273
Noncurrent deferred income taxes		109			148
Other assets		349			270
Total Assets		5,149			5,059
Liabilities:
Payable to related party		241			243
Advance billings on uncompleted contracts		750			739
Other current liabilities		108			105
Total current liabilities		2,510			2,498
Non current deferred tax liability		25			—
Total liabilities		3,716			3,679
Minority interest in consolidated subsidiaries		142			125
Member’s equity		1,418			1,392
Accumulated other comprehensive loss		(127	)		(137	)
Total member’s equity and accumulated other comprehensive loss		1,291			1,255
Total liabilities, minority interest and member’s equity and accumulated other comprehensive loss		5,149			5,059

F-14

The following table reflects the originally reported and restated amounts for the years ended December 31, 2005 and 2004:

	December 31, 2005						December 31, 2004
Millions of dollars	Restated			As previously reported			Restated			As previously reported
Assets:
Deferred income taxes	$	99		$	47		$	79		$	21
Other current assets		209			208			207			207
Total current assets		3,510			3,457			3,732			3,674
Property, plant, and equipment, net		444			446			467			469
Noncurrent deferred income taxes		124			165			116			170
Other assets		280			199			323			234
Total assets		5,182			5,091			5,487			5,396
Liabilities:
Noncurrent deferred tax liability		26			—			19			—
Total liabilities		3,783			3,757			4,560			4,541
Minority interest in consolidated subsidiaries		143			121			115			94
Member’s equity		1,384			1,350			—			—
Accumulated other comprehensive loss		(128	)		(137	)		(10	)		(27	)
Parent net investment		—			—			822			788
Total member’s equity and accumulated other comprehensive loss		1,256			1,213			812			761
Total liabilities, minority interest and member’s equity and accumulated other comprehensive loss		5,182			5,091			5,487			5,396

Note 5. Percentage-of-Completion Contracts

Revenue from contracts to provide construction, engineering, design, or similar services is reported on the percentage-of-completion method of accounting using measurements of progress toward completion appropriate for the work performed. Commonly used measurements are physical progress, man-hours, and costs incurred.

Billing practices for these projects are governed by the contract terms of each project based upon costs incurred, achievement of milestones, or pre-agreed schedules. Billings do not necessarily correlate with revenue recognized using the percentage-of-completion method of accounting. Billings in excess of recognized revenue are recorded in “Advance billings on uncompleted contracts.” When billings are less than recognized revenue, the difference is recorded in “Unbilled work on uncompleted contracts.” With the exception of claims and change orders that are in the process of being negotiated with customers, unbilled work is usually billed during normal billing processes following achievement of the contractual requirements.

Recording of profits and losses on percentage-of-completion contracts requires an estimate of the total profit or loss over the life of each contract. This estimate requires consideration of contract revenue, change orders and claims reduced by costs incurred, and estimated costs to complete. Anticipated losses on contracts are recorded in full in the period they become evident. Except in a limited number of projects that have significant uncertainties in the estimation of costs, we do not delay income recognition until projects have reached a specified percentage of completion. Generally, profits are recorded from the commencement date of the contract based upon the total estimated contract profit multiplied by the current percentage complete for the contract.

When calculating the amount of total profit or loss on a percentage-of-completion contract, we include unapproved claims as revenue when the collection is deemed probable based upon the four criteria for recognizing unapproved claims under the American Institute of Certified Public Accountants (AICPA) Statement of Position 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts.”

F-15

Including unapproved claims in this calculation increases the operating income (or reduces the operating loss) that would otherwise be recorded without consideration of the probable unapproved claims. Probable unapproved claims are recorded to the extent of costs incurred and include no profit element. In all cases, the probable unapproved claims included in determining contract profit or loss are less than the actual claim that will be or has been presented to the customer.

When recording the revenue and the associated unbilled receivable for unapproved claims, we only accrue an amount equal to the costs incurred related to probable unapproved claims. Therefore, the difference between the probable unapproved claims included in determining contract profit or loss and the probable unapproved claims accrued revenue recorded in unbilled work on uncompleted contracts relates to forecasted costs which have not yet been incurred. The amounts included in determining the profit or loss on contracts and the amounts booked to “Unbilled work on uncompleted contracts” for each period are as follows:

	Years ended December 31						Nine months ended September 30
Millions of dollars	2005		2004		2003		2006
							(unaudited)
Probable unapproved claims	$	175	$	182	$	233	$	185
Probable unapproved claims accrued revenue		172		182		225		182
Probable unapproved claims from unconsolidated related companies		92		45		10		93

As of September 30, 2006 (unaudited) and December 31, 2005, the probable unapproved claims, including those from unconsolidated related companies, related to seven and five contracts, respectively, most of which were complete or substantially complete. See Note 13 for a discussion of government contract claims, which are not included in the table above.

A significant portion of the probable unapproved claims as of September 30, 2006 (unaudited) and December 31, 2005 arose from three completed projects with Petroleos Mexicanos (PEMEX) ($148 million related to our consolidated entities and $45 million related to our unconsolidated related companies) that are currently subject to arbitration proceedings. In addition, we have “Other assets” of $64 million for previously approved services that are unpaid by PEMEX and have been included in these arbitration proceedings. Actual amounts we are seeking from PEMEX in the arbitration proceedings are in excess of these amounts. The arbitration proceedings are expected to extend through 2007. PEMEX has asserted unspecified counterclaims in each of the three arbitrations; however, it is premature based upon our current understanding of those counterclaims to make any assessment of their merits. As of December 31, 2005 and September 30, 2006 (unaudited), we had not accrued any amounts related to the counterclaims in the arbitrations.

We have contracts with probable unapproved claims accrued revenue that will likely not be settled within one year totaling $173 million (unaudited), $172 million and $153 million at September 30, 2006 and at December 31, 2005 and 2004, respectively, included in the table above, which are reflected as a non-current asset in “Unbilled work on uncompleted contracts” on the consolidated balance sheets. Other probable unapproved claims that we believe will be settled within one year, included in the table above, have been recorded as a current asset in “Unbilled work on uncompleted contracts” on the consolidated balance sheets.

Unapproved change orders

We have other contracts for which we are negotiating change orders to the contract scope and have agreed upon the scope of work but not the price. These change orders amounted to $298 million (unaudited), $52 million and $37 million at September 30, 2006 and at December 31, 2005 and 2004, respectively.

Included in the $298 million of change orders is $269 million for our consolidated 50%-owned gas-to-liquids project in Escravos, Nigeria. The increase in change orders from the second quarter of 2006 is due to

F-16

additional scope and work requested by our customer. In the second quarter of 2006, we recorded a $148 million charge, before income taxes and minority interest, related to this project. This charge was primarily attributable to increases in the overall estimated costs to complete the project. The project experienced delays relating to civil unrest and security on the Escravos River, near the project site, with additional delays resulting from scope changes and engineering and construction modifications. In October 2006, we reached agreement with our customer to fund $206 million of the $269 million in unapproved change orders. Portions of the remaining work now have a lower risk profile, particularly with respect to security and logistics. The project is approximately 38% complete as of September 30, 2006.

Unconsolidated related companies

Our unconsolidated related companies include probable unapproved claims as revenue to determine the amount of profit or loss for their contracts. Probable unapproved claims from our related companies are included in “Equity in and advances to related companies,” and our share totaled $93 million (unaudited), $92 million and $45 million at September 30, 2006 and at December 31, 2005 and 2004, respectively. In addition, our unconsolidated related companies are negotiating change orders to the contract scope where we have agreed upon the scope of work but not the price. Our share of these change orders totaled $4 million (unaudited), $5 million and $37 million at September 30, 2006 and at December 31, 2005 and 2004, respectively.

Note 6. Barracuda-Caratinga Project

In June 2000, we entered into a contract with Barracuda & Caratinga Leasing Company B.V., the project owner, to develop the Barracuda and Caratinga crude oilfields, which are located off the coast of Brazil. The Barracuda-Caratinga project consists of two converted supertankers, Barracuda and Caratinga, to be used as floating production, storage, and offloading units, commonly referred to as FPSOs. The project also includes 32 hydrocarbon production wells, 22 water injection wells, and all subsea flow lines, umbilicals, and risers necessary to connect the underwater wells to the FPSOs. At the beginning of the project, we received $300 million of advanced payments, which were used to fund the initial and continuing working capital for the project and were applied by Petrobras as a credit against the final invoices. The construction manager and project owner’s representative is Petrobras, the Brazilian national oil company. The original completion date for the Barracuda vessel was December 2003, and the original completion date for the Caratinga vessel was April 2004. The project has been significantly behind the original schedule, due in part to change orders from the project owner, and we have experienced significant losses related to this project. Currently, the Barracuda and Caratinga vessels are both fully operational.

We have recorded losses on the project of $15 million (unaudited), $8 million, $407 million, $238 million and $117 million for the nine months ended September 30, 2006 and for the years ended December 31, 2005, 2004, 2003 and 2002, respectively. The total losses recorded through September 30, 2006 of approximately $785 million (unaudited) are due to higher cost estimates, schedule extensions and certain warranty matters. Other contributing factors to these losses included a significant reduction in productivity during the latter stages of the project and rework that was required when we began to integrate the equipment modules onto the vessels. We have been in negotiations with the project owner since 2003 to settle the various issues that have arisen and have entered into several agreements to resolve those issues. As part of these settlements, we agreed to pay $22 million in liquidated damages. We funded approximately $34 million (unaudited) in cash shortfalls, net of revenue received, during the first nine months of 2006.

In April 2006, we executed an agreement with Petrobras that enabled us to achieve conclusion of the lenders’ reliability test and final acceptance of the FPSOs. These acceptances eliminated any further risk of liquidated damages being assessed but did not address the bolt arbitration discussed below. Our remaining obligation under the April 2006 agreement is primarily for warranty on the two vessels.

At Petrobras’ direction, we have replaced certain bolts located on the subsea flowlines that have failed through mid-November 2005, and we understand that additional bolts have failed thereafter, which have been

F-17

replaced by Petrobras. These failed bolts were identified by Petrobras when it conducted inspections of the bolts. The original design specification for the bolts was issued by Petrobras, and as such, we believe the cost resulting from any replacement is not our responsibility. Petrobras has indicated, however, that they do not agree with our conclusion. We have notified Petrobras that this matter is in dispute. We believe several possible solutions may exist, including replacement of the bolts. Estimates indicate that costs of these various solutions range up to $140 million. Should Petrobras instruct us to replace the subsea bolts, the prime contract terms and conditions regarding change orders require that Petrobras make progress payments of our reasonable costs incurred. Petrobras could, however, perform any replacement of the bolts and seek reimbursement from us. In March 2006, Petrobras notified us that they have submitted this matter to arbitration claiming $220 million plus interest for the cost of monitoring and replacing the defective stud bolts and, in addition, all of the costs and expenses of the arbitration including the cost of attorneys fees. We disagree with Petrobras’ claim since the bolts met Petrobras’ design specifications, and we do not believe there is any basis for the amount claimed by Petrobras. We intend to vigorously defend this matter and pursue recovery of the costs we have incurred to date through the arbitration process. Under the master separation agreement we will enter into with Halliburton in connection with this offering, Halliburton will agree, subject to certain conditions, to indemnify us and hold us harmless from all cash costs and expenses incurred as a result of the replacement of the subsea bolts. As of September 30, 2006 (unaudited) and December 31, 2005, we have not accrued any amounts related to this arbitration.

Note 7. Dispositions

Dulles Greenway Toll Road. As part of our infrastructure projects, we occasionally take an ownership interest in the constructed asset, with a view toward monetization of that ownership interest after the asset has been operating for some period and increases in value. In September 2005, we sold our 13% interest in a joint venture that owned the Dulles Greenway toll road in Virginia. We received $85 million in cash from the sale. Because of unfavorable early projections of traffic to support the toll road after it had opened, we wrote down our investment in the toll road in 1996. At the time of the sale, our investment had a net book value of zero, and therefore, we recorded the entire $85 million of cash proceeds to operating income in our G&I segment.

Production Services. In May 2006, we completed the sale of our Production Services group, which was part of our E&C segment. In connection with the sale, we received net proceeds of $265 million (unaudited). The sale of Production Services resulted in a pre-tax gain of approximately $120 million (unaudited), net of post-closing adjustments. See Note 25 (Discontinued Operations).

Note 8. Business Segment Information

We provide a wide range of services, but the management of our business is heavily focused on major projects within each of our reportable segments. At any given time, a relatively few number of projects and joint ventures represent a substantial part of our operations. We have organized our reporting structure based on similar products and services resulting in the following two segments.

Energy and Chemicals. Our E&C segment designs and constructs energy and petrochemical projects, including large, technically complex projects in remote locations around the world. Our expertise includes onshore and offshore oil and gas production facilities (including platforms, floating production and subsea facilities), onshore and offshore pipelines, LNG and GTL gas monetization facilities, refineries, petrochemical plants and Syngas. We provide a complete range of EPC-CS services, as well as program and project management, consulting and technology services.

TSKJ is a joint venture formed to design and construct large-scale projects in Nigeria. TSKJ’s members are Technip, SA of France, Snamprogetti Netherlands B.V., which is a subsidiary of Saipem SpA of Italy, JGC Corporation of Japan, and us, each of which has a 25% ownership interest. TSKJ has completed five LNG production facilities on Bonny Island, Nigeria and is currently working on a sixth such facility. We account for this investment using the equity method of accounting.

F-18

M. W. Kellogg Limited (MWKL) is a London-based joint venture that provides full EPC-CS related services for LNG, GTL, and onshore oil and gas projects. MWKL is owned 55% by us and 45% by JGC Corporation. We consolidate MWKL for financial accounting purposes.

Government and Infrastructure. Our G&I segment delivers on-demand support services across the full military mission cycle from contingency logistics and field support to operations and maintenance on military bases. In the civil infrastructure market, we operate in diverse sectors, including transportation, waste and water treatment, and facilities maintenance. We provide program and project management, contingency logistics, operations and maintenance, construction management, engineering, and other services to military and civilian branches of governments and private clients worldwide. We are also the majority owner of DML, which owns and operates Devonport Royal Dockyard, Western Europe’s largest naval dockyard complex.

Also included in this segment is the Alice Springs-Darwin railroad. The Alice Springs-Darwin railroad is a privately financed project that was formed in 2001 to build, operate and own the transcontinental railroad from Alice Springs to Darwin, Australia and has been granted a 50-year concession period by the Australian government. We provided engineering, procurement, and construction (EPC) services for the project and are the largest equity holder in the project with a 36.7% interest, with the remaining equity held by eleven other participants. We account for this investment using the equity method of accounting.

General corporate. General corporate represents assets not included in an operating segment and is primarily composed of cash and cash equivalents, tax assets, corporate accounts payable and reserves for employee benefits.

F-19

Other. Intersegment revenues and revenue between geographic areas are immaterial. Our equity in pretax earnings and losses of unconsolidated affiliates that are accounted for using the equity method of accounting is included in revenue and operating income of the applicable segment.

The tables below present information on our business segments.

Operations by Business Segment

	Years ended December 31									Nine months ended September 30
Millions of dollars	2005			2004			2003			2006			2005
										(unaudited)
Revenue:
Government and Infrastructure	$	8,136		$	9,409		$	5,474		$	5,427		$	6,006
Energy and Chemicals		2,010			2,497			3,389			1,697			1,416
Total	$	10,146		$	11,906		$	8,863		$	7,124		$	7,422
Operating income (loss):
Government and Infrastructure	$	332		$	82		$	189		$	139		$	277
Energy and Chemicals		123			(439	)		(253	)		(14	)		71
Total	$	455		$	(357	)	$	(64	)	$	125		$	348
Capital Expenditures:
Government and Infrastructure	$	33		$	41		$	46		$	11		$	24
Energy and Chemicals		4			9			5			15			2
General Corporate		39			24			12			24			24
Total	$	76		$	74		$	63		$	50		$	50
Equity in earnings (losses) of unconsolidated affiliates, net:
Government and Infrastructure	$	(26	)	$	(30	)	$	30		$	(65	)	$	(21	)
Energy and Chemicals		(34	)		(24	)		23			18			(33	)
Total	$	(60	)	$	(54	)	$	53		$	(47	)	$	(54	)
Depreciation and amortization:
Government and Infrastructure	$	32		$	27		$	21		$	15		$	26
Energy and Chemicals		9			11			17			5			7
General Corporate(a)		15			14			13			12			11
Total	$	56		$	52		$	51		$	32		$	44
Restructuring charge (Note 22):
Government and Infrastructure	$	—		$	12		$	—		$	—		$	—
Energy and Chemicals		1			28			—			—			1
Total	$	1		$	40		$	—		$	—		$	1

(a) Depreciation and amortization associated with corporate assets is allocated to our two operating segments for determining operating income or loss.

Within KBR Holdings, not all assets are associated with specific segments. Those assets specific to segments include receivables, inventories, certain identified property, plant and equity in and advances to related companies, and goodwill. The remaining assets, such as cash and the remaining property, plant and equipment, are considered to be shared among the segments.

F-20

Balance Sheet Information by Operating Segment

	December 31						September 30
Millions of dollars	2005		2004		2003		2006
							(unaudited)
Total assets:
Government and Infrastructure	$	2,708	$	3,387	$	2,907	$	2,251
Energy and Chemicals		1,776		1,767		2,159		2,008
General Corporate		491		133		263		1,483
Assets related to discontinued operations		207		200		203		—
Total	$	5,182	$	5,487	$	5,532	$	5,742
Equity in/advances to related companies:
Government and Infrastructure	$	158	$	131	$	80	$	58
Energy and Chemicals		106		192		242		211
General Corporate		13		—		—		12
Total	$	277	$	323	$	322	$	281

Revenue by country is determined based on the location of services provided. Long-lived assets by country are determined based on the location of tangible assets.

Selected Geographic Information

	Years ended December 31						Nine months ended September 30
Millions of dollars	2005		2004		2003		2006		2005
							(unaudited)
Revenue:
United States	$	1,273	$	1,222	$	1,655	$	1,071	$	823
Iraq		5,116		5,360		2,398		3,212		3,930
Kuwait		320		1,773		808		179		201
United Kingdom		1,142		995		963		811		839
Other Countries		2,295		2,556		3,039		1,851		1,629
Total	$	10,146	$	11,906	$	8,863	$	7,124	$	7,422

	December 31						September 30
	2005		2004		2003		2006
							(unaudited)
Long-Lived Assets:
United States	$	96	$	74	$	84	$	114
United Kingdom		286		382		339		272
Other Countries		62		11		8		95
Total	$	444	$	467	$	431	$	481

Note 9. Receivables

Our receivables are generally not collateralized. In May 2004, we entered into an agreement to sell, assign, and transfer the entire title and interest in specified United States government accounts receivable of KBR Holdings to a third party. The face value of the receivables sold to the third party is reflected as a reduction of accounts receivable in our consolidated balance sheets. The amount of receivables that could have been sold

F-21

under the agreement varied based on the amount of eligible receivables at any given time and other factors, and the maximum amount that could have been sold and outstanding under this agreement at any given time was $650 million. The total amount of receivables outstanding under this agreement as of December 31, 2004 was approximately $263 million. As of June 30, 2005, the total was $257 million, which was collected and the balance retired in the third quarter of 2005. As of December 31, 2005, these receivables were collected, the balance was retired, and the facility was terminated.

Note 10. Property, Plant and Equipment

Other than those assets that have been written down to their fair values due to impairment, property, plant, and equipment are reported at cost less accumulated depreciation, which is generally provided on the straight-line method over the estimated useful lives of the assets. Some assets are depreciated on accelerated methods. Accelerated depreciation methods are also used for tax purposes, wherever permitted. Upon sale or retirement of an asset, the related costs and accumulated depreciation are removed from the accounts and any gain or loss is recognized.

Property, plant and equipment are composed of the following:

	Estimated Useful Lives in Years	December 31						September 30
Millions of dollars		2005			2004			2006
								(unaudited)
Land	N/A	$	32		$	29		$	24
Buildings and property improvements	5-40		206			371			232
Machinery, equipment and other	3-25		511			430			569
Total			749			830			825
Less accumulated depreciation			(305	)		(363	)		(344	)
Net property, plant and equipment		$	444		$	467		$	481

Note 11. Resolution of Asbestos and Silica-Related Lawsuits

Kellogg Brown & Root, Inc., had been named as a defendant in a large number of asbestos- and silica-related lawsuits. The plaintiffs alleged injury primarily as a result of exposure to asbestos and silica in materials used in the construction and maintenance projects of Kellogg Brown & Root, Inc. or its subsidiaries.

In January 2005, DII Industries, LLC and certain of its affiliates, including certain subsidiaries of KBR Holdings resolved all open and future asbestos and silica claims and related insurance recoveries pursuant to prepackaged Chapter 11 proceedings. These proceedings commenced in December 2003 and the order confirming the plan of reorganization became final and non-appealable effective December 31, 2004. Under the plan of reorganization, all current and future asbestos and silica personal injury claims against DII Industries, LLC and its affiliates were channeled into trusts established for the benefit of asbestos and silica claimants.

Based upon this plan of reorganization and the final settlement agreement with claimants, approximately $44 million of the total settlement was allocated to KBR Holdings. This allocation was primarily based upon a product identification due diligence process undertaken to establish that the claimants’ injuries were based on exposure to products of DII Industries, LLC., Kellogg Brown & Root LLC and their subsidiaries or former businesses. This $44 million liability was recorded in 2002 and paid in January 2005.

F-22

Note 12. Debt

Long-term debt consists of the following:

	December 31				September 30
Millions of dollars	2005		2004		2006
					(unaudited)
Long-term debt	$	34	$	60	$	25
Less current portion		16		18		18
Noncurrent portion of long-term debt	$	18	$	42	$	7

Effective December 16, 2005, we entered into an unsecured $850 million five year revolving credit facility (Revolving Credit Facility) with Citibank, N.A., as agent, and a group of banks and institutional lenders. This facility, which extends through December 2010, serves to assist in providing our working capital and letters of credit to support our operations. Amounts drawn under the Revolving Credit Facility bear interest at variable rates based on a base rate (equal to the higher of Citibank’s publicly announced base rate, the Federal Funds rate plus 0.5% or a calculated rate based on the certificate of deposit rate) or the Eurodollar Rate, plus, in each case, the applicable margin. The applicable margin will vary based on our utilization spread. We are also charged an issuance fee for the issuance of letters of credit, a per annum charge for outstanding letters of credit and a per annum commitment fee for any unused portion of the credit line. The Revolving Credit Facility contains a number of covenants restricting, among other things, our ability to incur additional indebtedness and liens, sales of our assets and payment of dividends, as well as limiting the amount of investments we can make and payments to Halliburton under two subordinated intercompany notes. Furthermore, we are limited in the amount of additional letters of credit and other debt we can incur outside of the Revolving Credit Facility. Also, under the current provisions of the Revolving Credit Facility, it is an event of default if any person or two or more persons acting in concert, other than Halliburton or KBR, directly or indirectly acquire 25% or more of the combined voting power of all outstanding equity interests ordinarily entitled to vote in the election of directors of KBR Holdings, LLC, the borrower under the Revolving Credit Facility. The Revolving Credit Facility requires us to maintain certain financial ratios, as defined by the Revolving Credit Facility agreement, including a debt-to-capitalization ratio that does not exceed 55% until June 30, 2007 and 50% thereafter; a leverage ratio that does not exceed 3.5; and a fixed charge coverage ratio of at least 3.0. At September 30, 2006 (unaudited) and December 31, 2005, we were in compliance with these ratios and other covenants. As of September 30, 2006, there were $0 borrowings (unaudited) and $54 million (unaudited) in letters of credit outstanding under this facility. As of December 31, 2005, there were $0 borrowings and $25 million of letters of credit outstanding under the Revolving Credit Facility.

In connection with entering into the Revolving Credit Facility, we entered into two subordinated intercompany notes with Halliburton where accounts payable to Halliburton in the aggregate of $774 million were structured into two five-year subordinated notes payable to subsidiaries of Halliburton as further described in Note 20.

On November 29, 2002, DML entered into a credit facility denominated in British pounds with Bank of Scotland, HSBC Bank and The Royal Bank of Scotland totaling $138 million. The U.S. dollar amounts presented were converted using published exchange rates for the applicable periods. This facility, which is non-recourse to us, matures in September 2009, provides for a $133 million term loan facility and a $19 million revolving credit facility. The interest rate for both the term loan and revolving credit facility is variable based on an adjusted LIBOR rate and DML must maintain certain financial covenants. At September 30, 2006, there was $22 million (unaudited) outstanding under this term loan facility. At December 31, 2005, DML had $31 million outstanding under the term loan facility, which is payable in quarterly installments through September 2009. At September 30, 2006 (unaudited) and December 31, 2005, there were no amounts outstanding under the revolving credit facility. In addition, DML had $3 million and $3 million of other long-term debt outstanding at

F-23

September 30, 2006 (unaudited) and December 31, 2005, respectively. The interest rate on this debt is variable and payments are due quarterly through October 2008. DML also has a $28 million overdraft facility for which there was no outstanding balance at September 30, 2006 (unaudited) and December 31, 2005.

On June 6, 2005, our 55%-owned subsidiary, M.W. Kellogg Limited, entered into a credit facility with Barclays Bank totaling $26 million. The U.S. dollar amounts presented were converted using published exchange rates for the applicable periods. This facility, which is non-recourse to us is primarily used for bonding, guarantee, and other indemnity purposes. Fees are assessed monthly in the amount of 0.25% per annum of the average outstanding balance. Amounts outstanding under the facility are payable upon demand and the lender may require cash collateral for any amounts outstanding under the facility. At September 30, 2006 (unaudited) and December 31, 2005, there was $2 million of bank guarantees outstanding under the facility.

Maturities

At December 31, 2005, our debt matures as follows: $16 million in 2006; $16 million in 2007; and $2 million in 2008.

Note 13. United States Government Contract Work

We provide substantial work under our government contracts to the United States Department of Defense (DoD) and other governmental agencies. These contracts include our worldwide United States Army logistics contracts, known as LogCAP, and contracts to rebuild Iraq’s petroleum industry, such as the PCO Oil South. Our government services revenue related to Iraq totaled approximately $3.6 billion (unaudited), $5.4 billion, $7.1 billion and $3.5 billion for the nine months ended September 30, 2006 and for the years ended December 31, 2005, 2004 and 2003, respectively.

Given the demands of working in Iraq and elsewhere for the United States government, we expect that from time to time we will have disagreements or experience performance issues with the various government customers for which we work. If performance issues arise under any of our government contracts, the government retains the right to pursue remedies, which could include threatened termination or termination, under any affected contract. If any contract were so terminated, we may not receive award fees under the affected contract, and our ability to secure future contracts could be adversely affected although we would receive payment for amounts owed for our allowable costs under cost-reimbursable contracts. Other remedies that could be sought by our government customers for any improper activities or performance issues include sanctions such as forfeiture of profits, suspension of payments, fines and suspensions or debarment from doing business with the government. Further, the negative publicity that could arise from disagreements with our customers or sanctions as a result thereof could have an adverse effect on our reputation in the industry, reduce our ability to compete for new contracts, and may also have a material adverse effect on our business, financial condition, results of operations and cash flow.

DCAA audit issues

Our operations under United States government contracts are regularly reviewed and audited by the Defense Contract Audit Agency (DCAA) and other governmental agencies. The DCAA serves in an advisory role to our customer. When issues are found during the governmental agency audit process, these issues are typically discussed and reviewed with us. The DCAA then issues an audit report with its recommendations to our customer’s contracting officer. In the case of management systems and other contract administrative issues, the contracting officer is generally with the Defense Contract Management Agency (DCMA). We then work with our customer to resolve the issues noted in the audit report. If our customer or a government auditor finds that we improperly charged any costs to a contract, these costs are not reimbursable or, if already reimbursed, the cost must be refunded to the customer. Our revenue recorded for government contract work is reduced for our estimate of costs that may be categorized as disputed or unallowable as a result of cost overruns or the audit process.

F-24

Dining facilities (DFACs). During 2003, the DCAA raised issues related to our invoicing to the Army Materiel Command (AMC) for food services for soldiers and supporting civilian personnel in Iraq and Kuwait. During 2004, we received notice from the DCAA that it was recommending withholding 19.35% of our DFACs billings relating to subcontracts entered into prior to February 2004 until it completed its audits. Approximately $213 million had been withheld as of March 31, 2005. Subsequent to February 2004, we renegotiated our DFACs subcontracts to address the specific issues raised by the DCAA and advised the AMC and the DCAA of the new terms of the arrangements. We have had no objection by the government to the terms and conditions associated with our new DFACs subcontract agreements. On March 31, 2005, we reached an agreement with the AMC regarding the costs associated with the DFACs subcontractors, which totaled approximately $1.2 billion. Under the terms of the agreement, the AMC agreed to the DFACs subcontractor costs except for $55 million, which it retained from the $213 million previously withheld amount. In the second quarter of 2005, the government released the funds to KBR Holdings.

During 2005, we reached settlement agreements with all but one subcontractor, Eurest Support Services (Cyprus) International Limited, or ESS, and resolved $44 million of the $55 million disallowed DFACs subcontractor costs. Accordingly, we paid the amounts due to all subcontractors with whom settlements have been finalized, in accordance with the agreement reached with the government, but withheld the remaining $11 million pending settlement with ESS. On September 30, 2005, ESS filed suit against us alleging various claims associated with its performance as a subcontractor in conjunction with our LogCAP contract in Iraq. The case was settled during the first quarter of 2006 without material impact to us.

Recently, the DCAA has raised questions regarding $95 million of costs related to DFACs in Iraq. We have responded to the DCAA that our costs are reasonable.

Fuel. In December 2003, the DCAA issued a preliminary audit report that alleged that we may have overcharged the Department of Defense by $61 million in importing fuel into Iraq. The DCAA questioned costs associated with fuel purchases made in Kuwait that were more expensive than buying and transporting fuel from Turkey. We responded that we had maintained close coordination of the fuel mission with the Army Corps of Engineers (COE), which was our customer and oversaw the project, throughout the life of the task orders and that the COE had directed us to use the Kuwait sources. After a review, the COE concluded that we obtained a fair price for the fuel. Nonetheless, Department of Defense officials referred the matter to the agency’s inspector general, which we understand commenced an investigation.

The DCAA issued various audit reports related to task orders under the RIO contract that reported $275 million in questioned and unsupported costs. The majority of these costs were associated with the humanitarian fuel mission. In these reports, the DCAA compared fuel costs we incurred during the duration of the RIO contract in 2003 and early 2004 to fuel prices obtained by the Defense Energy Supply Center (DESC) in April 2004 when the fuel mission was transferred to that agency. During the fourth quarter of 2005, we resolved all outstanding issues related to the RIO contract with our customer and settled the remaining questioned costs under this contract.

Laundry. Prior to the fourth quarter of 2005, we received notice from the DCAA that it recommended withholding $18 million of subcontract costs related to the laundry service for one task order in southern Iraq for which it believes we and our subcontractors have not provided adequate levels of documentation supporting the quantity of the services provided. In the fourth quarter of 2005, the DCAA issued a notice to disallow costs totaling approximately $12 million, releasing $6 million of amounts previously withheld. In the second quarter of 2006, we successfully resolved this matter with the DCAA and received payment of the remaining $12 million.

Containers. In June 2005, the DCAA recommended withholding certain costs associated with providing containerized housing for soldiers and supporting civilian personnel in Iraq. Approximately $55 million (unaudited) has been withheld as of September 30, 2006 and December 31, 2005. The DCAA had recommended that the costs be withheld pending receipt of additional explanation or documentation to support the subcontract costs. Of the withheld

F-25

amounts, $17 million (unaudited) has been withheld from our subcontractors. We will continue working with the government and our subcontractors to resolve this issue.

Other issues. The DCAA is continuously performing audits of costs incurred for the foregoing and other services provided by us under our government contracts. During these audits, there are likely to be questions raised by the DCAA about the reasonableness or allowability of certain costs or the quality or quantity of supporting documentation. The DCAA might recommend withholding some portion of the questioned costs while the issues are being resolved with our customer. Because of the scrutiny involving our government contracts operations, issues raised by the DCAA may be more difficult to resolve. We do not believe any potential withholding will have a significant or sustained impact on our liquidity.

Investigations

In early 2004, our internal audit function identified a potential $4 million overbilling by La Nouvelle Trading & Contracting Company, W.L.L. (La Nouvelle), one of our subcontractors under the LogCAP contract in Iraq, for services performed during 2003. In accordance with our policy and government regulation, the potential overcharge was reported to the DoD Inspector General’s office as well as to our customer, the AMC. We reimbursed the AMC to cover that potential overbilling while we conducted our own investigation into the matter. We subsequently terminated La Nouvelle’s services under the LogCAP contract. In October 2004, La Nouvelle filed suit against us alleging $224 million in damages as a result of its termination. During the second quarter of 2005, this suit was settled without material impact to us. See Note 14 for further discussion.

In the first quarter of 2005, the United States Department of Justice (DOJ) issued two indictments associated with these issues against a former KBR Holdings procurement manager and a manager of La Nouvelle.

In October 2004, we reported to the DoD Inspector General’s office that two former employees in Kuwait may have had inappropriate contacts with individuals employed by or affiliated with two third party subcontractors prior to the award of the subcontracts. The Inspector General’s office may investigate whether these two employees may have solicited and/or accepted payments from those third party subcontractors while they were employed by us.

In October 2004, a civilian contracting official in the Army Corps of Engineers (COE) asked for a review of the process used by the COE for awarding some of the contracts to us. We understand that the DoD Inspector General’s office may review the issues involved.

We understand that the DOJ, an Assistant United States Attorney based in Illinois, and others are investigating these and other individually immaterial matters we have reported relating to our government contract work in Iraq. If criminal wrongdoing were found, criminal penalties could range up to the greater of $500,000 in fines per count for a corporation or twice the gross pecuniary gain or loss. We also understand that current and former employees of KBR Holdings have received subpoenas and have given or may give grand jury testimony related to some of these matters.

Withholding of payments

During 2004, the AMC issued a determination that a particular contract clause could cause it to withhold 15% from our invoices until our task orders under the LogCAP contract are definitized. The AMC delayed implementation of this withholding pending further review. During the third quarter of 2004, we and the AMC identified three senior management teams to facilitate negotiation under the LogCAP task orders, and these teams concluded their effort by successfully negotiating the final outstanding task order definitization on March 31, 2005. This made us current with regard to definitization of historical LogCAP task orders and eliminated the potential 15% withholding issue under the LogCAP contract.

Upon the completion of the RIO contract definitization process, the COE released all previously withheld amounts related to this contract in the fourth quarter of 2005.

F-26

The PCO Oil South project has definitized substantially all of the task orders, and we have collected a significant portion of any amounts previously withheld. We do not believe the withholding will have a significant or sustained impact on our liquidity because the withholding is temporary, and the definitization process is substantially complete. The amount of payments withheld by the client under the PCO Oil South project was less than $1 million (unaudited) at September 30, 2006 and $1.1 million and $1.5 million at December 31, 2005 and 2004, respectively. The PCO Oil South contract provides the customer the right to withhold payment of 15% of the amount billed, thus remitting a net of 85% of costs incurred until a task order is definitized. Once a task order is definitized, this contract provides that 100% of the costs billed will be paid pursuant to the “Allowable Cost and Payment Clause” of the contract.

We are working diligently with our customers to proceed with significant new work only after we have a fully definitized task order, which should limit withholdings on future task orders for all government contracts.

We had unapproved claims totaling $45 million (unaudited) at September 30, 2006 for the LogCAP contract and $69 million at December 31, 2005 for the LogCAP and PCO Oil South contracts. Of the $45 million of unapproved claims outstanding at September 30, 2006, $44 million are considered to be probable of collection and have been recognized as revenue. The remaining $1 million of unapproved claims are not considered probable of collection and have not been recognized as revenue. Similarly, of the $69 million of unapproved claims outstanding at December 31, 2005, $57 million were considered to be probable of collection and have been recognized as revenue. The remaining $12 million of unapproved claims were not considered probable of collection and have not been recognized as revenue. These unapproved claims related to contracts where our costs have exceeded the customer’s funded value of the task order.

In addition, as of September 30, 2006, we had incurred approximately $136 million (unaudited) of costs under the LogCAP III contract that could not be billed to the government due to lack of appropriate funding on various task orders. These amounts were associated with task orders that had sufficient funding in total, but the funding was not appropriately allocated within the task order. We are in the process of preparing a request for a reallocation of funding to be submitted to the client for negotiation. The project anticipates the negotiations will result in an appropriate distribution of funding by the client and collection of the full amounts due.

DCMA system reviews

Report on estimating system. In December 2004, the DCMA granted continued approval of our estimating system, stating that our estimating system is “acceptable with corrective action.” We are in the process of completing these corrective actions. Specifically, based on the unprecedented level of support that our employees are providing the military in Iraq, Kuwait, and Afghanistan, we needed to update our estimating policies and procedures to make them better suited to such contingency situations. Additionally, we have completed our development of a detailed training program and have made it available to all estimating personnel to ensure that employees are adequately prepared to deal with the challenges and unique circumstances associated with a contingency operation.

Report on purchasing system. As a result of a Contractor Purchasing System Review by the DCMA during the fourth quarter of 2005, the DCMA granted the continued approval of our government contract purchasing system. The DCMA’s October 2005 approval letter stated that our purchasing system’s policies and practices are “effective and efficient, and provide adequate protection of the Government’s interest.”

Report on accounting system. We received two draft reports on our accounting system, which raised various issues and questions. We have responded to the points raised by the DCAA, but this review remains open. Once the DCAA finalizes the report, it will be submitted to the DCMA, who will make a determination of the adequacy of our accounting systems for government contracting.

F-27

The Balkans

We have had inquiries in the past by the DCAA and the civil fraud division of the DOJ into possible overcharges for work performed during 1996 through 2000 under a contract in the Balkans, for which inquiry has not yet been completed by the DOJ. Based on an internal investigation, we credited our customer approximately $2 million during 2000 and 2001 related to our work in the Balkans as a result of billings for which support was not readily available. We believe that the preliminary DOJ inquiry relates to potential overcharges in connection with a part of the Balkans contract under which approximately $100 million in work was done. We believe that any allegations of overcharges would be without merit. Amounts accrued related to this matter as of September 30, 2006 (unaudited) are not material.

McBride qui tam suit

In September 2006, we became aware of a qui tam action filed against us by a former employee alleging various wrongdoings in the form of overbillings of our customer on the LogCAP III contract. This case was originally filed pending the government’s decision whether or not to participate in the suit. In June 2006, the government formally declined to participate. The principal allegations are that our compensation for the provision of Morale, Welfare and Recreation (MWR) facilities under LogCAP III is based on the volume of usage of those facilities and that we deliberately overstated that usage. In accordance with the contract, we charged our customer based on actual cost, not based on the number of users. It was also alleged that, during the period from November 2004 into mid-December 2004, we continued to bill the customer for lunches, although the dining facility was closed and not serving lunches. There are also allegations regarding housing containers and our provision of services to our employees and contractors. Our investigation is in its earliest stages. However, we believe the allegations to be without merit, and we intend to vigorously defend this action. As of September 30, 2006, we had accrued $0 in connection with this matter.

Note 14. Other Commitments and Contingencies

Foreign Corrupt Practices Act investigations

The SEC is conducting a formal investigation into whether improper payments were made to government officials in Nigeria through the use of agents or subcontractors in connection with the construction and subsequent expansion by TSKJ of a multibillion dollar natural gas liquefaction complex and related facilities at Bonny Island in Rivers State, Nigeria. The DOJ is also conducting a related criminal investigation. The SEC has also issued subpoenas seeking information, which we are furnishing, regarding current and former agents used in connection with multiple projects, including current and prior projects, over the past 20 years located both in and outside of Nigeria in which we, The M.W. Kellogg Company, M.W. Kellogg Limited or their or our joint ventures are or were participants. In September 2006, the SEC requested that we enter into a tolling agreement with respect to its investigation. We anticipate that we will enter into an appropriate tolling agreement with the SEC.

TSKJ is a private limited liability company registered in Madeira, Portugal whose members are Technip SA of France, Snamprogetti Netherlands B.V. (a subsidiary of Saipem SpA of Italy), JGC Corporation of Japan, and Kellogg Brown & Root LLC (a subsidiary of ours and successor to The M.W. Kellogg Company), each of which had an approximately 25% interest in the venture at September 30, 2006. TSKJ and other similarly owned entities entered into various contracts to build and expand the liquefied natural gas project for Nigeria LNG Limited, which is owned by the Nigerian National Petroleum Corporation, Shell Gas B.V., Cleag Limited (an affiliate of Total), and Agip International B.V. (an affiliate of ENI SpA of Italy). M.W. Kellogg Limited is a joint venture in which we had a 55% interest at September 30, 2006, and M.W. Kellogg Limited and The M.W.

F-28

Kellogg Company were subsidiaries of Dresser Industries before Halliburton’s 1998 acquisition of Dresser Industries. The M.W. Kellogg Company was later merged with a Halliburton subsidiary to form Kellogg Brown & Root, one of our subsidiaries.

The SEC and the DOJ have been reviewing these matters in light of the requirements of the FCPA. Halliburton has been cooperating with the SEC and DOJ investigations and with other investigations in France, Nigeria and Switzerland into the Bonny Island project. Halliburton’s Board of Directors has appointed a committee of independent directors to oversee and direct the FCPA investigations. Halliburton, acting through its committee of independent directors, will continue to oversee and direct the investigations after the offering, and our directors that are independent of Halliburton and us, acting as a committee of our board of directors, will monitor the continuing investigations directed by Halliburton.

The matters under investigation relating to the Bonny Island project cover an extended period of time (in some cases significantly before Halliburton’s 1998 acquisition of Dresser Industries and continuing through the current time period). We have produced documents to the SEC and the DOJ both voluntarily and pursuant to company subpoenas from the files of numerous officers and employees of Halliburton and KBR, including many current and former executives of Halliburton and KBR, and we are making our employees available to the SEC and the DOJ for interviews. In addition, we understand that the SEC has issued a subpoena to A. Jack Stanley, who formerly served as a consultant and chairman of Kellogg Brown & Root and to others, including certain of our current and former employees, former executive officers and at least one of our subcontractors. We further understand that the DOJ issued subpoenas for the purpose of obtaining information abroad, and we understand that other partners in TSKJ have provided information to the DOJ and the SEC with respect to the investigations, either voluntarily or under subpoenas.

The SEC and DOJ investigations include an examination of whether TSKJ’s engagement of Tri-Star Investments as an agent and a Japanese trading company as a subcontractor to provide services to TSKJ were utilized to make improper payments to Nigerian government officials. In connection with the Bonny Island project, TSKJ entered into a series of agency agreements, including with Tri-Star Investments, of which Jeffrey Tesler is a principal, commencing in 1995 and a series of subcontracts with a Japanese trading company commencing in 1996. We understand that a French magistrate has officially placed Mr. Tesler under investigation for corruption of a foreign public official. In Nigeria, a legislative committee of the National Assembly and the Economic and Financial Crimes Commission, which is organized as part of the executive branch of the government, are also investigating these matters. Our representatives have met with the French magistrate and Nigerian officials. In October 2004, representatives of TSKJ voluntarily testified before the Nigerian legislative committee. We are also aware that the Serious Frauds Office in the United Kingdom is conducting an investigation relating to the activities of TSKJ.

We notified the other owners of TSKJ of information provided by the investigations and asked each of them to conduct their own investigation. TSKJ has suspended the receipt of services from and payments to Tri-Star Investments and the Japanese trading company and has considered instituting legal proceedings to declare all agency agreements with Tri-Star Investments terminated and to recover all amounts previously paid under those agreements. In February 2005, TSKJ notified the Attorney General of Nigeria that TSKJ would not oppose the Attorney General’s efforts to have sums of money held on deposit in accounts of Tri-Star Investments in banks in Switzerland transferred to Nigeria and to have the legal ownership of such sums determined in the Nigerian courts.

As a result of these investigations, information has been uncovered suggesting that, commencing at least 10 years ago, members of TSKJ planned payments to Nigerian officials. We have reason to believe, based on the ongoing investigations, that payments may have been made by agents of TSKJ to Nigerian officials. In addition, information recently uncovered suggests that, prior to 1998, plans may have been made by employees of The M.W. Kellogg Company to make payments to government officials in connection with the pursuit of a number of other projects in countries outside of Nigeria. Certain of these employees are current employees or a consultant of ours. As a result, the consultant may be placed on suspension, and Halliburton’s pending investigation will include a review of the actions of these employees.

F-29

In June 2004, all relationships with Mr. Stanley and another consultant and former employee of M.W. Kellogg Limited were terminated. The termination of Mr. Stanley occurred because of violations of Halliburton’s Code of Business Conduct that allegedly involved the receipt of improper personal benefits from Mr. Tesler in connection with TSKJ’s construction of the Bonny Island project.

In 2006, Halliburton suspended the services of another agent who, until such suspension, had worked for us outside of Nigeria on several current projects and on numerous older projects going back to the early 1980s. The suspension will continue until such time, if ever, as Halliburton can satisfy itself regarding the agent’s compliance with applicable law and Halliburton’s Code of Business Conduct. In addition, Halliburton is actively reviewing the compliance of an additional agent on a separate current Nigerian project with respect to which Halliburton has recently received from a joint venture partner on that project allegations of wrongful payments made by such agent.

If violations of the FCPA were found, a person or entity found in violation could be subject to fines, civil penalties of up to $500,000 per violation, equitable remedies, including disgorgement (if applicable) generally of profits, including prejudgment interest on such profits, causally connected to the violation, and injunctive relief. Criminal penalties could range up to the greater of $2 million per violation or twice the gross pecuniary gain or loss from the violation, which could be substantially greater than $2 million per violation. It is possible that both the SEC and the DOJ could assert that there have been multiple violations, which could lead to multiple fines. The amount of any fines or monetary penalties which could be assessed would depend on, among other factors, the findings regarding the amount, timing, nature and scope of any improper payments, whether any such payments were authorized by or made with knowledge of us or our affiliates, the amount of gross pecuniary gain or loss involved, and the level of cooperation provided the government authorities during the investigations. Agreed dispositions of these types of violations also frequently result in an acknowledgement of wrongdoing by the entity and the appointment of a monitor on terms negotiated with the SEC and the DOJ to review and monitor current and future business practices, including the retention of agents, with the goal of assuring compliance with the FCPA. Other potential consequences could be significant and include suspension or debarment of our ability to contract with governmental agencies of the United States and of foreign countries. During 2005, we had revenue of approximately $6.6 billion from our government contracts work with agencies of the United States or state or local governments. If necessary, we would seek to obtain administrative agreements or waivers from the DoD and other agencies to avoid suspension or debarment. Suspension or debarment from the government contracts business would have a material adverse effect on our business, results of operations, and cash flow.

These investigations could also result in (1) third-party claims against us, which may include claims for special, indirect, derivative or consequential damages, (2) damage to our business or reputation, (3) loss of, or adverse effect on, cash flow, assets, goodwill, results of operations, business, prospects, profits or business value, (4) adverse consequences on our ability to obtain or continue financing for current or future projects and/or (5) claims by directors, officers, employees, affiliates, advisors, attorneys, agents, debt holders or other interest holders or constituents of us or our subsidiaries. In this connection, we understand that the government of Nigeria gave notice in 2004 to the French magistrate of a civil claim as an injured party in that proceeding. We are not aware of any further developments with respect to this claim. In addition, we could incur costs and expenses for any monitor required by or agreed to with a governmental authority to review our continued compliance with FCPA law.

The investigations by the SEC and DOJ and foreign governmental authorities are continuing. We do not expect these investigations to be concluded prior to conclusion of this offering or in the immediate future. The various governmental authorities could conclude that violations of the FCPA or applicable analogous foreign laws have occurred with respect to the Bonny Island project and other projects in or outside of Nigeria. In such circumstances, the resolution or disposition of these matters, even after taking into account the indemnity from Halliburton with respect to any liabilities for fines or other monetary penalties or direct monetary damages, including disgorgement, that may be assessed by the U.S. and certain foreign governments or governmental agencies against us or our greater than 50%-owned subsidiaries could have a material adverse effect on our business, prospects, results or operations, financial condition and cash flow.

F-30

As of September 30, 2006 (unaudited) and December 31, 2005, we are unable to estimate an amount of probable loss or a range of possible loss related to these matters.

Halliburton has incurred $9 million (unaudited), $9 million, $8 million and $0 for the nine months ended September 30, 2006 and for the years ended December 31, 2005, 2004 and 2003, respectively, for expenses relating to the FCPA and bidding practices investigations. In 2004, $1.5 million of the $8 million incurred was charged to us. Except for this $1.5 million, Halliburton has not charged these costs to us. These expenses were incurred for the benefit of both Halliburton and us, and we and Halliburton have no reasonable basis for allocating these costs between Halliburton and us.

Bidding practices investigation

In connection with the investigation into payments relating to the Bonny Island project in Nigeria, information has been uncovered suggesting that Mr. Stanley and other former employees may have engaged in coordinated bidding with one or more competitors on certain foreign construction projects, and that such coordination possibly began as early as the mid-1980s.

On the basis of this information, Halliburton and the DOJ have broadened their investigations to determine the nature and extent of any improper bidding practices, whether such conduct violated United States antitrust laws, and whether former employees may have received payments in connection with bidding practices on some foreign projects.

If violations of applicable United States antitrust laws occurred, the range of possible penalties includes criminal fines, which could range up to the greater of $10 million in fines per count for a corporation, or twice the gross pecuniary gain or loss, and treble civil damages in favor of any persons financially injured by such violations. Criminal prosecutions under applicable laws of relevant foreign jurisdictions and civil claims by or relationship issues with customers are also possible.

The results of these investigations may have a material adverse effect on our business and results of operations.

As of September 30, 2006 (unaudited) and December 31, 2005, we are unable to estimate an amount of probable loss or range of possible loss related to these matters.

Possible Algerian investigation

We believe that an investigation by a magistrate or a public prosecutor in Algeria may be pending with respect to sole source contracts awarded to Brown & Root-Condor Spa, a joint venture among Kellogg Brown & Root Ltd UK, Centre de Recherche Nuclear de Draria and Holding Services para Petroliers Spa. We had a 49% interest in this joint venture as of September 30, 2006.

Improper payments reported to the SEC

During the second quarter of 2002, we reported to the SEC that one of our foreign subsidiaries operating in Nigeria made improper payments of approximately $2.4 million to entities owned by a Nigerian national who held himself out as a tax consultant, when in fact he was an employee of a local tax authority. The payments were made to obtain favorable tax treatment and clearly violated our Code of Business Conduct and our internal control procedures. The payments were discovered during our audit of the foreign subsidiary. We conducted an investigation assisted by outside legal counsel, and, based on the findings of the investigation, we terminated several employees. None of our senior officers were involved. We are cooperating with the SEC in its review of the matter. We took further action to ensure that our foreign subsidiary paid all taxes owed in Nigeria. A preliminary assessment of approximately $4 million was issued by the Nigerian tax authorities in the second quarter of 2003. We are cooperating with the Nigerian tax authorities to determine the total amount due as quickly as possible.

F-31

Litigation brought by La Nouvelle

In October 2004, La Nouvelle, a subcontractor to us in connection with our government services work in Kuwait and Iraq, filed suit alleging breach of contract and interference with contractual and business relations. The relief sought included $224 million in damages for breach of contract, which included $34 million for wrongful interference and an unspecified sum for consequential and punitive damages. The dispute arose from our termination of a master agreement pursuant to which La Nouvelle operated a number of dining facilities in Kuwait and Iraq and the replacement of La Nouvelle with ESS, which, prior to La Nouvelle’s termination, had served as La Nouvelle’s subcontractor. In addition, La Nouvelle alleged that we wrongfully withheld from La Nouvelle certain sums due La Nouvelle under its various subcontracts. During the second quarter of 2005, this litigation was settled without material impact to us.

Iraq overtime litigation

During the fourth quarter of 2005, a group of present and former employees working on the LogCAP contract in Iraq and elsewhere filed a class action lawsuit alleging that KBR Holdings wrongfully failed to pay time and a half for hours worked in excess of 40 per work week and that “uplift” pay, consisting of a foreign service bonus, an area differential, and danger pay, was only applied to the first 40 hours worked in any work week. The class alleged by plaintiffs consists of all current and former employees on the LogCAP contract from December 2001 to present. The basis of plaintiffs’ claims is their assertion that they are intended third party beneficiaries of the LogCAP contract and that the LogCAP contract obligated KBR Holdings to pay time and a half for all overtime

hours. We have moved to dismiss the case on a number of bases. On September 26, 2006, the court granted the motion to dismiss insofar as claims for overtime pay and “uplift” pay are concerned, leaving only a contractual claim for miscalculation of employees’ pay. It is premature to assess the probability of an adverse result on that remaining claim. However, because the LogCAP contract is cost-reimbursable, we believe that we could charge any adverse award to the customer. On October 13, 2006, the plaintiffs filed their notice of appeal. It is our intention to vigorously defend the appeal and the judgment of dismissal. As of September 30, 2006, we had not accrued any amounts related to this matter.

Environmental

We are subject to numerous environmental, legal and regulatory requirements related to our operations worldwide. In the United States, these laws and regulations include, among others:

• the Comprehensive Environmental Response, Compensation and Liability Act;

• the Resources Conservation and Recovery Act;

• the Clean Air Act;

• the Federal Water Pollution Control Act; and

• the Toxic Substances Control Act.

In addition to the federal laws and regulations, states and other countries where we do business often have numerous environmental, legal and regulatory requirements by which we must abide. We evaluate and address the environmental impact of our operations by assessing and remediating contaminated properties in order to avoid future liabilities and comply with environmental, legal and regulatory requirements. On occasion, we are involved in specific environmental litigation and claims, including the remediation of properties we own or have operated as well as efforts to meet or correct compliance-related matters. Our Health, Safety and Environment group has several programs in place to maintain environmental leadership and to prevent the occurrence of environmental contamination. We do not expect costs related to environmental matters will have a material adverse effect on our consolidated financial position or our results of operations.

F-32

Letters of credit

In connection with certain projects, we are required to provide letters of credit, surety bonds or other financial and performance guarantees to our customers. As of September 30, 2006, we had approximately $724 million (unaudited) in letters of credit and financial guarantees outstanding, of which, $54 million (unaudited) were issued under our Revolving Credit Facility. Over $646 million (unaudited) of the remaining $670 million (unaudited) were issued under various facilities and are irrevocably and unconditionally guaranteed by Halliburton. Of the total outstanding, approximately $551 million (unaudited) relate to our joint venture operations, including $159 million (unaudited) issued in connection with our Allenby & Connaught project. In addition, as of September 30, 2006 there were approximately $15 million (unaudited) of performance letters of credit issued in connection with the Barracuda-Caratinga project. The remaining $158 million (unaudited) of outstanding letters of credit relate to various other projects. At September 30, 2006, $252 million (unaudited) of the $724 million (unaudited) outstanding letters of credit have triggering events that would entitle a bank to require cash collateralization.

In addition, Halliburton has guaranteed surety bonds and provided direct guarantees primarily related to our performance. We expect to cancel these letters of credit, surety bonds and other guarantees as we complete the underlying projects. We and Halliburton have agreed that the outstanding surety bonds, letters of credit, performance guarantees, financial guarantees and other outstanding credit support instruments guaranteed by Halliburton will remain in full force and effect following the separation of our companies until the earlier of: (1) the expiration of such instrument in accordance with its terms or the release of such instrument by our customer, or (2) the termination of the project contract to which such instrument relates or the termination of our obligations under the contract. In addition, we have agreed to use our reasonable best efforts to attempt to release or replace Halliburton’s liability under the outstanding credit support instruments and any additional credit support instruments relating to our business for which Halliburton may become liable following this offering for which such release or replacement is reasonably available. For so long as Halliburton or its affiliates remain liable with respect to any credit support instrument, we have agreed to pay the underlying obligation as and when it becomes due. Under certain reimbursement agreements, if we were unable to reimburse a bank under a paid letter of credit and the amount due is paid by Halliburton, we would be required to reimburse Halliburton for any amounts drawn on those letters of credit or guarantees in the future. Furthermore, we will agree to pay to Halliburton a quarterly carry charge for continuance of its guarantees of our outstanding letters of credit and surety bonds, and will agree to indemnify Halliburton for all losses in connection with the outstanding credit support instruments and any additional credit support instruments relating to our business for which Halliburton may become liable following this offering.

Other commitments

As of December 31, 2005, we had commitments to provide funds of approximately $79 million to related companies including $35 million to fund our privately financed projects. As of September 30, 2006, these commitments were $122 million (unaudited), including $107 million (unaudited) related to privately financed projects. These commitments arose primarily during the start-up of these entities or due to losses incurred by them. We expect approximately $61 million of the commitments at December 31, 2005 to be paid during 2006. In addition, we continue to fund operating cash shortfalls on the Barracuda-Caratinga project and are obligated to fund total shortage over the remaining life of the project. We expect the remaining project costs, net of revenue received, to be approximately $12 million at December 31, 2005 and $8 million (unaudited) at September 30, 2006.

Liquidated damages

Many of our engineering and construction contracts have milestone due dates that must be met or we may be subject to penalties for liquidated damages if claims are asserted and we were responsible for the delays. These generally relate to specified activities within a project by a set contractual date or achievement of a specified level of output or throughput of a plant we construct. Each contract defines the conditions under which

F-33

a customer may make a claim for liquidated damages. However, in most instances, liquidated damages are not asserted by the customer, but the potential to do so is used in negotiating claims and closing out the contract. We had not accrued for liquidated damages of $49 million (unaudited), $70 million and $44 million at September 30, 2006 and at December 31, 2005 and 2004, respectively (including amounts related to our share of unconsolidated subsidiaries), that we could incur based upon completing the projects as forecasted.

Leases

We are obligated under operating leases, principally for the use of land, offices, equipment, field facilities, and warehouses. We recognize minimum rental expenses over the term of the lease. When a lease contains a fixed escalation of the minimum rent or rent holidays, we recognize the related rent expense on a straight-line basis over the lease term and record the difference between the recognized rental expense and the amounts payable under the lease as deferred lease credits. We have certain leases for office space where we receive allowances for leasehold improvements. We capitalize these leasehold improvements as property, plant, and equipment and deferred lease credits. Leasehold improvements are amortized over the shorter of their economic useful lives or the lease term. Total rent expense, net of sublease rentals, was $383 million, $387 million and $193 million in 2005, 2004 and 2003, respectively.

Future total rentals on noncancelable operating leases are as follows: $62 million in 2006; $52 million in 2007; $38 million in 2008; $36 million in 2009; $35 million in 2010; and $190 million thereafter.

Note 15. Income Taxes

The components of the (provision)/benefit for income taxes on continuing operations were:

	Years ended December 31									Nine months ended September 30
Millions of dollars	2005			2004			2003			2006			2005
										(unaudited)
Current income taxes:
Federal	$	(118	)	$	140		$	76		$	7		$	(40	)
Foreign		(52	)		(27	)		(57	)		(70	)		(54	)
State		(8	)		7			(3	)		—			(7	)
Total current		(178	)		120			16			(63	)		(101	)
Deferred income taxes:
Federal		22			(5	)		(31	)		(20	)		(29	)
Foreign		(25	)		(20	)		—			20			(7	)
State		(1	)		1			4			(1	)		(1	)
Total deferred		(4	)		(24	)		(27	)		(1	)		(37	)
(Provision) benefit for income taxes	$	(182	)	$	96		$	(11	)	$	(64	)	$	(138	)

Income tax expense for KBR Holdings is calculated on a pro rata basis. Under this method, income tax expense is determined based on KBR Holdings operations and their contributions to income tax expense of the Halliburton consolidated group.

KBR Holdings, a limited liability company, is the parent of a group of our domestic companies which are currently included in the consolidated federal income tax return of Halliburton. Additionally, many subsidiaries and divisions of Halliburton are subject to consolidation, group relief or similar provisions of tax law in foreign jurisdictions that allow for sharing of tax attributes with other Halliburton affiliates. For purposes of determining income tax expense, it is assumed that KBR Holdings will continue to file on this combined basis.

F-34

As noted above, we have calculated income tax expense based on a pro rata method. A second method which is available for determining tax expense is the separate return method. Under the separate return method, KBR Holdings’ income tax expense is calculated as if we had filed tax returns for its own operations, excluding other Halliburton operations. If we had calculated income tax expense from continuing operations using the separate return method as of January 1, 2005, the income tax expense from continuing operations recorded in 2005 would have been $154 million resulting in an effective tax rate of 36%. Income tax expense from continuing operations for the nine months ended September 30, 2006 would have been $56 million (unaudited) resulting in an effective tax rate of 64% (unaudited) under the separate return method. Similarly, if we had calculated income tax expense from discontinued operations using the separate return method as of January 1, 2005, the income tax expense recorded in 2005 would have been $11 million resulting in an effective tax rate of 25% for discontinued operations. Income tax expense from discontinued operations for the nine months ended September 30, 2006 would have been $44 million (unaudited) resulting in an effective tax rate of 33% (unaudited) under the separate return method.

The United States and foreign components of income (loss) from continuing operations before income taxes and minority interest were as follows:

	Years ended December 31								Nine Months ended September 30
Millions of dollars	2005		2004			2003			2006		2005
									(unaudited)
United States	$	294	$	(51	)	$	(153	)	$	67	$	205
Foreign		139		(334	)		48			20		124
Total	$	433	$	(385	)	$	(105	)	$	87	$	329

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

	Years ended December 31						Nine months ended September 30
	2005		2004		2003		2006		2005
							(unaudited)
United States Statutory Rate	35.0	%	35.0	%	35.0	%	35.0	%	35.0	%
Rate differentials on foreign earnings	2.2		(2.2	)	(8.2	)	(11.0	)	1.3
Non-deductible loss	—		—		—		16.8		—
State income taxes	1.3		1.3		1.9		1.3		2.0
Prior year foreign taxes	(1.6	)	(2.7	)	(6.1	)	15.7		(2.5	)
Prior year federal & state taxes	1.2		—		(9.3	)	11.2		—
Valuation allowance	0.9		(5.3	)	(23.4	)	(4.2	)	—
Foreign tax credit displacement	4.4		—		—		4.8		6.5
Other	(1.3	)	(1.2	)	(0.4	)	4.0		(0.5	)
Total effective tax rate on continuing operations	42.1	%	24.9	%	(10.5	)%	73.6	%	41.8	%

We generally do not provide income taxes on the undistributed earnings of non-United States subsidiaries because such earnings are intended to be reinvested indefinitely to finance foreign activities. Taxes are provided as necessary with respect to earnings that are not permanently reinvested. The American Job Creations Act of 2004 introduced a special dividends received deduction with respect to the repatriation of certain foreign earnings to a United States taxpayer under certain circumstances. Based on its analysis of the Act, the Halliburton U.S. consolidated group decided not to utilize the special deduction. The tax calculations of KBR Holdings reflect this position.

F-35

The primary components of our deferred tax assets and liabilities and the related valuation allowances are as follows:

	Years ended December 31				September 30
Millions of dollars	2005		2004		2006
					(unaudited)
Gross deferred tax assets:
Depreciation and amortization	$	4	$	22	$	7
Employee compensation and benefits		52		54		46
Foreign tax credit carryforward		67		63		67
Construction contract accounting		81		69		76
Loss carryforwards		69		73		64
Insurance accruals		17		24		18
Interest accruals		6		22		—
Allowance for bad debt		18		—		9
Asbestos accruals		—		16		—
All other		32		27		22
Total	$	346	$	370	$	309
Gross deferred tax liabilities:
Depreciation and amortization	$	6	$	21	$	13
Employee compensation and benefits		—		25		13
Construction contract accounting		53		58		55
Total	$	59	$	104	$	81
Valuation Allowances:
Foreign tax credit carryforward	$	67	$	63	$	67
Loss carryforwards		23		27		19
Total	$	90	$	90	$	86
Net deferred income tax asset	$	197	$	176	$	142

At December 31, 2005, we had $170 million of net operating loss carryforwards that expire from 2005 through 2015 and loss carryforwards of $70 million with indefinite expiration dates.

Foreign tax credit carryforwards recorded in the financial statements reflect the credits actually generated by KBR Holdings operations, reduced for the amount considered utilized pursuant to the tax sharing agreement. Should KBR Holdings leave the Halliburton U.S. consolidated group at some point in the future, the amount of foreign tax credit carryforward taken by KBR Holdings will be determined by operation of U.S. tax law. The amount of such carryforward taken by KBR Holdings could be significantly different than the amount recorded in the financial statements.

We have established a valuation allowance for certain foreign loss carryforwards and foreign tax credit carryforwards on the basis that we believe these assets will not be utilized in the statutory carryover period. KBR Holdings is subject to a tax sharing agreement. The tax sharing agreement provides, in part, for settlement of utilized tax attributes on a consolidated basis. Therefore, intercompany settlements due to the utilized attributes are only established to the extent that the attributes decreased the tax liability of an affiliate in any given jurisdiction. The adjustment to reflect the difference between the tax provision/benefit calculated as described above and the amount settled with Halliburton pursuant to the tax sharing agreement is recorded to equity. The adjustment resulted in a credit to equity of $22 million in 2005 and $37 million in 2004 and a charge to equity of $56 million in 2003. The amount of settlement reflected in the intercompany account is a payable of $30 million (unaudited) as of September 30, 2006, a payable of $36 million as of December 31, 2005 and a benefit of $290 million as of December 31, 2004 and $91 million as of December 31, 2003.

F-36

Note 16. Member’s Equity

Prior to October 30, 2006, the existing ownership interest of the member of KBR Holdings, LLC was represented by 100 shares with a par value of $1.00 per share. On October 30, 2006, the sole member of KBR Holdings, LLC effected a 1,356,270-for-one split of KBR Holdings, LLC’s outstanding shares with a corresponding reduction in par value to $0.00000073 per share. Share and per share data of KBR Holdings, LLC for all periods presented herein have been adjusted to reflect the share split.

The following tables summarize our member’s equity activity:

Millions of dollars	Common Stock	Member’s Equity		Parent Net Investment			Accumulated Other Comprehensive Income (Loss)
Balance at December 31, 2002	—	$	—	$	1,277		$	(144	)
Intercompany settlement of taxes	—		—		(56	)		—
Comprehensive income:
Net loss	—		—		(133	)		—
Other comprehensive income, net of tax (provision):
Cumulative translation adjustment	—		—		—			74
Pension liability adjustment , net of tax of $(26)	—		—		—			(83	)
Other comprehensive gains (losses) on derivatives:
Unrealized gains (losses) on derivatives	—		—		—			6
Reclassification adjustments to net income (loss)	—		—		—			3
Total comprehensive loss	—		—		(133	)		—
Balance at December 31, 2003	—	$	—	$	1,088		$	(144	)
Intercompany settlement of taxes	—		—		37			—
Comprehensive income:
Net loss	—		—		(303	)		—
Other comprehensive income, net of tax (provision):
Cumulative translation adjustment	—		—		—			32
Pension liability adjustment, net of tax of $41	—		—		—			97
Other comprehensive gains (losses) on derivatives:
Unrealized gains (losses) on derivatives	—		—		—			39
Reclassification adjustments to net income (loss)	—		—		—			(26	)
Income tax benefit (provision) on derivatives	—		—		—			(8	)
Total comprehensive income (loss)	—		—		(303	)		134
Balance at December 31, 2004	—	$	—	$	822		$	(10	)
Intercompany settlement of taxes	—		—		22			—
Contribution from parent	—		—		300			—
Comprehensive income:
Net income	—		149		91			—
Other comprehensive income, net of tax (provision):
Cumulative translation adjustment	—		—		—			(46	)
Pension liability adjustment, net of tax of $(19)	—		—		—			(44	)
Other comprehensive gains (losses) on derivatives:
Unrealized gains (losses) on derivatives	—		—		—			(21	)
Reclassification adjustments to net income (loss)	—		—		—			(21	)
Income tax benefit (provision) on derivatives	—		—		—			14
Total comprehensive income (loss)	—		149		91			(118	)
Transfer to common stock and additional paid-in capital	—		1,235		(1,235	)		—
Balance at December 31, 2005	—	$	1,384	$	—		$	(128	)
Contribution from parent and other activities (unaudited)	—		33		—			—
Comprehensive income:
Net income (unaudited)	—		125		—			—
Other comprehensive income, net of tax (provision):
Cumulative translation adjustment (unaudited):
Cumulative translation adjustments (unaudited)	—		—		—			26
Other comprehensive gains (losses) on derivatives (unaudited):
Unrealized gains (losses) on derivatives (unaudited)	—		—		—			17
Reclassification adjustments to net income (loss) (unaudited)	—		—		—			2
Income tax benefit (provision) on derivatives (unaudited)	—				—			(6	)
Total comprehensive income (unaudited)	—		125		—			39
Balance at September 30, 2006 (unaudited)	—	$	1,542	$	—		$	(89	)

F-37

Accumulated other comprehensive income

	December 31									September 30
Millions of dollars	2005			2004			2003			2006
										(unaudited)
Cumulative translation adjustments	$	12		$	58		$	26		$	38
Pension liability adjustments		(126	)		(82	)		(179	)		(126	)
Unrealized gains (losses) on derivatives		(14	)		14			9			(1	)
Total    accumulated other comprehensive income	$	(128	)	$	(10	)	$	(144	)	$	(89	)

Note 17. Stock Incentive Plans

Halliburton has stock-based employee compensation plans in which certain key employees of KBR Holdings participate. Stock options under Halliburton’s 1993 Stock and Incentive Plan are granted at the fair market value of the common stock at the grant date, vest ratably over a three- or four-year period, and generally expire 10 years from the grant date. Under the terms of the 1993 Stock and Incentive Plan, as amended, 98 million shares of common stock have been reserved for issuance to key Halliburton employees, including key employees of KBR Holdings. The plan specifies that no more than 32 million shares can be awarded as restricted stock. At December 31, 2005 and September 30, 2006, 24 million and 21 million (unaudited) shares, respectively, were available for future grants under the 1993 Stock and Incentive Plan, of which 14 million and 12 million (unaudited) shares, respectively, remain available for restricted stock awards. The share amounts and exercise prices discussed in this Note have been adjusted for all periods presented to reflect the impact of Halliburton’s two-for-one common stock split, in the form of a stock dividend, paid on July 14, 2006 to Halliburton stockholders of record as of June 23, 2006.

The following table represents stock option activity for KBR Holdings employees under the incentive plans during the past three years:

Stock Options	Number of Shares (in millions)		Exercise Price per Share		Weighted Average Exercise Price per Share
Outstanding at December 31, 2002	9.6		$	4.55 – 27.25	$	15.78
Granted	1.0			9.45 – 12.38		11.82
Exercised	—	*		4.55 –   8.74		7.25
Forfeited	(0.4	)		4.55 – 26.57		14.81
Outstanding at December 31, 2003	10.2		$	4.55 – 27.25	$	15.45
Granted	1.0			14.29 – 20.09		14.54
Exercised	(0.6	)		4.55 – 19.78		11.55
Forfeited	(0.4	)		4.55 – 27.25		16.35
Outstanding at December 31, 2004	10.2		$	4.55 – 27.25	$	15.61
Granted	0.3			20.90 – 28.63		21.16
Exercised	(5.0	)		4.55 – 27.25		15.98
Forfeited	(0.4	)		4.55 – 26.57		16.06
Outstanding at December 31, 2005	5.1		$	4.55 – 28.63	$	15.53

* Actual exercises for 2003 were approximately 76,000 shares.

F-38

Options outstanding at December 31, 2005 are composed of the following:

	Outstanding				Exercisable
Range of Exercise Prices	Number of Shares (in millions)	Weighted Average Remaining Contractual Life	Weighted Average Exercise Price		Number of Shares (in millions)	Weighted Average Exercise Price
$  4.55 – 11.82	1.4	6.0	$	9.40	1.0	$	8.81
$11.83 – 14.93	1.5	5.0		14.39	1.0		14.38
$14.94 – 19.75	1.1	4.1		18.59	1.0		18.93
$19.76 – 28.63	1.1	5.0		22.04	0.8		22.38
$  4.55 – 28.63	5.1	5.1	$	15.53	3.8	$	15.75

There were approximately 7.6 million options exercisable with a weighted average exercise price of $16.67 at December 31, 2004 and approximately 7.0 million options exercisable with a weighted average exercise price of $16.99 at December 31, 2003.

Halliburton has awarded restricted shares to key KBR Holdings employees under Halliburton’s 1993 Stock and Incentive Plan. Under this plan, restricted shares awarded to our employees were 152,778 in 2005, 560,278 in 2004, and 336,880 in 2003. The shares awarded are net of forfeitures of 338,322 in 2005, 81,782 in 2004, and 73,750 in 2003. The weighted average fair market value per share at the date of grant of shares granted was $21.74 in 2005, $14.64 in 2004, and $11.54 in 2003.

Halliburton’s Employees’ Restricted Stock Plan was established for employees who are not officers, for which 400,000 shares have been reserved. At December 31, 2005, 303,700 shares (net of 87,100 shares forfeited) have been issued to Halliburton employees, including employees of KBR Holdings. There were no forfeitures or grants to KBR Holdings employees in 2005, 2004, or 2003. No further grants are being made under this plan.

Under the terms of Halliburton’s Career Executive Incentive Stock Plan, 30 million shares of common stock were reserved for issuance to officers and key employees at a purchase price not to exceed par value of $2.50 per share. At December 31, 2005, 23.4 million shares (net of 4.4 million shares forfeited) have been issued under the plan. The last grant made under this plan was in December 1992. No further grants will be made under the Career Executive Incentive Stock Plan.

Restricted shares issued under Halliburton’s 1993 Stock and Incentive Plan, Employees’ Restricted Stock Plan, and the Career Executive Incentive Stock Plan are limited as to sale or disposition. These restrictions lapse periodically over an extended period of time not exceeding 10 years. Restrictions may also lapse for early retirement and other conditions in accordance with the established policies of Halliburton. Upon termination of employment, shares in which restrictions have not lapsed must be returned to Halliburton, resulting in restricted stock forfeitures. The fair market value of the stock on the date of issuance is being amortized and charged to income over the period during which the restrictions lapse, with similar credits to intercompany payable. At December 31, 2005, the unamortized amount was $17 million. KBR Holdings recognized compensation costs of $7 million in 2005, $7 million in 2004, and $8 million in 2003.

During 2002, Halliburton’s Board of Directors approved the 2002 Employee Stock Purchase Plan (ESPP) and reserved 24 million shares for issuance. Under the ESPP, eligible employees may have up to 10% of their earnings withheld, subject to some limitations, to be used to purchase shares of Halliburton common stock. Unless Halliburton’s Board of Directors shall determine otherwise, each six-month offering period commences on January 1 and July 1 of each year. The price at which Halliburton common stock may be purchased under the ESPP is equal to 85% of the lower of the fair market value of the common stock on the commencement date or last trading day of each offering period. Through the ESPP, there were approximately 890,000 shares sold to KBR Holdings employees in 2005, approximately 1.2 million shares sold to KBR Holdings employees in 2004, and 780,000 shares sold to KBR Holdings employees in 2003.

F-39

Presentation under recently adopted SFAS No. 123(R), “Share-Based Payment” (unaudited)

Effective January 1, 2006, we adopted the fair value recognition provisions of SFAS No. 123(R) using the modified prospective application. Accordingly, we are recognizing compensation expense for all newly granted awards and awards modified, repurchased, or cancelled after January 1, 2006. Compensation cost for the unvested portion of awards that are outstanding as of January 1, 2006 is recognized ratably over the remaining vesting period based on the fair value at date of grant. Also, beginning with the January 1, 2006 purchase period, compensation expense for the ESPP is being recognized. The cumulative effect of this change in accounting principle related to stock-based awards was immaterial. Prior to January 1, 2006, we accounted for these plans under the recognition and measurement provisions of APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. Under APB Opinion No. 25, no compensation expense was recognized for stock options or the ESPP. Compensation expense was recognized for restricted stock awards. As a result of adopting SFAS No. 123(R), the incremental pretax expense related to employee stock option awards and the ESPP totaled approximately $5 million (unaudited) in the first nine months of 2006. There was no effect on our cash flows from operating or financing activities for the nine months ended September 30, 2006 from the adoption of SFAS No. 123(R).

Total stock-based compensation expense, net of related tax effects, was $6 million (unaudited) in the first nine months of 2006. Total income tax benefit recognized in net income for stock-based compensation arrangements was $3 million (unaudited) in the first nine months of 2006, compared to $4 million (unaudited) in the first nine months of 2005. Total incremental compensation cost resulting from modifications of previously granted stock-based awards was $1 million (unaudited) for the nine months ended September 30, 2006, compared to $7 million (unaudited) for the nine months ended September 30, 2005. These modifications allowed certain employees to retain their awards after leaving the company.

The following table summarizes the pro forma effect on net income for the nine months ended September 30, 2005 as if we had applied the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” to stock-based employee compensation.

Millions of dollars, except for per share data	Nine Months Ended September 30, 2005
	(unaudited)
Net income, as reported	$	184
Add: Total stock-based compensation expense included in net income, net of related tax effects		7
Less: Total stock-based compensation expense determined under fair-value-based method for all awards, net of related tax effects		(12	)
Net income, pro forma	$	179
Net income per share
As reported	$	1.35
Pro forma	$	1.32

Each of the active stock-based compensation arrangements is discussed below.

Stock options

All stock options under Halliburton’s 1993 Plan are granted at the fair market value of the common stock at the grant date. Employee stock options vest ratably over a three- or four-year period and generally expire 10 years from the grant date.

F-40

There were no Halliburton stock options granted to our employees in the first nine months of 2006. For stock options granted in the first nine months of 2005, the fair value of options at the date of grant was estimated using the Black-Scholes option pricing model. The expected volatility of options granted in 2005 is based upon the historical volatility of Halliburton common stock, and the expected term is based upon historical observation of actual time elapsed between date of grant and exercise of options for all employees. The related assumptions and resulting fair value of options granted were as follows:

	Nine months ended September 30, 2005
	(unaudited)
Expected term (in years)	5.00
Expected volatility	51.71 – 52.79%
Expected dividend yield	1.05 –   1.16%
Risk-free interest rate	3.77 –   4.27%
Weighted average grant-date fair value per share	$9.67

The following table represents Halliburton’s stock options granted to, exercised by, and forfeited by KBR Holdings’ employees during the first nine months of 2006 (unaudited).

Stock Options	Number of Shares (in millions)		Weighted Average Exercise Price per Share		Weighted Average Remaining Contractual Term (years)	Aggregate Intrinsic Value (in millions)
Outstanding at January 1, 2006	5.1		$	15.53
Granted	—			—
Exercised	(1.1	)		16.19
Forfeited/expired	(0.1	)(a)		15.24
Outstanding at September 30, 2006	3.9		$	15.34	4.53	$	51
Exercisable at September 30, 2006	3.5		$	15.08	4.14	$	47

(a) Actual expired shares for the nine months ended September 30, 2006 (unaudited) were approximately 15,000 shares with a weighted average exercise price per share of $15.17.

The total intrinsic value of options exercised by KBR Holdings’ employees was $23 million (unaudited) in the first nine months of 2006, compared to $46 million (unaudited) in the first nine months of 2005. As of September 30, 2006, there was $2 million (unaudited) of unrecognized compensation cost, net of estimated forfeitures, related to nonvested stock options, which is expected to be recognized over a weighted average period of approximately one year.

Restricted stock

Restricted shares issued under Halliburton’s 1993 Plan are restricted as to sale or disposition. These restrictions lapse periodically over an extended period of time not exceeding 10 years. Restrictions may also lapse for early retirement and other conditions in accordance with Halliburton’s established policies. Upon termination of employment, shares on which restrictions have not lapsed must be returned to Halliburton, resulting in restricted stock forfeitures. The fair market value of the stock on the date of grant is amortized and ratably charged to income over the period during which the restrictions lapse.

F-41

The following table represents Halliburton’s 1993 Plan restricted stock for our employees during the first nine months of 2006 (unaudited).

Restricted Stock	Number of Shares (in millions)		Weighted Average Grant-Date Fair Value per Share
Nonvested shares at January 1, 2006	1.4		$	16.12
Granted	—	(a)		34.82
Vested	(0.3	)		16.12
Forfeited	—	(b)		16.76
Nonvested shares at September 30, 2006	1.1		$	16.81

(a) Actual grants for the nine months ended September 30, 2006 included approximately 42,000 shares.

(b) Actual forfeited for the nine months ended September 30, 2006 included approximately 89,000 shares.

The weighted average grant-date fair value of restricted shares granted to our employees during the first nine months of 2005 was $21.22 (unaudited). The total fair value of shares vested during the nine months ended September 30, 2006 was $10 million (unaudited), compared to $14 million (unaudited) during the nine months ended September 30, 2005. As of September 30, 2006, there was $13 million (unaudited) of unrecognized compensation cost, net of estimated forfeitures, related to nonvested restricted stock, which is expected to be recognized over a period of 3.5 years (unaudited).

2002 Employee Stock Purchase Plan

Under the ESPP, eligible employees may have up to 10% of their earnings withheld, subject to some limitations, to be used to purchase shares of Halliburton’s common stock. Unless Halliburton’s Board of Directors shall determine otherwise, each six-month offering period commences on January 1 and July 1 of each year. The price at which Halliburton’s common stock may be purchased under the ESPP is equal to 85% of the lower of the fair market value of the common stock on the commencement date or last trading day of each offering period. Under this plan, 24 million shares of common stock have been reserved for issuance, which may be authorized but unissued shares or treasury shares. As of September 30, 2006, 3.4 million shares (unaudited) have been sold to our employees through the ESPP.

The fair value of ESPP shares was estimated using the Black-Scholes option pricing model. The expected volatility is a one-year historical volatility of Halliburton’s common stock. The assumptions and resulting fair values of options granted were as follows:

	Offering Period July 1 to December 31
	2006			2005
Expected term (in years)		0.5			0.5
Expected volatility		37.77	%		30.46	%
Expected dividend yield		0.80	%		0.73	%
Risk-free interest rate		5.29	%		3.89	%
Weighted average grant-date fair value per share	$	9.32		$	5.50

F-42

	Offering Period January 1 to June 30
	2006			2005
Expected term (in years)		0.5			0.5
Expected volatility		35.65	%		26.93	%
Expected dividend yield		0.75	%		1.16	%
Risk-free interest rate		4.38	%		3.15	%
Weighted average grant-date fair value per share	$	7.91		$	4.15

Note 18. Financial Instruments and Risk Management

Foreign exchange risk. Techniques in managing foreign exchange risk include, but are not limited to, foreign currency borrowing and investing and the use of currency derivative instruments. We selectively manage significant exposures to potential foreign exchange losses considering current market conditions, future operating activities and the associated cost in relation to the perceived risk of loss. The purpose of our foreign currency risk management activities is to protect us from the risk that the eventual dollar cash flow resulting from the sale and purchase of products and services in foreign currencies will be adversely affected by changes in exchange rates.

We manage our currency exposure through the use of currency derivative instruments as it relates to the major currencies, which are generally the currencies of the countries for which we do the majority of our international business. These contracts generally have an expiration date of two years or less. Forward exchange contracts, which are commitments to buy or sell a specified amount of a foreign currency at a specified price and time, are generally used to manage identifiable foreign currency commitments. Forward exchange contracts and foreign exchange option contracts, which convey the right, but not the obligation, to sell or buy a specified amount of foreign currency at a specified price, are generally used to manage exposures related to assets and liabilities denominated in a foreign currency. None of the forward or option contracts are exchange traded. While derivative instruments are subject to fluctuations in value, the fluctuations are generally offset by the value of the underlying exposures being managed. The use of some contracts may limit our ability to benefit from favorable fluctuations in foreign exchange rates.

Foreign currency contracts are not utilized to manage exposures in some currencies due primarily to the lack of available markets or cost considerations (non-traded currencies). We attempt to manage our working capital position to minimize foreign currency commitments in non-traded currencies and recognize that pricing for the services and products offered in these countries should cover the cost of exchange rate devaluations. We have historically incurred transaction losses in non-traded currencies.

Assets, liabilities and forecasted cash flow denominated in foreign currencies. We utilize the derivative instruments described above to manage the foreign currency exposures related to specific assets and liabilities, that are denominated in foreign currencies; however, we have not elected to account for these instruments as hedges for accounting purposes. Additionally, we utilize the derivative instruments described above to manage forecasted cash flow denominated in foreign currencies generally related to long-term engineering and construction projects. Beginning in 2003, we designated these contracts related to engineering and construction projects as cash flow hedges. The ineffective portion of these hedges is included in operating income in the accompanying consolidated statement of operations and was not material in 2005, 2004 or 2003. As of September 30, 2006, we had approximately $1 million (unaudited) in unrealized net losses on these cash flow hedges. As of December 31, 2005, we had approximately $14 million in unrealized net losses on these cash flow hedges and approximately $14 million in unrealized net gains as of December 31, 2004. We include these unrealized gains and losses on these cash flow hedges in our other comprehensive income in the accompanying consolidated balance sheets. Changes in the timing or amount of the future cash flow being hedged could result in hedges becoming ineffective and, as a result, the amount of unrealized gain or loss associated with that hedge would be reclassified from other comprehensive income into earnings. At September 30, 2006 (unaudited) and

F-43

December 31, 2005, the maximum length of time over which we are hedging our exposure to the variability in future cash flow associated with foreign currency forecasted transactions is 15 months. The fair value of these contracts was less than $1 million as of September 30, 2006, $2 million as of December 31, 2005, and $28 million as of December 31, 2004.

Notional amounts and fair market values. The notional amounts of open forward contracts and options contracts for operations were $146 million (unaudited), $362 million and $483 million at September 30, 2006 and at December 31, 2005 and 2004, respectively. The notional amounts of our foreign exchange contracts do not generally represent amounts exchanged by the parties, and thus, are not a measure of our exposure or of the cash requirements relating to these contracts. The amounts exchanged are calculated by reference to the notional amounts and by other terms of the derivatives, such as exchange rates.

Credit risk. Financial instruments that potentially subject us to concentrations of credit risk are primarily cash equivalents, investments and trade receivables. It is our practice to place our cash equivalents and investments in high-quality securities with various investment institutions. We derive the majority of our revenues from engineering and construction services to the energy industry and services provided to the United States government. There are concentrations of receivables in the United States and the United Kingdom. We maintain an allowance for losses based upon the expected collectibility of all trade accounts receivable. See Note 9 for further discussion of United States government receivables.

There are no significant concentrations of credit risk with any individual counterparty related to our derivative contracts. We select counterparties based on their profitability, balance sheet and a capacity for timely payment of financial commitments which is unlikely to be adversely affected by foreseeable events.

Interest rate risk. We have several debt instruments outstanding with variable interest rates. We may manage our variable-rate debt through the use of different types of debt instruments and derivative instruments. As of September 30, 2006 (unaudited) and December 31, 2005, we held no material interest rate derivative instruments.

Fair market value of financial instruments. The carrying amount of variable rate long-term debt approximates fair market value because these instruments reflect market changes to interest rates. The carrying amount of short-term financial instruments, cash and equivalents, receivables, and accounts payable, as reflected in the consolidated balance sheets, approximates fair market value due to the short maturities of these instruments. The currency derivative instruments are carried on the balance sheet at fair value and are based upon third party quotes.

Note 19. Equity Method Investments and Variable Interest Entities

We conduct some of our operations through joint ventures which are in partnership, corporate, undivided interest and other business forms and are principally accounted for using the equity method of accounting.

The following is a description of our significant unconsolidated subsidiaries that are accounted for using the equity method of accounting:

• TSKJ Group is joint venture consortium consisting of several private limited liability companies registered in Madeira, Portugal. TSKJ Group entered into various contracts to design and construct large-scale projects in Nigeria. KBR Holdings has an approximately 25% interest in the TSKJ Group.

• Brown & Root-Condor Spa (BRC) is registered in Algiers, Algeria and primarily executes oil and gas production facilities and civil infrastructure projects in Algeria. KBR Holdings owns a 49% interest in the joint venture.

• Combisa is a limited liability company registered in Mexico. Combisa was created to build an offshore floating, storage, production and offloading oil and gas facility in the Bay of Campeche in the Gulf of Mexico. KBR Holdings owns a 50% interest in the company.

F-44

• JK Group is a joint venture consortium consisting of several private limited liability companies registered in the Cayman Islands. The JK Group was created for the purpose of building two gas processing plants and related pipelines in Algeria. KBR Holdings owns a 50% interest in each of the JK Group companies.

• Adrail is a general partnership registered in Australia and was created for the purpose of constructing a railroad between Alice Springs and Darwin in Australia. KBR Holdings owns a 50% interest in the partnership.

Summarized financial information for our significant equity method investments are as follows:

Balance Sheets

	December 31, 2005
Millions of dollars	TSKJ Group		BRC		Combisa		JK Group		Adrail
Current assets	$	423	$	354	$	91	$	154	$	7
Noncurrent assets	$	—	$	28	$	—	$	—	$	—
Total assets	$	423	$	382	$	91	$	154	$	7
Current liabilities	$	382	$	366	$	—	$	213	$	4
Noncurrent liabilities	$	—	$	—	$	91	$	—	$	—
Total liabilities	$	382	$	366	$	91	$	213	$	4

Statements of Operations

	For the Year Ended December 31, 2005
Millions of dollars	TSKJ Group		BRC			Combisa		JK Group			Adrail
Revenue	$	707	$	365		$	—	$	210		$	—
Operating income (loss)	$	2	$	(71	)	$	3	$	(70	)	$	1
Net income (loss)	$	11	$	(53	)	$	3	$	(69	)	$	1

Balance Sheets	December 31, 2004
Millions of dollars	TSKJ Group		BRC			Combisa			JK Group			Adrail
Current assets	$	460	$	262		$	21		$	239		$	7
Noncurrent assets	$	—	$	25		$	—		$	—		$	—
Total assets	$	460	$	287		$	21		$	239		$	7
Current liabilities	$	406	$	203		$	7		$	325		$	4
Noncurrent liabilities	$	—	$	—		$	78		$	—		$	—
Total liabilities	$	406	$	203		$	85		$	325		$	4
Statements of Operations	For the Year Ended December 31, 2004
Millions of dollars	TSKJ Group		BRC			Combisa			JK Group			Adrail
Revenue	$	796	$	360		$	—		$	153		$	5
Operating income (loss)	$	69	$	(31	)	$	1		$	(105	)	$	1
Net income (loss)	$	80	$	(21	)	$	(3	)	$	(103	)	$	2

F-45

Balance Sheets	December 31, 2003
Millions of dollars	TSKJ Group		BRC		Combisa			JK Group		Adrail
Current assets	$	615	$	270	$	140		$	141	$	12
Noncurrent assets	$	—	$	19	$	—		$	6	$	2
Total assets	$	615	$	289	$	140		$	147	$	14
Current liabilities	$	558	$	164	$	88		$	128	$	9
Noncurrent liabilities	$	—	$	—	$	75		$	—	$	—
Total liabilities	$	558	$	164	$	163		$	128	$	9
Statements of Operations	For the Year Ended December 31, 2003
Millions of dollars	TSKJ Group		BRC		Combisa			JK Group		Adrail
Revenue	$	788	$	144	$	21		$	204	$	198
Operating income (loss)	$	98	$	35	$	(34	)	$	4	$	52
Net income (loss)	$	112	$	25	$	(20	)	$	5	$	52

Consolidated summarized financial information for all other jointly owned operations that are accounted for using the equity method of accounting is as follows:

Financial Position	December 31,
Millions of dollars	2005		2004		2003
Current assets	$	1,126	$	759	$	889
Noncurrent assets		2,636		2,334		2,049
Total	$	3,762	$	3,093	$	2,938
Current liabilities	$	1,232	$	651	$	741
Noncurrent liabilities		2,204		2,103		1,814
Member’s equity		326		339		383
Total	$	3,762	$	3,093	$	2,938

Operating Results	Years ended December 31,
Millions of dollars	2005			2004			2003
Revenue	$	1,462		$	996		$	981
Operating income (loss)	$	(16	)	$	(35	)	$	(11	)
Net income (loss)	$	(16	)	$	(36	)	$	2

The FASB issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51” (FIN 46), in January 2003. In December 2003, the FASB issued FIN 46R, a revision which supersedes the original interpretation. We adopted FIN 46R effective January 1, 2004. FIN 46R requires the consolidation of entities in which a company absorbs a majority of another entity’s expected losses, receives a majority of the other entity’s expected residual returns, or both, as a result of ownership, contractual, or other financial interests in the other entity. Previously, entities were generally consolidated based upon a controlling financial interest through ownership of a majority voting interest in the entity.

F-46

G&I Segment

We have identified the following variable interest entities:

• during 2001, we formed a joint venture, in which we own a 50% equity interest with an unrelated partner, that owns and operates heavy equipment transport vehicles in the United Kingdom. This variable interest entity was formed to construct, operate, and service certain assets for a third party, and was funded with third party debt. The construction of the assets was completed in the second quarter of 2004, and the operating and service contract related to the assets extends through 2023. The proceeds from the debt financing were used to construct the assets and will be paid down with cash flow generated during the operation and service phase of the contract. As of September 30, 2006 and December 31, 2005, the joint venture had total assets of $161 million (unaudited) and $147 million and total liabilities of $147 million (unaudited) and $152 million, respectively. Our aggregate exposure to loss as a result of our involvement with this joint venture is limited to our equity investment and subordinated debt which totaled approximately $7 million at December 31, 2005 and September 30, 2006 (unaudited) and any future losses related to the operation of the assets. We are not the primary beneficiary. The joint venture is accounted for using the equity method of accounting in our G&I segment;

• we are involved in three privately financed projects, executed through joint ventures, to design, build, operate, and maintain roadways for certain government agencies in the United Kingdom. We have a 25% ownership interest in these joint ventures and account for them using the equity method of accounting. The joint ventures have obtained financing through third parties that is not guaranteed by us. These joint ventures are considered variable interest entities; however, we are not the primary beneficiary of these joint ventures and will, therefore, continue to account for them using the equity method of accounting. As of December 31, 2005, these joint ventures had total assets of $1.4 billion and total liabilities of $1.5 billion. As of September 30, 2006, these joint ventures had total assets of $1.6 billion (unaudited) and total liabilities of $1.4 billion (unaudited). Our maximum exposure to loss is limited to our equity investments in and loans to the joint ventures, which totaled $35 million at December 31, 2005, and was $23 million (unaudited) at September 30, 2006. With respect to one of these roadways, KBR received a revised financial forecast during the second quarter of 2006, which takes into account sustained projected losses due to lower than anticipated long vehicle traffic and higher than forecasted lane availability deductions, which reduce project revenues. Because of this new information, we recorded an impairment charge of $10 million (unaudited) and a $7 million (unaudited) loss during the second quarter of 2006 in our equity investment. As of September 30, 2006, our investment in this joint venture and the related company that performed the construction of the road was $0 (unaudited). In addition, at September 30, 2006 (unaudited), we had no additional funding commitments;

• we participate in a privately financed project executed through Adrail formed for operating and maintaining a railroad freight business in Australia. We own 36.7% of the joint venture and operating company and we are accounting for these investments using the equity method of accounting in our G&I segment. This joint venture is considered a variable interest entity; however, we are not the primary beneficiary of the joint venture. The joint venture is funded through senior and subordinated debt and equity contributions from the joint venture partners. As of December 31, 2005 and September 30, 2006, the joint venture had total assets of $796 million and $851 million (unaudited) and total liabilities of $672 million and $618 million (unaudited), respectively. Our maximum exposure to loss is limited to our equity investments and senior operating notes in the joint venture and the operating company which totaled $68 million at December 31, 2005 and our commitment to fund an additional $9 million of subordinated notes to the operating company. In the first quarter of 2006, we recorded a $26 million (unaudited) impairment charge. In addition, in the first nine months of 2006, we recorded $11 million (unaudited) in losses related to our Adrail investment and made approximately $10 million (unaudited) in advances to this joint venture. This impairment charge is included in Equity in earnings (losses) of unconsolidated affiliates, net in the Consolidated Statement of Operations. This joint venture has sustained losses since the railway commenced operations in early 2004 and at June 30, 2006, was projected to violate the joint venture’s loan covenants. These loans are non-recourse to us. We received revised financial forecasts from the joint

F-47

venture during the first quarter of 2006, which took into account decreases, as compared to prior forecasts, in anticipated freight volume related to delays in mining of minerals, as well as a slowdown in the planned expansion of the Port of Darwin and ultimately contributed to the impairment charge recorded in the first quarter of 2006. At that time, the joint venture engaged investment bankers in an effort to raise additional capital for the venture. At the end of the second quarter of 2006, our valuation of our investment took into consideration the bids tendered at that time by interested parties to accomplish this recapitalization, and no further impairment was evident. However, the efforts to raise additional capital ceased during the third quarter because all previous bids were subsequently rejected or withdrawn. The board of the joint venture is currently attempting to restructure debt payment terms and raise additional subordinated financing. In October 2006, the joint venture violated its loan covenants by failing to make an interest and principal payment. In light of the loan covenant default and the joint venture’s need for additional equity or subordinated financing, we recorded a $32 million impairment charge in the third quarter of 2006. We will receive no tax benefit as this impairment charge is not deductible for Australian tax purposes. At September 30, 2006, our investment in this joint venture was $10 million and we had $0 of additional funding commitments. In addition, the senior lenders have agreed to waive the financial covenant violations through November 15, 2006 to allow the shareholders time to arrange additional subordinated financing estimated at $12 million. We have offered to fund approximately $6 million provided that other shareholders commit to funding $6 million in the aggregate and the senior lenders agree to certain concessions including a principal payment holiday for 27 months and a reduction in the debt service reserve required by the existing indenture.

• we participate in a privately financed project executed through certain joint ventures formed to design, build, operate, and maintain a viaduct and several bridges in southern Ireland. The joint ventures were funded through debt and were formed with minimal equity. We have up to a 25% ownership interest in the project’s joint ventures, and we are accounting for this interest using the equity method of accounting. These joint ventures are considered variable interest entities; however, we are not the primary beneficiary of the joint ventures. As of September 30, 2006 and December 31, 2005, the joint ventures had total assets of $291 million (unaudited) and $239 million and total liabilities of $269 million (unaudited) and $226 million, respectively. Our maximum exposure to loss is limited to our equity investments in and loan to the joint venture, totaling $6 million and $4 million at September 30, 2006 and December 31, 2005, respectively, and our share of any future losses resulting from the project. In addition, at September 30, 2006, we had remaining funding commitments of approximately $4 million (unaudited); and

• in April 2006, Aspire Defence, a joint venture between us, Mowlem Plc. and a financial investor, was awarded a privately financed project contract, the Allenby & Connaught project, by the MoD to upgrade and provide a range of services to the British Army’s garrisons at Aldershot and around Salisbury Plain in the United Kingdom. In addition to a package of ongoing services to be delivered over 35 years, the project includes a nine-year construction program to improve soldiers’ single living, technical and administrative accommodations, along with leisure and recreational facilities. Aspire Defence will manage the existing properties and will be responsible for design, refurbishment, construction and integration of new and modernized facilities. We indirectly own a 45% interest in Aspire Defence, the project company that is the holder of the 35-year concession contract. In addition, we own a 50% interest in each of two joint ventures that provide the construction and the related support services to Aspire Defence. Our performance through the construction phase is supported by $159 million (unaudited) in letters of credit and surety bonds totaling approximately $209 million (unaudited) as of September 30, 2006, both of which have been guaranteed by Halliburton. Furthermore, our financial and performance guarantees are joint and several, subject to certain limitations, with our joint venture partners. The project is funded through equity and subordinated debt provided by the project sponsors and the issuance of publicly held senior bonds. The entities we hold an interest in are considered variable interest entities; however, we are not the primary beneficiary of these entities. We account for our interests in each of the entities using the equity method of accounting. As of September 30, 2006, the aggregate total assets and total liabilities of the variable interest entities was $3.0 billion (unaudited)

F-48

and 3.1 billion (unaudited), respectively. Our maximum exposure to project company losses as of September 30, 2006 is limited to our commitment to fund debt totaling approximately $102 million (unaudited). Our maximum exposure to construction and operating joint venture losses is limited to the funding of any future losses incurred by those entities.

E&C Segment

We perform many of our long-term energy-related construction projects through incorporated or unincorporated joint ventures. Typically, these ventures are dissolved upon completion of the project. Many of these ventures are funded by advances from the project owner, and accordingly, require no equity investment by the joint venture partners or shareholders. Occasionally, a venture incurs losses, which then requires funding by the joint venture partners or shareholders in proportion to their interest percentages. The ventures that have little or no initial equity investment are variable interest entities. Our significant variable interest entities are:

• during 2005, we formed a joint venture to engineer and construct a gas monetization facility. We own 50% equity interest and determined that we are the primary beneficiary of the joint venture which is consolidated for financial reporting purposes. At December 31, 2005, the joint venture had $324 million in total assets and $311 million in total liabilities. At September 30, 2006, the joint venture had $557 million (unaudited) in total assets and $685 million (unaudited) in total liabilities. There are no consolidated assets that collateralize the joint venture’s obligations. However, at September 30, 2006 and December 31, 2005, the joint venture had approximately $442 and $173 million of cash, respectively, which relates to advance billings in connection with the joint venture’s obligations under the EPC contract;

• we have equity ownership in three joint ventures to execute EPC projects. Our equity ownership ranges from 33% to 50%, and these joint ventures are considered variable interest entities. We are not the primary beneficiary and thus account for these joint ventures using the equity method of accounting. At December 31, 2005 and September 30, 2006, these joint ventures had aggregate assets of $861 million and $871 million (unaudited) and aggregate liabilities of $912 million and $919 million (unaudited), respectively; and

• we have an investment in a development corporation that has an indirect interest in the new Egypt Basic Industries Corporation (EBIC) ammonia plant project located in Egypt. We are performing the engineering, procurement and construction (EPC) work for the project and operations and maintenance services for the facility. We own 60% of this development company and consolidate it for financial reporting purposes within our E&C segment. The development corporation owns a 25% ownership interest in a company that consolidates the ammonia plant which is considered a variable interest entity. The development corporation accounts for its investment in the company using the equity method of accounting. The variable interest entity is funded through debt and equity. We are not the primary beneficiary of the variable interest entity. As of September 30, 2006, the variable interest entity had total assets of $297 million (unaudited) and total liabilities of $149 million (unaudited). Our maximum exposure to loss on our equity investments at September 30, 2006 is limited to our investment of $15 million (unaudited) and our commitment to fund an additional $3 million (unaudited) of stand-by equity. In August 2006, the lenders providing the construction financing notified EBIC that it was in default of the terms of its debt agreement, which effectively prevents the project from making additional borrowings until such time as certain security interests in the ammonia plant assets related to the export facilities can be perfected. Indebtedness under the debt agreement is non-recourse to us. At this time, we are continuing to work on the project, and we understand that discussions with the lenders regarding the security interests are ongoing. No event of default has occurred pursuant to our EPC contract as we have been paid all amounts due from EBIC. We believe EBIC may potentially cure the default by perfecting the lenders’ security interests in the port assets. In addition, EBIC may be required to construct its export facilities at a location farther from the plant than originally planned. This would require an increase to the overall project cost and a change order, which we estimate at $5 million. In addition, we have been instructed by EBIC to cease work on one location of the project on which the ammonia storage tanks were originally planned to

F-49

be constructed and have been instructed to perform soil testing at an alternative site in the vicinity of the original site. We understand this potential relocation of the ammonia storage site is in connection with the security interest described above. In addition to the schedule delays, we estimate that the cost of moving to the alternate ammonia storage site would result in additional EPC cost of up to $6 million, and we would have entitlement to a change order to recover our costs. Any solution resulting in additional costs could require EBIC to raise additional financing, some of which could be from us and the other current stakeholders. If the default under the debt agreement is not cured, the project may not have sufficient financing to continue, which could result in an impairment of our investment and, a termination of our EPC contract with EBIC, which could result in a reduction of our profits or a recognition of a loss.

In July 2006, we were awarded, through a 50%-owned joint venture, a contract with Qatar Shell GTL Limited to provide project management and cost-reimbursable engineering, procurement and construction management services for the Pearl GTL project in Ras Laffan, Qatar. The project, which is expected to be completed by 2011, consists of gas production facilities and a GTL plant. The joint venture is considered a variable interest entity. We consolidate the joint venture for financial reporting purposes within our E&C segment because we are the primary beneficiary. As of September 30, 2006, the Pearl joint venture had total assets of $69 million and total liabilities of $57 million.

As of December 31, 2005, we had performed work for two developmental phase projects pursuant to contractual arrangements that provide for reimbursement of our engineering and other project related costs incurred. We also expect to own a minority interest in each project and as of December 31, 2005, we have funded our equity commitment to date in one project. One of these two projects closed in the first quarter of 2006 and the other project closed in April 2006.

Note 20. Related Party Transactions

Historically, all transactions between Halliburton and KBR Holdings were recorded as an intercompany payable or receivable. At December 31, 2004, KBR Holdings had an outstanding intercompany payable to Halliburton of $1.2 billion. In October 2005, Halliburton contributed $300 million of the intercompany balance to KBR Holdings’ equity in the form of a capital contribution. On December 1, 2005, the remaining intercompany balance was converted to two long-term notes payable to Halliburton subsidiaries (Subordinated Intercompany Notes). At September 30, 2006 (unaudited) and December 31, 2005, the outstanding aggregate principal balance of the Subordinated Intercompany Notes was $774 million and is to be paid on or before December 31, 2010. Interest on both notes, which accrues at 7.5% per annum, is payable semi-annually beginning June 30, 2006. The notes are subordinated to the Revolving Credit Facility. At September 30, 2006 (unaudited) and December 31, 2005, the amount of $774 million is shown in the Consolidated Financial Statements as Notes Payable to Related Party.

In addition, Halliburton will continue to provide daily cash management services. Accordingly, we will invest surplus cash with Halliburton on a daily basis, which will be returned as needed for operations. A Halliburton subsidiary executed a demand note payable (Halliburton Cash Management Note) for amounts outstanding under these arrangements. Annual interest on the Halliburton Cash Management Note is based on the closing rate of overnight Federal Funds rate determined on the first business day of each month. Similarly, we may, from time to time, borrow funds from Halliburton, subject to limitations provided under the Revolving Credit Facility, on a daily basis pursuant to a note payable (KBR Cash Management Note). Annual interest on the KBR Cash Management Note is based on the six-month Eurodollar Rate plus 1.00%. At September 30, 2006, we had a net receivable from Halliburton of $648 million (unaudited), which includes a $732 million (unaudited) receivable from Halliburton under the Halliburton Cash Management Note. At December 31, 2005, we had a net receivable due from Halliburton of $121 million, which includes a $165 million receivable from Halliburton under the Halliburton Cash Management Note.

F-50

We conduct business with other Halliburton entities on a commercial basis, and we recognize revenues as services are rendered and costs as they are incurred. Amounts billed to us by Halliburton were primarily for services provided by Halliburton’s Energy Services Group on projects in the Middle East and were $0 (unaudited), $0, $18 million and $60 million for the nine months ended September 30, 2006 and for the years ended December 31, 2005, 2004 and 2003, respectively, and are included in cost of services in the consolidated statements of operations. Amounts we billed to Halliburton’s Energy Services Group were $1 million (unaudited), $1 million, $4 million and $4 million for the nine months ended September 30, 2006 and for the years ended December 31, 2005, 2004 and 2003, respectively.

In addition to the transactions described above, Halliburton and certain of its subsidiaries provide various support services to KBR, including information technology, legal and internal audit. Costs for information

50.1

technology, including payroll processing services, which totaled $7 million (unaudited), $20 million, $19 million and $22 million for the nine months ended September 30, 2006 and for the years ended December 31, 2005, 2004 and 2003, respectively, are allocated to KBR based on a combination of factors of Halliburton and KBR, including relative revenues, assets and payroll, and negotiation of the reasonableness of the charge. Costs for other services allocated to KBR were $17 million (unaudited), $20 million, $20 million and $18 million for the nine months ended September 30, 2006 and for the years ended December 31, 2005, 2004 and 2003, respectively. Costs for these other services, including legal services and audit services, are primarily charged to KBR based on direct usage of the service. Costs allocated to KBR using a method other than direct usage are not significant individually or in the aggregate. We believe the allocation methods are reasonable. In addition, KBR leases office space to Halliburton at its Leatherhead, U.K. location.

Halliburton centrally develops, negotiates and administers our risk management process. The insurance program includes broad, all-risk coverage of worldwide property locations, excess worker’s compensation, general, automobile and employer liability, director’s and officer’s and fiduciary liability, global cargo coverage and other standard business coverages. Net expenses of $13 million (unaudited), $17 million, $20 million and $21 million, representing our share of these risk management coverages and related administrative costs, have been allocated to us for the nine months ended September 30, 2006 and for the years ended December 31, 2005, 2004 and 2003, respectively. These expenses are included in cost of services in the consolidated statements of operations.

We perform many of our projects through incorporated and unincorporated joint ventures. In addition to participating as a joint venture partner, we often provide engineering, procurement, construction, operations or maintenance services to the joint venture as a subcontractor. Where we provide services to a joint venture that we control and therefore consolidate for financial reporting purposes, we eliminate intercompany revenues and expenses on such transactions. In situations where we account for our interest in the joint venture under the equity method of accounting, we do not eliminate any portion of our revenues or expenses. We recognize the profit on our services provided to joint ventures that we consolidate and joint ventures that we record under the equity method of accounting primarily using the percentage-of-completion method. Total revenue from services provided to our unconsolidated joint ventures recorded in our consolidated statements of operations were $224 million, $483 million and $504 million for the years ended December 31, 2005, 2004 and 2003, respectively, and $299 million and $153 million for the nine months ended September 30, 2006 and 2005, respectively. Profit on transactions with our joint ventures recognized in our consolidated statements of operations were $23 million, $51 million and $56 million for the years ended December 31, 2005, 2004 and 2003, respectively, and $54 million and $23 million for the nine months ended September 30, 2006 and 2005, respectively.

Some insurable risks, such as general liability, property damage and workers’ compensation are self-insured by Halliburton and KBR Holdings; however, Halliburton has umbrella insurance coverage for some risk exposures subject to specified limits.

The balances for the related party transactions described above are reflected in the consolidated financial statements as due from parent or due to parent, as appropriate. The average intercompany balance for 2005 was $921 million. For 2004 and 2003, the average intercompany balance was $1.2 billion and $965 million, respectively.

In connection with certain projects, we are required to provide letters of credit and guarantees to our customers. As of December 31, 2005, in addition to our $25 million of letters of credit issued under our Revolving Credit Facility, approximately $864 million in letters of credit and bank guarantees were issued and outstanding to support our operations. Of the $864 million in letters of credit, $828 million of letters of credit and bank guarantees are irrevocably and unconditionally guaranteed by Halliburton. Approximately $434 million of the $864 million outstanding related to our joint venture operations, approximately $297 million related to the Barracuda-Caratinga project, which was 98 percent complete at that time and approximately $133 million related to various other projects. If any amounts are drawn on these letters of credit and Halliburton reimburses the bank, we would be required to reimburse Halliburton. As of September 30, 2006, in addition to the $54 million (unaudited) of letters of credit outstanding under our revolving credit facility, we had additional letters of credit

F-51

and financial guarantees totaled approximately $670 million (unaudited), of which, approximately $551 million (unaudited) related to our joint venture operations, including $159 million (unaudited) issued in connection with the Allenby & Connaught project. Of the $724 million (unaudited) in letters of credit outstanding at September 30, 2006, $647 million (unaudited) are irrevocably and unconditionally guaranteed by Halliburton. With the execution of the April 2006 agreement with Petrobras, the Barracuda-Caratinga project performance letters of credit were reduced to $15 million (unaudited) in the second quarter of 2006. The remaining $158 million (unaudited) of outstanding letters of credit relate to various other projects. In addition, Halliburton has guaranteed surety bonds and provided direct guarantees primarily related to our performance. Under certain reimbursement agreements, if we were unable to reimburse a bank under a paid letter of credit and the amount due is paid by Halliburton, we would be required to reimburse Halliburton for any amounts drawn on those letters of credit or guarantees in the future. We expect to cancel these letters of credit, surety bonds and other guarantees as we complete the underlying projects. (See Note 14.)

All of the charges described above have been included as costs of our operation in these consolidated financial statements. It is possible that the terms of these transactions may differ from those that would result from transactions among third parties.

Halliburton has incurred $9 million (unaudited), $9 million, $8 million and $0 for the nine months ended September 30, 2006 and for the years ended December 31, 2005, 2004 and 2003, respectively, for expenses relating to the FCPA and bidding practices investigations described in Note 14. In 2004, $1.5 million of the $8 million incurred was charged to us. Except for this $1.5 million, Halliburton has not charged these costs to us. These expenses were incurred for the benefit of both Halliburton and us, and we and Halliburton have no reasonable basis for allocating these costs between Halliburton and us.

Halliburton and KBR will enter into certain agreements, as discussed in Note 26, in connection with the separation.

On April 1, 2006, Halliburton contributed to us its interest in three joint ventures, which are accounted for using the equity method of accounting. These joint ventures own and operate offshore vessels equipped to provide various services, including accommodations, catering and other services to sea-based oil and gas platforms and rigs off the coast of Mexico. At March 31, 2006, the contributed interest in the three joint ventures had a book value of approximately $26 million.

Note 21. Retirement Plans

We have various plans that cover a significant number of our employees. These plans include defined contribution plans, defined benefit plans, and other postretirement plans:

• Our defined contribution plans provide retirement benefits in return for services rendered. These plans provide an individual account for each participant and have terms that specify how contributions to the participant’s account are to be determined rather than the amount of pension benefits the participant is to receive. Contributions to these plans are based on pretax income and/or discretionary amounts determined on an annual basis. Our expense for the defined contribution plans totaled $48 million, $40 million and $29 million in 2005, 2004 and 2003, respectively. Additionally, we participate in a Canadian multi-employer plan to which the company contributed $24 million and $20 million in 2005 and 2004, respectively. In 2004, we amended certain defined contribution plans to allow for a non-elective contribution, which resulted in an increase of $8 million over the 2003 expense.

• Our defined benefit plans are funded pension plans, which define an amount of pension benefit to be provided, usually as a function of age, years of service, or compensation. In the first quarter of 2005, we amended the terms and conditions of one of our international defined benefit plans and ceased future service and benefit accruals for all plan participants. In conjunction with this amendment, the company changed the terms of the related defined contribution plan to allow higher company contributions. This

F-52

action is defined as a curtailment under SFAS No. 88 and during the first quarter of 2005, we recognized a curtailment loss of approximately $5 million.

• Our postretirement medical plans are offered to specific eligible employees. These plans are contributory. Beginning in 2004, the plans were amended to eliminate company contributions for future retirees. Our liability for past retirees is limited to a fixed contribution amount for each participant or dependent. The plan participants share the total cost for all benefits provided above our fixed contributions. Participants’ contributions are adjusted as required to cover benefit payments. We have made no commitment to adjust the amount of our contributions; therefore, the computed accumulated postretirement benefit obligation amount is not affected by the expected future health care cost inflation rate.

Plan assets, expenses, and obligation for retirement plans are presented in the following tables.

We use a September 30th measurement date for our international plans and an October 31st measurement date for our domestic plans.

	Pension Benefits												Other Postretirement Benefits
Benefit obligation	United States			Int’l			United States			Int’l
Millions of dollars	2005						2004						2005			2004
Change in projected benefit obligation
Projected benefit obligation at beginning of period	$	45		$	2,552		$	42		$	2,053		$	1		$	2
Service cost		—			50			—			68			—			—
Interest cost		2			138			2			123			—			—
Plan participants’ contributions		—			12			—			16			1			1
Settlements/curtailments		—			(59	)		—			—			—			—
Currency fluctuations		—			(35	)		—			312			—			—
Actuarial (gain) loss		1			341			3			57			—			(1	)
Benefits paid		(2	)		(80	)		(2	)		(77	)		(1	)		(1	)
Projected benefit obligation at end of period	$	46		$	2,919		$	45		$	2,552		$	1		$	1
Accumulated benefit obligation at end of period	$	46		$	2,453		$	45		$	1,999		$	—		$	—

	Pension Benefits												Other Postretirement Benefits
Plan assets	United States			Int’l			United States			Int’l
Millions of dollars	2005						2004						2005			2004
Change in plan assets
Fair value of plan assets at beginning of period	$	33		$	2,188		$	33		$	1,725		$	—		$	—
Actual return on plan assets		3			467			2			218			—			—
Employer contributions		4			43			—			43			—			—
Plan participants’ contributions		—			12			—			16			1			1
Currency fluctuations		—			(32	)		—			263			—			—
Benefits paid		(2	)		(80	)		(2	)		(77	)		(1	)		(1	)
Fair value of plan assets at end of period	$	38		$	2,598		$	33		$	2,188		$	—		$	—

F-53

Our pension plan weighted-average asset allocations by asset category at December 31, 2005 and 2004 were and the target allocations for 2006 are as follows:

	Target Allocation		Percentage of Plan Assets at Year-End
			United States		Int’l		United States		Int’l
	2006		2005				2004
Asset category
Equity securities	55% – 70	%	63	%	62	%	63	%	64	%
Debt securities	25% – 45	%	36	%	30	%	33	%	34	%
Real estate	0	%	0	%	0	%	0	%	0	%
Other—STIF	0% – 10	%	1	%	8	%	4	%	2	%
Total	100	%	100	%	100	%	100	%	100	%

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

Funded status

The funded status of the plans, reconciled to the amount reported on the consolidated balance sheets, was as follows:

	Pension Benefits												Other Postretirement Benefits
	United States			Int’l			United States			Int’l
Millions of dollars	2005						2004						2005			2004
Fair value of plan assets at end of period	$	38		$	2,598		$	33		$	2,188		$	—		$	—
Projected benefit obligation at end of period		46			2,919			45			2,552			1			1
Funded status	$	(8	)	$	(321	)	$	(12	)	$	(364	)	$	(1	)	$	(1	)
Employer contribution		—			8			—			12			—			—
Unrecognized transition asset		(1	)		—			(1	)		—			—			—
Unrecognized actuarial loss (gain)		20			475			20			520			(2	)		(2	)
Unrecognized prior service benefit		—			(10	)		—			(6	)		(2	)		(2	)
Net amount recognized	$	11		$	152		$	7		$	162		$	(5	)	$	(5	)

Amounts recognized in the consolidated balance sheets were as follows:

	Pension Benefits												Other Postretirement Benefits
	United States			Int’l			United States			Int’l
Millions of dollars	2005						2004						2005			2004
Prepaid benefit cost	$	11		$	152		$	7		$	162		$	—		$	—
Accrued benefit liability, including additional minimum liability		(19	)		(163	)		(19	)		(105	)		(5	)		(5	)
Intangible asset		—			—			—			5			—			—
Accumulated other comprehensive income, net of tax		12			114			12			70			—			—
Deferred tax asset		7			49			7			30			—			—
Net amount recognized	$	11		$	152		$	7		$	162		$	(5	)	$	(5	)

F-54

We recognized an additional minimum liability for the underfunded defined benefit plans of $58 million in 2005, of which $44 million was recorded as “Other comprehensive income.” We reduced our additional minimum pension liability $137 million in 2004, of which $97 million was recorded as “Other comprehensive income.” The additional minimum liability is equal to the excess of the accumulated benefit obligation over plan assets and accrued liabilities. A corresponding amount is recognized as either an intangible asset or a charge to accumulated other comprehensive income.

The projected benefit obligation, accumulated benefit obligation, and fair value of plan assets for the pension plans with accumulated benefit obligations in excess of plan assets as of December 31, 2005 and 2004 were as follows:

	Pension Benefits
Millions of dollars	2005		2004
Projected benefit obligation	$	1,441	$	1,282
Accumulated benefit obligation	$	1,330	$	1,087
Fair value of plan assets	$	1,247	$	1,056

Expected cash flow

Contributions. Funding requirements for each plan are determined based on the local laws of the country where such plan resides. In certain countries the funding requirements are mandatory while in other countries they are discretionary. We currently expect to contribute $113 million to our international pension plans in 2006.

Benefit payments. The following table presents the expected benefit payments over the next 10 years.

	Pension Benefits
Millions of dollars	United States		Int’l
2006	$	2	$	81
2007		2		86
2008		2		88
2009		3		90
2010		3		93
Years 2011 - 2015		15		311

Expected benefit payments for other postretirement benefits are immaterial.

The components of net periodic benefit cost related to pension benefits for the years ended December 31, 2005, 2004 and 2003 are as follows:

	Pension Benefits
	United States			Int’l			United States			Int’l			United States			Int’l
Millions of dollars	2005						2004						2003
Components of net periodic benefit cost
Service cost	$	—		$	50		$	—		$	68		$	—		$	52
Interest cost		2			138			2			123			3			94
Expected return on plan assets		(3	)		(158	)		(3	)		(147	)		(3	)		(114	)
Transition amount		—			—			—			(1	)		—			(1	)
Amortization of prior service cost		—			(1	)		—			—			—			—
Settlements/curtailments		—			5			—			—			—			—
Recognized actuarial loss		1			14			1			15			—			13
Net periodic benefit cost	$	—		$	48		$	—		$	58		$	—		$	44

F-55

For other postretirement plans, net periodic cost was immaterial for the year ended December 31, 2005.

The components of net periodic benefit cost related to pension benefits for the nine months ended September 30, 2006 and 2005 are as follows:

	Nine Months Ended
	September 30, 2006						September 30, 2005
Millions of dollars	United States			International			United States			International
Components of net periodic benefit cost:
Service cost	$	—		$	35		$	—		$	39
Interest cost		2			104			2			103
Expected return on plan assets		(2	)		(124	)		(2	)		(118	)
Settlements/curtailments		—			—			—			5
Recognized actuarial loss		—			13			—			10
Net periodic benefit cost	$	—		$	28		$	—		$	39

In the first quarter of 2005, we amended the terms and conditions of one of our foreign defined benefit plans and ceased future service and benefit accruals for all plan participants. This action is defined as a curtailment under SFAS No. 88 and, therefore, during the first quarter of 2005, we recognized a curtailment loss of approximately $5 million.

We currently expect to contribute approximately $113 million (unaudited) to our international pension plans in 2006. As of September 30, 2006, we had contributed $105 million (unaudited) of this amount. We do not expect to make additional contributions to our domestic plan in 2006.

For other postretirement benefits, net periodic cost was immaterial for the nine months ended September 30, 2006.

Assumptions

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

Weighted-average assumptions used to determine benefit obligations at measurement date	Pension Benefits											Other Postretirement Benefits
	United States		Int’l	United States		Int’l		United States		Int’l
	2005			2004				2003				2005		2004		2003
Discount rate	5.75	%	5.0%	5.75	%	5.5	%	6.25	%	5.3	%	5.75	%	5.75	%	6.25	%
Rate of compensation increase	N/A		2.5–3.5%	N/A		4.0	%	N/A		3.75	%	N/A		N/A		N/A

Weighted-average assumptions used to determine net periodic benefit cost for years ended December 31	Pension Benefits												Other Postretirement Benefits
	United States		Int’l		United States		Int’l		United States		Int’l
	2005				2004				2003				2005		2004		2003
Discount rate	5.75	%	5.5	%	6.25	%	5.3	%	7.0	%	5.25	%	5.75	%	6.25	%	N/A
Expected return on plan assets	8.5	%	7.0	%	8.5	%	7.0	%	8.75	%	6.75	%	N/A		N/A		N/A
Rate of compensation increase	N/A		4.0	%	N/A		3.75	%	N/A		3.75	%	N/A		N/A		N/A

F-56

The discount rate was determined based on the rates of return of high-quality fixed income investments as of the measurement date. Our discount rate assumption for the United States domestic pension plans was based on the weighted average annualized yield of the Moody Baa-Aaa corporate bonds. For our United Kingdom pension plans, which constitute all of our international pension plans’ projected benefit obligations, the discount rate was based on the annualized yield of the iBoxx AA corporate bonds, and was reduced from 5.5% at December 31, 2004 to 5.0% at December 31, 2005. This decrease in the discount rate resulted in increases in the present value of our benefit obligations.

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

Note 22. Reorganization of Business Operations

Effective October 1, 2004, we restructured our business into two segments, G&I and E&C. In 2004, we recorded restructuring and related costs of $40 million related to the reorganization. The total restructuring charges consisted of $31 million in personnel termination benefits and $9 million in impairment charges on technology-related assets. For the year-ended December 31, 2004, $32 million of the restructuring charge was included in “Cost of services” and $8 million was included in “General and administrative” on the consolidated statements of operations. As of December 31, 2005, all amounts related to the 2004 restructuring had been paid and the balance in the restructuring reserve account was zero.

Note 23. Quarterly Data (Unaudited)

	Quarter
Millions of dollars	First			Second			Third			Fourth			Year
2005
Revenue	$	2,591		$	2,512		$	2,319		$	2,724		$	10,146
Operating income		95			109			143			108			455
Net income from continuing operations		40			37			86			47			210
Net income from discontinued operations		8			6			8			8			30
Net income	$	48		$	43		$	94		$	55		$	240
2004
Revenue	$	3,572		$	2,921		$	2,539		$	2,874		$	11,906
Operating loss		(22	)		(282	)		(44	)		(9	)		(357	)
Net loss from continuing operations		(34	)		(225	)		(52	)		(3	)		(314	)
Net income from discontinued operations		3			2			—			6			11
Net income (loss)	$	(31	)	$	(223	)	$	(52	)	$	3		$	(303	)

Note 24. Recent Accounting Pronouncements

In March 2005, the FASB issued FASB Interpretation No. 47 (FIN 47), “Accounting for Conditional Asset Retirement Obligations, an interpretation of FASB Statement No. 143.” This statement clarifies that an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation when incurred if the liability’s fair value can be reasonably estimated. The provisions of FIN 47 were adopted as of December 31, 2005. The total liability at adoption for asset retirement obligations and the related accretion and depreciation expense for all periods presented is immaterial to our consolidated financial position and results of operations.

In December 2004, the FASB issued SFAS No. 123(R), “Share-Based Payment.” SFAS No. 123(R) is a revision of SFAS No. 123 and supersedes APB No. 25. In April 2005, the SEC adopted a rule that defers the required effective date of SFAS No. 123(R). The SEC rule provides that SFAS No. 123(R) is now effective for

F-57

registrants as of the beginning of the first fiscal year beginning after June 15, 2005. Certain of our key employees participate in the Halliburton stock-based employee compensation plans. As a result, we adopted the provisions of SFAS No. 123(R) on January 1, 2006 using the modified prospective application. Accordingly, we will recognize compensation expense for all newly granted awards and awards modified, repurchased, or cancelled after January 1, 2006. Compensation expense for the unvested portion of awards that were outstanding as of January 1, 2006 will be recognized ratably over the remaining vesting period based on the fair value at date of grant as calculated under the Black-Scholes option pricing model. This treatment will be consistent with our pro forma disclosure under SFAS No. 123. We will recognize compensation expense for Halliburton’s Employee Stock Purchase Plan (ESPP) using the Black-Scholes pricing model beginning with the January 1, 2006 purchase period.

In June 2006, the FASB issued FASB Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109.” This interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes.” The interpretation prescribes a recognition threshold and measurement attribute for a tax position taken or expected to be taken in a tax return and also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006. We will not elect early adoption of this interpretation and will adopt the provision of FIN 48 beginning January 1, 2007. We are currently evaluating what impact, if any, this statement will have on our financial statements.

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R).” SFAS No. 158 requires an employer to:

• recognize on its balance sheet the funded status (measured as the difference between the fair value of plan assets and the projected benefit obligation) of pension and other postretirement benefit plans;

• recognize, through comprehensive income, changes in the funded status of a defined benefit and postretirement plan in the year in which the changes occur;

• measure plans assets and benefit obligations as of the end of the employer’s fiscal year; and

• disclose additional information.

The requirement to recognize the funded status of a benefit plan and the additional disclosure requirements are effective for fiscal years ending after December 15, 2006. We will adopt SFAS No. 158 requirements for our fiscal year ending December 31, 2006. The requirement to measure plan assets and benefit obligations as of the date of the employer’s fiscal year-end is effective for fiscal years ending after December 15, 2008. We will not elect early adoption of these additional SFAS No. 158 requirements and will adopt these requirements for our fiscal year ending December 31, 2008.

We are currently assessing the quantitative impact to our financial statements, which we believe will be material. For example, using the information disclosed as of December 31, 2005, total assets as of December 31, 2005 would have been approximately $73 million lower, total liabilities would have been approximately $136 million higher, minority interest would have been approximately $74 million lower, and member’s equity would have been $135 million lower. Because our pension and other postretirement benefit plans are dependent on future events and circumstances and current actuarial assumptions, the impact at the time of adoption of SFAS No. 158 will differ from these amounts.

F-58

Note 25. Discontinued Operations

In May 2006, we completed the sale of our Production Services group, which was part of our E&C segment. The Production Services group delivers a range of support services, including asset management and optimization; brownfield projects; engineering; hook-up, commissioning and start-up; maintenance management and execution; and long-term production operations, to oil and gas exploration and production customers. In connection with the sale, we received net proceeds of $265 million (unaudited). The sale of Production Services resulted in a pre-tax gain of approximately $120 million (unaudited) in the nine months ended September 30, 2006. In accordance with the provisions of SFAS No. 144, “Accounting for Impairment or Disposal of Long-Lived Assets,” the results of operations of the Production Services group for the current and prior periods have been reported as discontinued operations. The major classes of assets and liabilities of discontinued operations in the consolidated balance sheet at December 31, 2005 and 2004 are as follows:

	December 31
Millions of dollars	2005			2004
Assets:
Accounts receivable—related party	$	15		$	—
Accounts receivable and unbilled work on uncompleted contracts, net		130			135
Other current assets		(5	)		3
Total current assets related to discontinued operations		140			138
Property, plant, and equipment, net		8			9
Goodwill		49			49
Equity in and advances to related companies		7			3
Other noncurrent assets		3			2
Total noncurrent assets related to discontinued operations		67			63
Total assets related to discontinued operations	$	207		$	201
Liabilities:
Accounts payable	$	33		$	30
Advance billings on incomplete contracts		12			5
Other current liabilities		10			7
Total current liabilities related to discontinued operations		55			42
Accounts payable—related party		3			—
Other long-term liabilities		7			6
Total noncurrent liabilities related to discontinued operations		10			6
Total liabilities related to discontinued operations	$	65		$	48

The operating results of our Production Services group, which are classified as discontinued operations in our consolidated statements of operations, are summarized in the following table:

	Years ended December 31						Nine months ended September 30
Millions of dollars	2005		2004		2003		2006		2005
							(unaudited)
Revenue	$	754	$	588	$	473	$	300	$	528
Operating profit	$	44	$	17	$	15	$	15	$	33
Pretax income (loss)	$	44	$	17	$	15	$	15	$	33

F-59

Note 26. Subsequent Events (unaudited)

Initial Public Offering

Halliburton has announced its intention to divest its interest in KBR and its subsidiaries, including KBR Holdings and all related operations. Its plans include an initial public offering of KBR common stock. Upon the closing of this offering, Halliburton will continue to hold a controlling interest in KBR. Halliburton has advised us that it intends to dispose of the KBR common stock that it owns following this offering as expeditiously as possible through a tax-free distribution to Halliburton’s stockholders. Halliburton has advised us that it has requested a ruling from the Internal Revenue Service that, among other things, no gain or loss will be recognized by Halliburton or its stockholders as a result of the distribution. Halliburton also intends to obtain an opinion of counsel related to the tax-free nature of the distribution. The determination of whether, and if so, when, to proceed with the distribution is entirely within the discretion of Halliburton. If Halliburton does not proceed with the distribution, it could elect to dispose of KBR common stock in a number of different types of transactions, including additional public offerings, open market sales, sales to one or more third parties or split-off offerings to Halliburton’s stockholders that would allow for the opportunity to exchange Halliburton shares for shares of our common stock or a combination of these transactions. In connection with this offering, we will enter into various agreements to complete the separation of our business from Halliburton, including, among others, a master separation agreement, transition services agreements and a tax sharing agreement. The master separation agreement will provide for, among other things, our responsibility for liabilities relating to our business and the responsibility of Halliburton for liabilities unrelated to our business. Pursuant to our master separation agreement, we will agree to indemnify Halliburton for, among other matters, all past, present and future liabilities related to our business and operations. We will also agree to indemnify Halliburton for liabilities under various outstanding and certain additional credit support instruments relating to our businesses and for liabilities under litigation matters related to our business. Halliburton will agree to indemnify us for, among other things, liabilities unrelated to our business, for certain other agreed matters relating to the FCPA investigations and the Barracuda-Caratinga project and for other litigation matters related to Halliburton’s business.

Under the transition services agreements, Halliburton is expected to continue providing various interim corporate support services to us and we will continue to provide various interim corporate support services to Halliburton. The tax sharing agreement provides for certain allocations of U.S. income tax liabilities and other agreements between us and Halliburton with respect to tax matters. The services to be provided under the transition services agreement between Halliburton and KBR are substantially the same as the services historically provided. Similarly, the related costs of such services will be substantially the same as the costs incurred and recorded in our historical financial statements. Further, the tax sharing agreement to be entered into in connection with the offering will contain substantially the same tax sharing provisions as included in our previous tax sharing agreements.

Partial Repayment of Subordinated Intercompany Notes

In October 2006, we repaid $324 million in aggregate principal amount of the Subordinated Intercompany Notes (which indebtedness totaled $774 million in aggregate principal amount at September 30, 2006).

F-60

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholder

KBR, Inc.:

We have audited the accompanying balance sheet of KBR, Inc. as of March 21, 2006. This financial statement is the responsibility of the Company’s management. Our responsibility is to express an opinion on this financial statement based on our audit.

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

In our opinion, the financial statement referred to above presents fairly, in all material respects, the financial position of KBR, Inc. as of March 21, 2006, in conformity with U.S. generally accepted accounting principles.

/s/ KPMG LLP

Houston, Texas

April 11, 2006, except as to Note 2,

which is as of October 27, 2006

F-61

KBR, INC.

Balance Sheet

(Whole dollars)

	March 21,			September 30,
	2006			2006
				(unaudited)
Assets
Cash	$	1		$	1
Total assets	$	1		$	1
Liabilities and shareholder’s equity
Liabilities	$	—		$	—
Preferred stock, $0.001 par value, 50,000,000 shares authorized, 0 shares issued and outstanding		—			—
Common stock, $0.001 par value, 300,000,000 shares authorized and 135,627,000 shares issued		135,627			135,627
Paid in capital		—			—
Receivable from parent		(135,626	)		(135,626	)
Shareholder’s equity		1			1
Total liabilities and shareholder’s equity	$	1		$	1

See notes to the balance sheet.

F-62

KBR, INC.

Notes to Balance Sheet

Note 1. Background and Basis of Presentation

KBR, Inc., a Delaware corporation (“KBR”), was formed on March 21, 2006 as an indirect, wholly owned subsidiary of Halliburton Company (“Halliburton”). KBR was formed to own and operate KBR Holdings, LLC (“KBR Holdings”). At inception, KBR issued 1,000 shares of common stock for $1 to Halliburton. See Note 2.

KBR intends to conduct an initial public offering of its common stock (the “Offering”). At or before the closing of the Offering, KBR will own KBR Holdings. There can be no assurances that the Offering will be completed.

The accounts of KBR are included in the balance sheet. As of September 30, 2006, KBR did not have any operations.

Halliburton has announced its intention to divest its interest in KBR and its subsidiaries, including KBR Holdings and all related operations. Its plans include the Offering. Upon the closing of the Offering, Halliburton will continue to hold a controlling interest in KBR. Halliburton has advised us that it intends to dispose of the KBR common stock that it owns following the Offering as expeditiously as possible through a tax-free distribution to Halliburton’s stockholders. Halliburton has advised us that it has requested a ruling from the Internal Revenue Service that, among other things, no gain or loss will be recognized by Halliburton or its stockholders as a result of the distribution. Halliburton also intends to obtain an opinion of counsel related to the tax-free nature of the distribution. The determination of whether, and if so, when, to proceed with the distribution is entirely within the discretion of Halliburton. If Halliburton does not proceed with the distribution, it could elect to dispose of KBR common stock in a number of different types of transactions, including additional public offerings, open market sales, sales to one or more third parties or split-off offerings to Halliburton’s stockholders that would allow for the opportunity to exchange Halliburton shares for shares of our common stock or a combination of these transactions. In connection with the Offering, we will enter into various agreements to complete the separation of our business from Halliburton, including, among others, a master separation agreement, transition services agreements and a tax sharing agreement. Pursuant to our master separation agreement, we will agree to indemnify Halliburton for, among other matters, all past, present and future liabilities related to our business and operations. We will also agree to indemnify Halliburton for liabilities under various outstanding and certain additional credit support instruments relating to our businesses and for liabilities under litigation matters related to our business. Halliburton will agree to indemnify us for, among other things, liabilities unrelated to our business, for certain other agreed matters relating to the FCPA investigations and the Barracuda-Caratinga project and for other litigation matters related to Halliburton’s business.

The tax sharing agreement provides for certain allocations of U.S. income tax liabilities and other agreements between us and Halliburton with respect to tax matters. The services to be provided under the transition services agreement between Halliburton and KBR are substantially the same as the services historically provided. Similarly, the related costs of such services will be substantially the same as the costs incurred and recorded in our historical financial statements. Further, the tax sharing agreement to be entered into in connection with the offering will contain substantially the same tax sharing provisions as included in our previous tax sharing agreements.

Under the transition services agreements, Halliburton is expected to continue providing various interim corporate support services to us and we will continue to provide various interim corporate support services to Halliburton.

F-63

Note 2. Common Stock Split

On October 27, 2006, our board of directors approved a 135,627-for-one split of our common stock. In connection with the stock split, our sole stockholder approved on October 27, 2006 an amendment and restatement of our certificate of incorporation to increase the number of authorized shares of common stock from 1,000 to 300,000,000 and to authorize 50,000,000 shares of preferred stock with a par value of $0.001 per share. All share data of our company presented in this prospectus has been adjusted to reflect the stock split. In connection with the stock split our stockholder will contribute $135,626 which has been recorded as a receivable from parent in shareholder’s equity.

F-64

APPENDIX A

GLOSSARY OF TERMS

AMC: Army Materiel Command.

Barracuda-Caratinga project: Project to develop the Barracuda and Caratinga crude oil fields located off the coast of Brazil pursuant to a contract with Barracuda & Caratinga Leasing Company B.V.

B-C Matters: The replacement of certain subsea flow-line bolts installed in connection with the Barracuda-Caratinga project.

DCAA: Defense Contract Audit Agency.

DCMA: Defense Contract Management Agency.

DML: Devonport Management Limited.

DoD: United States Department of Defense.

DOJ: United States Department of Justice.

E&C: Energy and Chemicals.

EPC: Engineering, procurement and construction.

EPC-CS: Engineering, procurement, construction, facility commissioning and start-up.

EPCm: Engineering, procurement and construction management.

FCPA: United States Foreign Corrupt Practices Act of 1977, as amended.

FCPA Matters: Claims relating to the alleged or actual violations occurring prior to the date of the master separation agreement of the FCPA or particular, analogous applicable statutes, laws, regulations and rules of U.S. and foreign governments and governmental bodies identified in the master separation agreement in connection with the Bonny Island project in Nigeria and in connection with any other project, whether located inside or outside of Nigeria, including without limitation the use of agents in connection with such projects, identified by a governmental authority in connection with investigations in the United States, the United Kingdom, France, Nigeria, Switzerland and Algeria.

FPSOs: Floating production, storage and offloading units.

GTL: Gas-to-liquids.

G&I: Government and Infrastructure.

LNG: Liquefied natural gas; natural gas that has been reduced to 1/600^th of its volume by cooling it through a sophisticated refrigeration process until it liquefies.

LogCAP: Logistics civil augmentation program; our worldwide United States Army logistics contract.

MoD: United Kingdom Ministry of Defence.

MWKL: M.W. Kellogg Limited.

A-1

PCO Oil South contract: A contract related to the rebuilding of Iraq’s petroleum industry.

Syngas: Synthesis gas; a mixture of hydrogen and carbon monoxide derived from natural gas, oil, or coal.

TSKJ: A private limited liability company registered in Madeira, Portugal whose members are Technip SA of France, Snamprogetti Netherlands B.V. (a subsidiary of Saipem SpA of Italy), JGC Corporation of Japan (JGC), and us (as successor to The M.W. Kellogg Company).

A-2

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

Item 13. Other Expenses of Issuance and Distribution.

The following table sets forth the expenses, other than underwriting discounts and commissions, payable in connection with the sale of common stock being registered. All the amounts shown are estimates except for the SEC registration fee and the NASD filing fee.

SEC registration fee	$	58,850
NASD filing fee		55,500
Printing and engraving expenses		850,000
Fees and expenses of legal counsel		1,100,000
Accounting fees and expenses		1,200,000
Transfer agent and registrar fees		27,000
NYSE listing fee		250,000
Miscellaneous		60,000
Total	$	3,601,350

(*) To be filed by amendment.

Item 14. Indemnification of Officers and Directors.

Delaware law permits a corporation to adopt a provision in its certificate of incorporation eliminating or limiting the personal liability of a director, but not an officer in his or her capacity as such, to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except that such provision shall not eliminate or limit the liability of a director for (1) any breach of the director’s duty of loyalty to the corporation or its stockholders, (2) acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (3) liability under section 174 of the Delaware General Corporation Law (the “DGCL”) for unlawful payment of dividends or stock purchases or redemptions or (4) any transaction from which the director derived an improper personal benefit. Our certificate of incorporation will provide that, to the fullest extent of Delaware law, none of our directors will be liable to us or our stockholders for monetary damages for breach of fiduciary duty as a director.

Under Delaware law, a corporation may indemnify any person who was or is a party or is threatened to be made a party to any type of proceeding, other than an action by or in the right of the corporation, because he or she is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation or other entity, against expenses, including attorneys’ fees, judgments, fines and amounts paid in settlement actually and reasonably incurred in connection with such proceeding if: (1) he or she acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the corporation and (2) with respect to any criminal proceeding, he or she had no reasonable cause to believe that his or her conduct was unlawful. The termination of any proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that a person did not act in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal proceeding, had reasonable cause to believe that his or her conduct was unlawful. A corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit brought by or in the right of the corporation because he or she is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director,

II-1

officer, employee or agent of another corporation or other entity, against expenses, including attorneys’ fees, actually and reasonably incurred in connection with such action or suit if he or she acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the corporation, except that no indemnification will be made if the person is found liable to the corporation unless, in such a case, the court determines the person is nonetheless entitled to indemnification for such expenses. A corporation must also indemnify a present or former director or officer who has been successful on the merits or otherwise in defense of any proceeding, or in defense of any claim, issue or matter therein, against expenses, including attorneys’ fees, actually and reasonably incurred by him or her. Expenses, including attorneys’ fees, incurred by a director, officer, employee or agent, in defending civil or criminal proceedings may be paid by the corporation in advance of the final disposition of such proceedings upon, in the case of a current director or officer, receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that he or she is not entitled to be indemnified by the corporation. The Delaware law regarding indemnification and the advancement of expenses is not exclusive of any other rights a person may be entitled to under any bylaw, agreement, vote of stockholders or disinterested directors or otherwise.

Section 174 of the DGCL provides, among other things, that a director, who willfully or negligently approves of an unlawful payment of dividends or an unlawful stock purchase or redemption, may be held liable for such actions. A director who was either absent when the unlawful actions were approved or dissented at the time, may avoid liability by causing his or her dissent to such actions to be entered in the books containing the minutes of the meetings of the board of directors at the time such action occurred or immediately after such absent director receives notice of the unlawful acts.

Our bylaws will generally provide for mandatory indemnification of directors and officers to the fullest extent permitted by law. We also intend to enter into indemnification agreements with our directors in the form filed as an exhibit to this Registration Statement that will generally provide for mandatory indemnification to the fullest extent permitted by law.

Delaware law also provides that a corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation or other entity, against any liability asserted against and incurred by such person, whether or not the corporation would have the power to indemnify such person against such liability. We will maintain, at our expense, an insurance policy that insures our officers and directors, subject to customary exclusions and deductions, against specified liabilities that may be incurred in those capacities.

ITEM 15. Recent Sales of Unregistered Securities

On March 21, 2006, in connection with the formation of KBR, Inc. (“KBR”), KBR issued 1,000 shares of its common stock, par value $0.001 per share, to a wholly owned subsidiary of Halliburton Company in exchange for $1.00. The issuance was exempt from registration under Section 4(2) of the Securities Act. There have been no other sales of unregistered securities by KBR within the past three years.

II-2

ITEM 16. Exhibits and Financial Statement Schedules

(A) Exhibits:

Exhibit Number	Description
1.1	Form of Underwriting Agreement
2.1	Proposed Joint Pre-packaged Plan of Reorganization for Mid-Valley, Inc., DII Industries, LLC, Kellogg Brown & Root, Inc., KBR Technical Services, Inc., Kellogg Brown & Root Engineering Corporation, Kellogg Brown & Root International, Inc. (a Delaware corporation), Kellogg Brown & Root International, Inc. (a Panamanian corporation), and BPM Minerals, LLC under Chapter 11 of the United States Bankruptcy Code dated September 18, 2003 (incorporated by reference to Exhibit 99 to Halliburton’s Form 8-K dated as of September 22, 2003, File No. 1-3492)
2.2	First Amended Joint Pre-packaged Plan of Reorganization for Mid-Valley, Inc., DII Industries, LLC, Kellogg Brown & Root, Inc., KBR Technical Services, Inc., Kellogg Brown & Root Engineering Corporation, Kellogg Brown & Root International, Inc. (a Delaware corporation), Kellogg Brown & Root International, Inc. (a Panamanian corporation), and BPM Minerals, LLC under Chapter 11 of the United States Bankruptcy Code dated November 14, 2003 (incorporated by reference to Annex 1 of Exhibit 99 to Halliburton’s Form 8-K dated as of November 19, 2003, File No. 1-3492)
3.1**	Form of Amended and Restated Certificate of Incorporation
3.2**	Form of Amended and Restated Bylaws
4.1	Form of specimen common stock certificate
5.1	Opinion of Baker Botts L.L.P. regarding validity of securities being issued
10.1	Form of Master Separation Agreement
10.2	Form of Tax Sharing Agreement
10.3**	Form of Registration Rights Agreement
10.4**	Form of Transition Services Agreement (KBR as service provider)
10.5**	Form of Transition Services Agreement (Halliburton as service provider)
10.6	Form of Employee Matters Agreement
10.7	Form of Intellectual Property Matters Agreement
10.8	Five Year Revolving Credit Agreement, dated as of December 16, 2005, among KBR Holdings, LLC, a Delaware limited liability company, as Borrower, the Banks and the Issuing Banks party thereto, Citibank, N.A. (“Citibank”), as Paying Agent, and Citibank and HSBC Bank USA, National Association, as Co-Administrative Agents (incorporated by reference to Exhibit 10.30 to Halliburton Company’s Annual Report on Form 10-K for the year ended December 31, 2005; File No. 1-03492)
10.9**	Amendment No. 1 to the Five Year Revolving Credit Agreement, dated as of April 13, 2006, among KBR Holdings, LLC, a Delaware limited liability company, as Borrower, the Banks and Institutional Banks parties to the Five Year Revolving Credit Agreement, and Citibank, N.A., as paying agent
10.10**	Intercompany Note, dated as of December 1, 2005, payable by KBR Holdings, LLC to Halliburton Energy Services, Inc.
10.11**	Intercompany Note, dated as of December 1, 2005, payable by Georgetown Financial Ltd. to Avalon Financial Services Ltd.
10.12**	Halliburton Cash Management Note, dated as of December 1, 2005
10.13**	KBR Cash Management Note, dated as of December 1, 2005

II-3

Exhibit Number	Description
10.14	Credit Facility in the amount of £80 million dated November 29, 2002 between Devonport Royal Dockyard Limited and Devonport Management Limited and The Governor and Company of the Bank of Scotland, HSBC Bank Plc and The Royal Bank of Scotland Plc (incorporated by reference to Exhibit 4.22 to Halliburton’s Form 10-K for the year ended December 31, 2002, File No. 1-3492)
10.15+**	Employment Agreement, dated as of April 3, 2006, between William P. Utt and KBR Technical Services, Inc.
10.16+**	Employment Agreement, dated as of November 7, 2005, between Cedric W. Burgher and KBR Technical Services, Inc.
10.17+**	Employment Agreement, dated as of August 1, 2004, between Bruce A. Stanski and KBR Technical Services, Inc.
10.18**	Form of Indemnification Agreement between KBR, Inc. and its directors
10.19+	Halliburton Company 1993 Stock and Incentive Plan, as amended and restated effective February 16, 2006 (incorporated by reference to Exhibit 10.3 to Halliburton’s Form 10-K for the year ended December 31, 2005, File No. 1-3492)
10.20+	Halliburton Company Benefit Restoration Plan, as amended and restated effective January 1, 2004 (incorporated by reference to Exhibit 10.2 to Halliburton’s Form 10-Q for the quarter ended September 30, 2004, File No. 1-3492)
10.21+	Halliburton Annual Performance Pay Plan, as amended and restated effective January 26, 2006 (incorporated by reference to Exhibit 10.17 to Halliburton’s Form 10-K for the year ended December 31, 2005, File No. 1-3492)
10.22+	Halliburton Company Supplemental Executive Retirement Plan, as amended and restated effective December 7, 2005 (incorporated by reference to Exhibit 10.29 to Halliburton’s Form 10-K for the year ended December 31, 2005, File No. 1-3492)
10.23+	Form of 2006 KBR, Inc. Stock and Incentive Plan
10.24	Form of Amendment No. 2 to the Five Year Revolving Credit Agreement, to be dated as of October 31, 2006, among KBR Holdings, LLC, a Delaware limited liability company, as Borrower, the banks, financial institutions and other institutional lenders parties to the Five Year Revolving Credit Agreement, and Citibank, N.A., as paying agent
21.1	List of subsidiaries
23.1	Consent of KPMG LLP
23.2	Consent of Baker Botts L.L.P. (included in Exhibit 5.1)
23.3	Consent of Richard J. Slater, as Director Nominee
24.1**	Power of Attorney
99.1**	Halliburton Company Code of Business Conduct

+ Management contract or compensatory plan or arrangement.

** Previously filed.

II-4

(B) Financial Statement Schedules:

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON

SUPPLEMENTAL SCHEDULE

The Member and Board of Directors:

KBR Holdings, LLC

Under date of April 11, 2006, except as to Note 4, which is as of September 20, 2006, and except as to Note 2, which is as of October 30, 2006, we reported on the consolidated balance sheets of KBR Holdings, LLC and subsidiaries (the Company) as of December 31, 2005 and 2004, and the related consolidated statements of operations, member’s equity and cash flow for each of the years in the three-year period ended December 31, 2005, which are included in KBR, Inc.’s Registration Statement on Form S-1. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related consolidated financial statement schedule (Schedule II) included in KBR, Inc.’s Registration Statement on Form S-1. The financial statement schedule is the responsibility of the Company’s management. Our responsibility is to express an opinion on the consolidated financial statement schedule based on our audits.

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

/s/    KPMG LLP

Houston, Texas

April 11, 2006, except as to Note 4, which

    is as of September 20, 2006, and except

    as to Note 2, which is as of

    October 30, 2006

II-5

KBR Holdings, LLC Schedule II - Valuation and Qualifying Accounts (Millions of Dollars)

The table below presents valuation and qualifying accounts for continuing operations.

			Additions
Descriptions	Balance at Beginning Period		Charged to Costs and Expenses		Charged to Other Accounts			Deductions			Balance at End of Period
Year ended December 31, 2003:
Deducted from accounts and notes receivable:
Allowance for bad debts	$	48	$	4	$	3		$	(3	)(a)	$	52
Accrued reorganization charges	$	—	$	—	$	—		$	—		$	—
Reserve for disputed and unallowable costs incurred under government contracts	$	13	$	—	$	36	(b)	$	(1	)	$	48
Year ended December 31, 2004:
Deducted from accounts and notes receivable:
Allowance for bad debts	$	52	$	6	$	2		$	(8	)(a)	$	52
Accrued reorganization charges	$	—	$	40	$	—		$	(21	)	$	19
Reserve for disputed and unallowable costs incurred under government contracts	$	48	$	—	$	83	(b)	$	—		$	131
Year ended December 31, 2005:
Deducted from accounts and notes receivable:
Allowance for bad debts	$	52	$	36	$	—		$	(37	)(a)	$	51
Accrued reorganization charges	$	19	$	—	$	—		$	(19	)	$	—
Reserve for disputed and unallowable costs incurred under government contracts	$	131	$	—	$	11	(b)	$	(9	)	$	133
Nine months ended September 30, 2006 (unaudited):
Deducted from accounts and notes receivable:
Allowance for bad debts	$	51	$	15	$	1		$	(29	)	$	38
Reserve for disputed and unallowable costs incurred under government contracts	$	133	$	—	$	39		$	(69	)	$	103

(a) Receivable write-offs, net of recoveries, and reclassifications.

(b) Reserves have been recorded as reductions of revenue, net of reserves no longer required.

II-6

ITEM 17. Undertakings

(a) The undersigned registrant hereby undertakes to provide to the underwriter at the closing specified in the underwriting agreements certificates in such denominations and registered in such names as required by the underwriter to permit prompt delivery to each purchaser.

(b) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.

(c) The undersigned registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective.

(2) For purposes of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

II-7

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Houston, State of Texas, on October 30, 2006.

KBR, INC.
By:	/s/    WILLIAM P. UTT
	William P. Utt President and Chief Executive Officer

Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities indicated on October 30, 2006.

Signature	Title
/s/    WILLIAM P. UTT
William P. Utt /s/    CEDRIC W. BURGHER	President, Chief Executive Officer and Director (Principal Executive Officer and Director)
Cedric W. Burgher /s/    JOHN W. GANN, JR.	Senior Vice President and Chief Financial Officer (Principal Financial Officer)
John W. Gann, Jr.	Vice President and Chief Accounting Officer (Principal Accounting Officer)
/s/    ALBERT O. CORNELISON, JR.
Albert O. Cornelison, Jr.	Director
/S/    C. CHRISTOPHER GAUT
C. Christopher Gaut	Director
/s/    ANDREW R. LANE
Andrew R. Lane	Director
/S/    MARK A. MCCOLLUM
*Mark A. McCollum	Director
/S/    MICHAEL A. WEBERPAL
*By:        Michael A. Weberpal, Attorney-in-fact

II-8

INDEX TO EXHIBITS

Exhibit Number	Description
1.1	Form of Underwriting Agreement
2.1	Proposed Joint Pre-packaged Plan of Reorganization for Mid-Valley, Inc., DII Industries, LLC, Kellogg Brown & Root, Inc., KBR Technical Services, Inc., Kellogg Brown & Root Engineering Corporation, Kellogg Brown & Root International, Inc. (a Delaware corporation), Kellogg Brown & Root International, Inc. (a Panamanian corporation), and BPM Minerals, LLC under Chapter 11 of the United States Bankruptcy Code dated September 18, 2003 (incorporated by reference to Exhibit 99 to Halliburton’s Form 8-K dated as of September 22, 2003, File No. 1-3492)
2.2	First Amended Joint Pre-packaged Plan of Reorganization for Mid-Valley, Inc., DII Industries, LLC, Kellogg Brown & Root, Inc., KBR Technical Services, Inc., Kellogg Brown & Root Engineering Corporation, Kellogg Brown & Root International, Inc. (a Delaware corporation), Kellogg Brown & Root International, Inc. (a Panamanian corporation), and BPM Minerals, LLC under Chapter 11 of the United States Bankruptcy Code dated November 14, 2003 (incorporated by reference to Annex 1 of Exhibit 99 to Halliburton’s Form 8-K dated as of November 19, 2003, File No. 1-3492)
3.1**	Form of Amended and Restated Certificate of Incorporation
3.2**	Form of Amended and Restated Bylaws
4.1	Form of specimen common stock certificate
5.1	Opinion of Baker Botts L.L.P. regarding validity of securities being issued
10.1	Form of Master Separation Agreement
10.2	Form of Tax Sharing Agreement
10.3**	Form of Registration Rights Agreement
10.4**	Form of Transition Services Agreement (KBR as service provider)
10.5**	Form of Transition Services Agreement (Halliburton as service provider)
10.6	Form of Employee Matters Agreement
10.7	Form of Intellectual Property Matters Agreement
10.8	Five Year Revolving Credit Agreement, dated as of December 16, 2005, among KBR Holdings, LLC, a Delaware limited liability company, as Borrower, the Banks and the Issuing Banks party thereto, Citibank, N.A. (“Citibank”), as Paying Agent, and Citibank and HSBC Bank USA, National Association, as Co-Administrative Agents (incorporated by reference to Exhibit 10.30 to Halliburton Company’s Annual Report on Form 10-K for the year ended December 31, 2005; File No. 1-03492)
10.9**	Amendment No. 1 to the Five Year Revolving Credit Agreement, dated as of April 13, 2006, among KBR Holdings, LLC, a Delaware limited liability company, as Borrower, the Banks and Institutional Banks parties to the Five Year Revolving Credit Agreement, and Citibank, N.A., as paying agent
10.10**	Intercompany Note, dated as of December 1, 2005, payable by KBR Holdings LLC to Halliburton Energy Services, Inc.
10.11**	Intercompany Note, dated as of December 1, 2005, payable by Georgetown Financial Ltd. to Avalon Financial Services Ltd.
10.12**	Halliburton Cash Management Note, dated as of December 1, 2005
10.13**	KBR Cash Management Note, dated as of December 1, 2005
10.14	Credit Facility in the amount of £80 million dated November 29, 2002 between Devonport Royal Dockyard Limited and Devonport Management Limited and The Governor and Company of the Bank of Scotland, HSBC Bank Plc and The Royal Bank of Scotland Plc (incorporated by reference to Exhibit 4.22 to Halliburton’s Form 10-K for the year ended December 31, 2002, File No. 1-3492)

II-9

Exhibit Number	Description
10.15+**	Employment Agreement, dated as of April 3, 2006, between William P. Utt and KBR Technical Services, Inc.
10.16+**	Employment Agreement, dated as of November 7, 2005, between Cedric W. Burgher and KBR Technical Services, Inc.
10.17+**	Employment Agreement, dated as of August 1, 2004, between Bruce A. Stanski and KBR Technical Services, Inc.
10.18**	Form of Indemnification Agreement between KBR, Inc. and its directors
10.19+	Halliburton Company 1993 Stock and Incentive Plan, as amended and restated effective February 16, 2006 (incorporated by reference to Exhibit 10.3 to Halliburton’s Form 10-K for the year ended December 31, 2005, File No. 1-3492)
10.20+	Halliburton Company Benefit Restoration Plan, as amended and restated effective January 1, 2004 (incorporated by reference to Exhibit 10.2 to Halliburton’s Form 10-Q for the quarter ended September 30, 2004, File No. 1-3492)
10.21+	Halliburton Annual Performance Pay Plan, as amended and restated effective January 26, 2006 (incorporated by reference to Exhibit 10.17 to Halliburton’s Form 10-K for the year ended December 31, 2005, File No. 1-3492)
10.22+	Halliburton Company Supplemental Executive Retirement Plan, as amended and restated effective December 7, 2005 (incorporated by reference to Exhibit 10.29 to Halliburton’s Form 10-K for the year ended December 31, 2005, File No. 1-3492)
10.23+	Form of 2006 KBR, Inc. Stock and Incentive Plan
10.24	Form of Amendment No. 2 to the Five Year Revolving Credit Agreement, to be dated as of October 31, 2006, among KBR Holdings, LLC, a Delaware limited liability company, as Borrower, the banks, financial institutions and other institutional lenders parties to the Five Year Revolving Credit Agreement, and Citibank, N.A., as paying agent
21.1	List of subsidiaries
23.1	Consent of KPMG LLP
23.2	Consent of Baker Botts L.L.P. (included in Exhibit 5.1)
23.3	Consent of Richard J. Slater, Director Nominee
24.1**	Power of Attorney
99.1**	Halliburton Company Code of Business Conduct

+ Management contract or compensatory plan or arrangement.

** Previously filed.

II-10

EX-1.1

Exhibit 1.1

27,840,000 Shares

KBR, Inc.

Common Stock

UNDERWRITING AGREEMENT

                            , 2006

CREDIT SUISSE SECURITIES (USA) LLC

GOLDMAN, SACHS & CO.

UBS SECURITIES LLC,

As Representatives of the Several Underwriters,

c/o Credit Suisse Securities (USA) LLC,

Eleven Madison Avenue,

New York, N.Y. 10010-3629

Dear Sirs:

1. Introductory. KBR, Inc., a Delaware corporation (“Company”), proposes to issue and sell 27,840,000 shares (“Firm Securities”) of its Common Stock, par value $.001 per share (“Securities”), and also proposes to issue and sell to the Underwriters, at the option of the Underwriters, an aggregate of not more than 4,176,000 additional shares (“Optional Securities”) of its Securities as set forth below. The Firm Securities and the Optional Securities are herein collectively called the “Offered Securities”. KBR Holdings, LLC, a Delaware limited liability company (“Holdings”), and its subsidiaries currently conduct the business described in the Registration Statement, the General Disclosure Package and the Prospectus (each as defined below). Prior to the First Closing Date (as defined below), the Company will own Holdings. Each of the Company and Holdings hereby agrees with the several Underwriters named in Schedule A hereto (“Underwriters”) as follows:

2. Representations and Warranties of the Company. Each of the Company and Holdings represents and warrants to, and agrees with, the several Underwriters that:

(a) registration statement (No. 333-133302) relating to the Offered Securities, including a form of prospectus, has been filed with the Securities and Exchange Commission (“Commission”) and either (i) has been declared effective under the Securities Act of 1933 (“Act”) and is not proposed to be amended or (ii) is proposed to be amended by amendment or post-effective amendment. If such registration statement (“initial registration statement”) has been declared effective, either (i) an additional registration statement (“additional registration statement”) relating to the Offered Securities may have been filed with the Commission pursuant to Rule 462(b) (“Rule 462(b)”) under the Act and, if so filed, has become effective upon filing pursuant to such Rule and the Offered Securities all have been duly registered under the Act pursuant to the initial registration statement and, if applicable, the additional registration statement or (ii) such an additional registration statement is proposed to be filed with the Commission pursuant to Rule 462(b) and will become effective upon filing pursuant to such Rule and upon such filing the Offered Securities will all have been duly registered under the Act pursuant to the initial registration statement and such additional registration statement. If the Company does not propose to amend the initial registration statement or if an additional registration statement has been filed and the Company does not propose to amend it, and if any post-effective amendment to either such registration statement has been filed with the Commission prior to the execution and delivery of this Agreement, the most recent amendment (if any) to each such registration statement has been declared effective by the Commission or has become effective upon filing pursuant to Rule 462(c) (“Rule 462(c)”) under the Act or, in the case of the additional registration statement, Rule 462(b). For purposes of this Agreement, “Effective Time” with respect to the

initial registration statement or, if filed prior to the execution and delivery of this Agreement, the additional registration statement means (i) if the Company has advised the Representatives that it does not propose to amend such registration statement, the date and time as of which such registration statement, or the most recent post-effective amendment thereto (if any) filed prior to the execution and delivery of this Agreement, was declared effective by the Commission or has become effective upon filing pursuant to Rule 462(c), or (ii) if the Company has advised the Representatives that it proposes to file an amendment or post-effective amendment to such registration statement, the date and time as of which such registration statement, as amended by such amendment or post-effective amendment, as the case may be, is declared effective by the Commission. If an additional registration statement has not been filed prior to the execution and delivery of this Agreement but the Company has advised the Representatives that it proposes to file one, “Effective Time” with respect to such additional registration statement means the date and time as of which such registration statement is filed and becomes effective pursuant to Rule 462(b). “Effective Date” with respect to the initial registration statement or the additional registration statement (if any) means the date of the Effective Time thereof. The initial registration statement, as amended at its Effective Time, including all information contained in the additional registration statement (if any) and deemed to be a part of the initial registration statement as of the Effective Time of the additional registration statement pursuant to the General Instructions of the Form on which it is filed and including all information (if any) deemed to be a part of the initial registration statement as of its Effective Time pursuant to Rule 430A(b) (“Rule 430A(b)”) under the Act, is hereinafter referred to as the “Initial Registration Statement”. The additional registration statement, as amended at its Effective Time, including the contents of the initial registration statement incorporated by reference therein and including all information (if any) deemed to be a part of the additional registration statement as of its Effective Time pursuant to Rule 430A(b), is hereinafter referred to as the “Additional Registration Statement”. The Initial Registration Statement and the Additional Registration Statement are herein referred to collectively as the “Registration Statements” and individually as a “Registration Statement”. “Registration Statement” without reference to a time means the Registration Statement as of its Effective Time. “Registration Statement” as of any time means the initial registration statement and any additional registration statement in the form then filed with the Commission, including any amendment thereto and any prospectus deemed or retroactively deemed to be a part thereof that has not been superseded or modified. For purposes of the previous sentence, information contained in a form of prospectus or prospectus supplement that is deemed retroactively to be a part of the Registration Statement pursuant to Rule 430A shall be considered to be included in the Registration Statement as of the time specified in Rule 430A. “Statutory Prospectus” as of any time means the prospectus included in the Registration Statement immediately prior to that time, including any prospectus deemed to be a part thereof that has not been superseded or modified. For purposes of the preceding sentence, information contained in a form of prospectus that is deemed retroactively to be a part of the Registration Statement pursuant to Rule 430A shall be considered to be included in the Statutory Prospectus as of the actual time that form of prospectus is filed with the Commission pursuant to Rule 424(b) (“Rule 424(b)”) under the Act. “Prospectus” means the Statutory Prospectus that discloses the public offering price and other final terms of the Offered Securities and otherwise satisfies Section 10(a) of the Act. “Issuer Free Writing Prospectus” means any “issuer free writing prospectus,” as defined in Rule 433, relating to the Offered Securities in the form filed or required to be filed with the Commission or, if not required to be filed, in the form retained in the Company’s records pursuant to Rule 433(g). “General Use Issuer Free Writing Prospectus” means any Issuer Free Writing Prospectus that is intended for general distribution to prospective investors, as evidenced by its being specified in a schedule to this Agreement. “Limited Use Issuer Free Writing Prospectus” means any Issuer Free Writing Prospectus that is not a General Use Issuer Free Writing Prospectus. “Applicable Time” means :00 [a/p]m (Eastern time) on the date of this Agreement.

(b) If the Effective Time of the Initial Registration Statement is prior to the execution and delivery of this Agreement: (i) on the Effective Date of the Initial Registration Statement, the Initial Registration Statement conformed in all material respects to the requirements of the Act and the rules and regulations of the Commission (“Rules and Regulations”) and did not include any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, (ii) on the Effective Date of the Additional Registration Statement (if any), each Registration Statement conformed, or will conform, in all material respects to the requirements of the Act and the Rules and Regulations and did not include, or will not include, any untrue statement of a

2

material fact and did not omit, or will not omit, to state any material fact required to be stated therein or necessary to make the statements therein not misleading and (iii) on the date of this Agreement, the Initial Registration Statement and, if the Effective Time of the Additional Registration Statement is prior to the execution and delivery of this Agreement, the Additional Registration Statement each conforms, and at the time of filing of the Prospectus pursuant to Rule 424(b) or (if no such filing is required) at the Effective Date of the Additional Registration Statement in which the Prospectus is included, each Registration Statement and the Prospectus will conform, in all material respects to the requirements of the Act and the Rules and Regulations, and neither of such documents includes, or will include, any untrue statement of a material fact or omits, or will omit, to state any material fact required to be stated therein or necessary to make the statements therein not misleading. If the Effective Time of the Initial Registration Statement is subsequent to the execution and delivery of this Agreement: on the Effective Date of the Initial Registration Statement, the Initial Registration Statement and the Prospectus will conform in all material respects to the requirements of the Act and the Rules and Regulations, neither of such documents will include any untrue statement of a material fact or will omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, and no Additional Registration Statement has been or will be filed. The two preceding sentences do not apply to statements in or omissions from a Registration Statement or the Prospectus based upon written information furnished to the Company by any Underwriter through the Representatives specifically for use therein, it being understood and agreed that the only such information is that described as such in Section 8(b) hereof.

(c) (i) At the time of the initial filing of the initial registration statement and (ii) at the date of this Agreement, the Company was not and is not an “ineligible issuer,” as defined in Rule 405, including (x) the Company, Holdings or any subsidiary of either the Company or Holdings in the preceding three years not having been convicted of a felony or misdemeanor or having been made the subject of a judicial or administrative decree or order as described in Rule 405 and (y) the Company or Holdings in the preceding three years not having been the subject of a bankruptcy petition or insolvency or similar proceeding, not having had a registration statement be the subject of a proceeding under Section 8 of the Act and not being the subject of a proceeding under Section 8A of the Act in connection with the offering of the Offered Securities, all as described in Rule 405.

(d) As of the Applicable Time, neither (i) the General Use Issuer Free Writing Prospectus(es) issued at or prior to the Applicable Time, the Statutory Prospectus distributed generally to prospective investors and the pricing information set forth on Schedule B hereto, all considered together (collectively, the “General Disclosure Package”), nor (ii) any individual Limited Use Issuer Free Writing Prospectus, when considered together with the General Disclosure Package, included any untrue statement of a material fact or omitted to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. The preceding sentence does not apply to statements in or omissions from any prospectus included in the Registration Statement or any Issuer Free Writing Prospectus in reliance upon and in conformity with written information furnished to the Company by any Underwriter through the Representatives specifically for use therein, it being understood and agreed that the only such information furnished by any Underwriter consists of the information described as such in Section 8(b) hereof.

(e) Each Issuer Free Writing Prospectus, as of its issue date and at all subsequent times through the completion of the public offer and sale of the Offered Securities or until any earlier date that the Company notified or notifies the Representatives as described in the next sentence, did not, does not and will not include any information that conflicted, conflicts or will conflict with the information then contained in the Registration Statement, the Statutory Prospectus or the Prospectus. If at any time following issuance of an Issuer Free Writing Prospectus through the completion of the public offer and sale of the Offered Securities there occurred or occurs an event or development as a result of which such Issuer Free Writing Prospectus conflicted or would conflict with the information then contained in the Registration Statement or included or would include an untrue statement of a material fact or omitted or would omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances prevailing at that subsequent time, not misleading, (i) the Company has promptly notified or will promptly notify the Representatives and (ii) the Company has promptly amended or will promptly amend or supplement such Issuer Free Writing Prospectus to eliminate or correct such conflict, untrue

3

statement or omission. The foregoing two sentences do not apply to statements in or omissions from any Issuer Free Writing Prospectus in reliance upon and in conformity with written information furnished to the Company by any Underwriter through the Representatives specifically for use therein, it being understood and agreed that the only such information furnished by any Underwriter consists of the information described as such in Section 8(b) hereof.

(f) The Company has been duly incorporated and is an existing corporation in good standing under the laws of the State of Delaware, with corporate power and authority to own its properties and conduct its business as described in the General Disclosure Package and Holdings has been duly formed and is an existing limited liability company in good standing under the laws of the State of Delaware, with limited liability power and authority to own its properties and conduct its business as described in the General Disclosure Package; and each of the Company and Holdings is duly qualified to do business as a foreign corporation or limited liability company, as applicable, in good standing in all other jurisdictions in which its ownership or lease of property or the conduct of its business requires such qualification.

(g) Each subsidiary of Holdings has been duly formed or incorporated and is existing in good standing as a corporation, limited liability company or limited partnership, as applicable, under the laws of the jurisdiction of its incorporation or formation, with corporate, limited liability company or limited partnership power and authority to own its properties and conduct its business as described in the General Disclosure Package; and each subsidiary of Holdings is duly qualified to do business in good standing in all other jurisdictions in which its ownership or lease of property or the conduct of its business requires such qualification; except where any such failure to be so qualified or in good standing in such other jurisdictions would not, individually or in the aggregate, have a material adverse effect on the condition (financial or other), business, properties or results of operations of the Company, Holdings and their subsidiaries taken as a whole (“Material Adverse Effect”); all of the issued and outstanding capital stock of Holdings and each of its material subsidiaries (as identified on Schedule C hereto furnished by the Company and which each of Holdings and the Company represent lists all material subsidiaries of Holdings (each such subsidiary, a “Material Subsidiary” and collectively, the “Material Subsidiaries”)) has been duly authorized and validly issued and is fully paid and nonassessable; the capital stock of each Material Subsidiary owned by Holdings, directly or through subsidiaries, is owned free from liens, encumbrances and defects; and the capital stock of Holdings owned by Halliburton Company, directly or through subsidiaries, is owned free from liens, encumbrances and defects.

(h) The Offered Securities and all other outstanding shares of capital stock of the Company have been duly authorized; all outstanding shares of capital stock of the Company are, and, when the Offered Securities have been delivered and paid for in accordance with this Agreement on each Closing Date (as defined below), such Offered Securities will have been, validly issued, fully paid and nonassessable and will conform in all material respects to the description thereof contained in the General Disclosure Package; and the stockholders of the Company have no preemptive rights with respect to the Offered Securities.

(i) Except as disclosed in the General Disclosure Package, there are no contracts, agreements or understandings between the Company or Holdings and any person that would give rise to a valid claim against the Company or any Underwriter for a brokerage commission, finder’s fee or other like payment in connection with this offering.

(j) Except for the Registration Rights Agreement between Halliburton Company and the Company to be entered into on or prior to the First Closing Date and as described under the caption, “Our Relationship With Halliburton—Registration Rights Agreement” in the General Disclosure Package, there are no contracts, agreements or understandings between the Company and any person granting such person the right to require the Company to file a registration statement under the Act with respect to any securities of the Company owned or to be owned by such person or to require the Company to include such securities in the securities registered pursuant to a Registration Statement or in any securities being registered pursuant to any other registration statement filed by the Company under the Act.

(k) The Offered Securities have been approved for listing on the New York Stock Exchange subject to notice of issuance.

4

(l) No consent, approval, authorization, or order of, or filing with, any governmental agency or body or any court is required for the consummation of the transactions contemplated by this Agreement in connection with the issuance and sale of the Offered Securities by the Company, except such as have been obtained and made under the Act and such as may be required under state securities laws.

(m) The execution, delivery and performance of this Agreement, and the issuance and sale of the Offered Securities will not result in a breach or violation of any of the terms and provisions of, or constitute a default under, (i) any statute, any rule, regulation or order of any governmental agency or body or any court, domestic or foreign, having jurisdiction over the Company, Holdings or any subsidiary of Holdings or any of their properties, (ii) any agreement or instrument to which the Company, Holdings or any such subsidiary is a party or by which the Company, Holdings or any such subsidiary is bound or to which any of the properties of the Company, Holdings or any such subsidiary is subject, or (iii) the certificate of incorporation or by-laws of the Company or the certificate of formation or limited liability company agreement of Holdings, except, in the case of clauses (i) and (ii), where any such breach, violation or default would not, individually or in the aggregate, have a Material Adverse Effect; and the Company has full power and authority to authorize, issue and sell the Offered Securities as contemplated by this Agreement.

(n) This Agreement has been duly authorized, executed and delivered by each of the Company and Holdings.

(o) Except as disclosed in the General Disclosure Package, Holdings and its subsidiaries (i) have good and marketable title to all real properties and all other properties and assets owned by them, in each case free from liens, encumbrances and defects that would affect the value thereof or interfere with the use made or to be made thereof by them, and (ii) except as disclosed in the General Disclosure Package, Holdings and its subsidiaries hold any leased real or personal property under valid and enforceable leases with no exceptions that would interfere with the use made or to be made thereof by them, except, in each case, for such liens, encumbrances, defects or exceptions that would not have a Material Adverse Effect.

(p) Holdings and its subsidiaries possess adequate certificates, authorities or permits issued by appropriate governmental agencies or bodies necessary to conduct the business now operated by them, except where the lack thereof would not, individually or in the aggregate, have a Material Adverse Effect, and have not received any notice of proceedings relating to the revocation or modification of any such certificate, authority or permit that, if determined adversely to Holdings or any of its subsidiaries, would individually or in the aggregate have a Material Adverse Effect.

(q) No labor dispute with the employees of Holdings or any subsidiary exists or, to the knowledge of either the Company or Holdings, is imminent that is reasonably expected to have a Material Adverse Effect.

(r) Holdings and its subsidiaries own, possess or can acquire on reasonable terms, adequate trademarks, trade names and other rights to inventions, know-how, patents, copyrights, confidential information and other intellectual property (collectively, “intellectual property rights”) necessary to conduct the business now operated by them, or presently employed by them, except where the failure to own, possess or acquire such intellectual property rights would not, individually or in the aggregate, have a Material Adverse Effect and have not received any notice of infringement of or conflict with asserted rights of others with respect to any intellectual property rights that, if determined adversely to Holdings or any of its subsidiaries, would individually or in the aggregate have a Material Adverse Effect.

(s) Except as disclosed in the General Disclosure Package, neither the Company, Holdings nor any of Holdings’ subsidiaries is in violation of any statute, any rule, regulation, decision or order of any governmental agency or body or any court, domestic or foreign, relating to the use, disposal or release of hazardous or toxic substances or relating to the protection or restoration of the environment or human exposure to hazardous or toxic substances (collectively, “environmental laws”), owns or operates any real property contaminated with any substance that is subject to any environmental laws, is liable for any off-site disposal or contamination pursuant to any environmental laws, or is subject to any claim relating to any

5

environmental laws, which violation, contamination, liability or claim would individually or in the aggregate have a Material Adverse Effect; and neither the Company nor Holdings is aware of any pending investigation which is reasonably expected to lead to such a claim.

(t) Except as disclosed in the General Disclosure Package, there are no pending or, to either of the Company’s or Holdings’ knowledge, threatened or contemplated actions, suits or proceedings against or affecting the Company, Holdings or any of Holdings’ subsidiaries or any of their respective properties that, if determined adversely to the Company, Holdings or any of Holdings’ subsidiaries, would individually or in the aggregate have a Material Adverse Effect, or would materially and adversely affect the ability of the Company or Holdings to perform their obligations under this Agreement, or which are otherwise material in the context of the sale of the Offered Securities.

(u) The financial statements included in each Registration Statement and the General Disclosure Package present fairly the financial position of each of (i) Holdings and its consolidated subsidiaries and (ii) the Company and its consolidated subsidiaries as of the dates shown and their results of operations and cash flows for the periods shown, and such financial statements comply in all material respects with the applicable requirements of the Act and have been prepared in conformity with the generally accepted accounting principles in the United States applied on a consistent basis; and the schedules included in each Registration Statement present fairly the information required to be stated therein.

(v) Except as disclosed in the General Disclosure Package, since the date of the respective latest audited financial statements of each of Holdings and the Company included in the General Disclosure Package there has been no material adverse change, nor any development or event involving a prospective material adverse change, in the condition (financial or other), business, properties or results of operations of Holdings and its subsidiaries taken as a whole or the Company and its subsidiaries taken as a whole, and, except as disclosed in or contemplated by the General Disclosure Package, there has been no dividend or distribution of any kind declared, paid or made by either of Holdings or the Company on any class of their respective capital stock.

(w) The Company is not and, after giving effect to the offering and sale of the Offered Securities and the application of the proceeds thereof as described in the General Disclosure Package, will not be an “investment company” as defined in the Investment Company Act of 1940.

(x) Except as disclosed in the Registration Statement, the General Disclosure Package and the Prospectus, each of Holdings and the Company maintains an effective system of “disclosure controls and procedures” (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that is designed to ensure that information required to be disclosed by the Company, including with respect to Holdings, in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms, including controls and procedures designed to ensure that such information is accumulated and communicated to the Company’s management as appropriate to allow timely decisions regarding required disclosure.

(y) Except as disclosed in the Registration Statement, the General Disclosure Package and the Prospectus, each of Holdings and the Company makes and keeps accurate books and records and maintains a system of internal controls over financial reporting sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management’s general or specific authorizations; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain asset accountability; (iii) access to assets is permitted only in accordance with management’s general or specific authorization; and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences.

(z) From and after the filing of the Initial Registration Statement, there is and has been no failure on the part of either of Holdings or the Company or any of their directors, members or officers, in their

6

capacities as such, to comply with any applicable provision of the Sarbanes-Oxley Act of 2002 and the rules and regulations promulgated in connection therewith.

(aa) Except for the matters described under the caption “Business–Legal Proceedings–FCPA Investigations” in the General Disclosure Package or as otherwise disclosed in the General Disclosure Package, to the knowledge of each of Holdings and the Company (i) none of the Company, Holdings, any of their subsidiaries, any of their majority owned or otherwise controlled joint ventures or any director, officer, agent or employee of the Company, Holdings, any of their subsidiaries or, with respect to any of such persons who are also employees of the Company or Holdings, any of their majority owned or otherwise controlled joint ventures is aware of or has taken any action, directly or indirectly, that would result in a violation by such persons of the Foreign Corrupt Practices Act of 1977, as amended, and the rules and regulations thereunder (the “FCPA”), including, without limitation, making use of the mails or any means or instrumentality of interstate commerce corruptly in furtherance of an offer, payment, promise to pay or authorization of the payment of any money, or other property, gift, promise to give, or authorization of the giving of anything of value to any “foreign official” (as such term is defined in the FCPA) or any foreign political party or official thereof or any candidate for foreign political office, in contravention of the FCPA and (ii) the Company, Holdings, their subsidiaries, their majority owned or otherwise controlled joint ventures and the directors, officers, agents and employees of the Company, Holdings, their subsidiaries and, with respect to any of such persons who are also employees of the Company or Holdings, their majority owned or otherwise controlled joint ventures have conducted their businesses in compliance with the FCPA and have instituted and maintain policies and procedures designed to ensure, and which are reasonably expected to continue to ensure, continued compliance therewith.

(bb) To the knowledge of each of Holdings and the Company, the operations of the Company, Holdings, their subsidiaries and their majority owned or otherwise controlled joint ventures are and have been conducted at all times in compliance with applicable financial recordkeeping and reporting requirements of (i) the Currency and Foreign Transactions Reporting Act of 1970, as amended, the rules and regulations thereunder and any related or similar rules, regulations or guidelines, issued, administered or enforced by any U.S. governmental agency (collectively, the “CFTRA”) and (ii) the money laundering statutes of all non-U.S. jurisdictions, the rules and regulations thereunder and any related or similar rules, regulations or guidelines, issued, administered or enforced by any non-U.S. governmental agency (collectively with the CFTRA, the “Money Laundering Laws”), except in the case of clause (ii), where any such failure to comply would not, individually or in the aggregate, have a Material Adverse Effect; and no action, suit or proceeding by or before any court or governmental agency, authority or body or any arbitrator involving the Company, Holdings, any of their subsidiaries or any of their majority owned or otherwise controlled joint ventures with respect to the Money Laundering Laws is pending or, to the knowledge of either of Holdings or the Company, threatened.

(cc) To the knowledge of each of Holdings and the Company, none of the Company, Holdings, any of their subsidiaries, any of their majority owned or otherwise controlled joint ventures or any director, officer, agent or employee of the Company, Holdings, any of their subsidiaries or, with respect to any of such persons who are also employees of the Company or Holdings, any of their majority owned or otherwise controlled joint ventures is currently subject to any penalty, charging or warning letter, settlement agreement or order relating to any U.S. sanctions administered by or on behalf of the Office of Foreign Assets Control of the U.S. Treasury Department (“OFAC”); and the Company will not directly or indirectly use the proceeds of the offering, or lend, contribute or otherwise make available such proceeds to any subsidiary, any majority owned or otherwise controlled joint venture partner or other person or entity, for the purpose of financing the activities of any person currently subject to any penalty, charging or warning letter, settlement agreement or order relating to any U.S. sanctions administered by or on behalf of OFAC.

3. Purchase, Sale and Delivery of Offered Securities. On the basis of the representations, warranties and agreements herein contained, but subject to the terms and conditions herein set forth, the Company agrees to sell to the Underwriters, and the Underwriters agree, severally and not jointly, to purchase from the Company, at a purchase price of $             per share, the respective numbers of shares of Firm Securities set forth opposite the names of the Underwriters in Schedule A hereto.

7

The Company will deliver the Firm Securities to the Representatives for the accounts of the Underwriters, against payment of the purchase price in Federal (same day) funds by wire transfer to an account at a bank acceptable to the Representatives drawn to the order of the Company at the office of Baker Botts L.L.P., 910 Louisiana, Houston, Texas 77002-4995, at [            ] A.M., New York time, on [            ], 2006, or at such other time not later than seven full business days thereafter as the Representatives and the Company determine, such time being herein referred to as the “First Closing Date”. For purposes of Rule 15c6-1 under the Securities Exchange Act of 1934, the First Closing Date (if later than the otherwise applicable settlement date) shall be the settlement date for payment of funds and delivery of securities for all the Offered Securities sold pursuant to the offering. The Firm Securities so to be delivered will be in uncertificated form and in such denominations and registered in such names as the Representatives request and shall be delivered through the facilities of The Depository Trust Company (“DTC”), unless the Representatives shall otherwise instruct.

In addition, upon written notice from the Representatives given to the Company from time to time not more than 30 days subsequent to the date of the Prospectus, the Underwriters may purchase all or less than all of the Optional Securities at the purchase price per Security to be paid for the Firm Securities. The Company agrees to sell to the Underwriters the number of Optional Securities specified in such notice and the Underwriters agree, severally and not jointly, to purchase such Optional Securities. Such Optional Securities shall be purchased for the account of each Underwriter in the same proportion as the number of shares of Firm Securities set forth opposite such Underwriter’s name bears to the total number of Firm Securities (subject to adjustment by the Representatives to eliminate fractions) and may be purchased by the Underwriters only for the purpose of covering over-allotments made in connection with the sale of the Firm Securities. No Optional Securities shall be sold or delivered unless the Firm Securities previously have been, or simultaneously are, sold and delivered. The right to purchase the Optional Securities or any portion thereof may be exercised from time to time and to the extent not previously exercised may be surrendered and terminated at any time upon notice by the Representatives to the Company.

Each time for the delivery of and payment for the Optional Securities, being herein referred to as an “Optional Closing Date”, which may be the First Closing Date (the First Closing Date and each Optional Closing Date, if any, being sometimes referred to as a “Closing Date”), shall be determined by the Representatives but shall be not later than five full business days after written notice of election to purchase Optional Securities is given. The Company will deliver the Optional Securities being purchased on each Optional Closing Date to the Representatives for the accounts of the several Underwriters, against payment of the purchase price therefor in Federal (same day) funds by wire transfer to an account at a bank acceptable to the Representatives drawn to the order of the Company, at the office of Baker Botts L.L.P., 910 Louisiana, Houston, Texas 77002-4995. The Optional Securities being purchased on each Optional Closing Date will be in uncertificated form and in such denominations and registered in such names as the Representatives request upon reasonable notice prior to such Optional Closing Date and shall be delivered through the facilities of DTC, unless the Representatives shall otherwise instruct.

4. Offering by Underwriters. It is understood that the several Underwriters propose to offer the Offered Securities for sale to the public as set forth in the Prospectus.

5. Certain Agreements of the Company. Each of the Company and Holdings agrees with the several Underwriters that:

(a) If the Effective Time of the Initial Registration Statement is prior to the execution and delivery of this Agreement, the Company will file the Prospectus with the Commission pursuant to and in accordance with subparagraph (1) (or, if applicable and if consented to by the Representatives (which consent shall not be unreasonably withheld or delayed), subparagraph (4)) of Rule 424(b) not later than the earlier of (A) the second business day following the execution and delivery of this Agreement or (B) the fifteenth business day after the Effective Date of the Initial Registration Statement. The Company will advise the Representatives promptly of any such filing pursuant to Rule 424(b). If the Effective Time of the Initial Registration Statement is prior to the execution and delivery of this Agreement and an additional registration statement is necessary to register a portion of the Offered Securities under the Act but the Effective Time thereof has not occurred as of such execution and delivery, the Company will file the additional registration statement or, if filed, will file a post-effective amendment thereto with the Commission pursuant to and in accordance with Rule 462(b) on or prior to 10:00 P.M., New York time, on the date of this Agreement or, if earlier, on or prior to the time the Prospectus is printed and distributed to

8

any Underwriter, or will make such filing at such later date as shall have been consented to by the Representatives (which consent shall not be unreasonably withheld or delayed).

(b) The Company will advise the Representatives promptly of any proposal to amend or supplement the initial or any additional registration statement as filed or the related prospectus or the Initial Registration Statement, the Additional Registration Statement (if any) or any Statutory Prospectus and will not effect such amendment or supplementation without the Representatives’ consent (which consent shall not be unreasonably withheld or delayed); and the Company will also advise the Representatives promptly of the effectiveness of each Registration Statement (if its Effective Time is subsequent to the execution and delivery of this Agreement) and of any amendment or supplementation of a Registration Statement or any Statutory Prospectus and of the institution by the Commission of any stop order proceedings in respect of a Registration Statement and will use commercially reasonable best efforts to prevent the issuance of any such stop order and to obtain as soon as possible its lifting, if issued.

(c) If, at any time when a prospectus relating to the Offered Securities is (or but for the exemption in Rule 172 would be required to be) delivered under the Act in connection with sales by any Underwriter or dealer, any event occurs as a result of which the Prospectus as then amended or supplemented would include an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, or if it is necessary at any time to amend the Prospectus to comply with the Act, the Company will promptly notify the Representatives of such event and will promptly prepare and file with the Commission, at its own expense, an amendment or supplement which will correct such statement or omission or an amendment which will effect such compliance. Neither the Representatives’ consent to, nor the Underwriters’ delivery of, any such amendment or supplement shall constitute a waiver of any of the conditions set forth in Section 7.

(d) As soon as practicable, but not later than the Availability Date (as defined below), the Company will make generally available to its securityholders an earnings statement covering a period of at least 12 months beginning after the Effective Date of the Initial Registration Statement (or, if later, the Effective Date of the Additional Registration Statement) which will satisfy the provisions of Section 11(a) of the Act. For the purpose of the preceding sentence, “Availability Date” means the 45th day after the end of the fourth fiscal quarter following the fiscal quarter that includes such Effective Date, except that, if such fourth fiscal quarter is the last quarter of the Company’s fiscal year, “Availability Date” means the 90th day after the end of such fourth fiscal quarter.

(e) The Company will furnish to the Representatives copies of each Registration Statement (three of which will be signed and will include all exhibits), each related preliminary prospectus, and, so long as a prospectus relating to the Offered Securities is required to be delivered under the Act in connection with sales by any Underwriter or dealer, the Prospectus and all amendments and supplements to such documents, in each case in such quantities as the Representatives reasonably request. The Prospectus shall be so furnished on or prior to 10:00 A.M., New York time, on the second business day following the later of the execution and delivery of this Agreement or the Effective Time of the Initial Registration Statement. All other documents shall be so furnished as soon as available. The Company will pay the expenses of printing and distributing to the Underwriters all such documents.

(f) The Company shall cooperate with the Representatives and counsel for the Underwriters to qualify the Offered Securities for sale under the applicable securities laws of such states and other jurisdictions as the Representatives designate and shall continue such qualifications in effect so long as required for the distribution of the Offered Securities; provided, however, that the Company shall not be obligated to qualify or register as a foreign corporation or as a dealer in securities or to take any action that would subject it to general service of process in any such jurisdiction or to subject itself to taxation in respect of doing business in any jurisdiction in which it is not otherwise so subject.

(g) The Company and Holdings will pay all expenses incident to the performance of their respective obligations under this Agreement, for any filing fees and other expenses (including fees and disbursements of counsel) incurred in connection with qualification of the Offered Securities for sale and

9

determination of their eligibility for investment under the laws of such jurisdictions as the Representatives designate and the printing of memoranda relating thereto, for the filing fee incident to the review by the National Association of Securities Dealers, Inc. of the Offered Securities, for any travel expenses of the Company’s and Holdings’ officers and employees and any other expenses of the Company and Holdings in connection with attending or hosting meetings with prospective purchasers of the Offered Securities, including the cost of any aircraft chartered in connection with attending or hosting such meetings, for expenses incurred in distributing preliminary prospectuses and the Prospectus (including any amendments and supplements thereto) to the Underwriters and for expenses incurred for preparing, printing and distributing any Issuer Free Writing Prospectuses to investors or prospective investors.

(h) For the period specified below (the “Lock-Up Period”), the Company will not offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, or file with the Commission a registration statement under the Act (other than a registration statement or statements on Form S-8 or any successor form in connection with the registration of securities issuable under the KBR, Inc. 2006 Stock and Incentive Plan (the “Company Plan”) and the transitional stock adjustment plan described under the caption “Management—Anticipated Conversion of Halliburton Equity-Based Awards into KBR Equity-Based Awards” in the General Disclosure Package (the “Transitional Plan”)) relating to, any additional shares of its Securities or securities convertible into or exchangeable or exercisable for any shares of its Securities, or publicly disclose the intention to make any such offer, sale, pledge, disposition or filing, without the prior written consent of the Representatives, except with respect to Securities and Securities-based awards (i) under the Company Plan that are expected to be granted to outside directors of the Company as described under the caption “Management—Board Structure and Compensation of Directors” in the General Disclosure Package, (ii) under the Company Plan that are expected to be granted to employees after the First Closing Date as set forth in the table under the caption “Management–KBR, Inc. 2006 Stock and Incentive Plan” in the General Disclosure Package and (iii) under the Transitional Plan that may be granted in connection with the anticipated conversion of Halliburton Company equity awards held by the Company’s employees that have been granted under Halliburton Company’s 1993 Stock and Incentive Plan into equity awards relating to the Company’s Securities as described under the caption “Management—Anticipated Conversion of Halliburton Equity-Based Awards into KBR Equity-Based Awards.” The initial Lock-Up Period will commence on the date hereof and will continue and include the date 180 days after the date hereof or such earlier date that the Representatives consent to in writing; provided, however, that if (i) during the last 17 days of the initial Lock-Up Period, the Company releases earnings results or material news or a material event relating to the Company occurs or (ii) prior to the expiration of the initial Lock-Up Period, the Company announces that it will release earnings results during the 16-day period beginning on the last day of the initial Lock-Up Period, then in each case the Lock-Up Period will be extended until the expiration of the 18-day period beginning on the date of release of the earnings results or the occurrence of the material news or material event, as applicable, unless the Representatives waive, in writing, such extension. The Company will provide the Representatives with notice of any announcement described in clause (ii) of the preceding sentence that gives rise to an extension of the Lock-Up Period.

6. Free Writing Prospectuses. The Company represents and agrees that, unless it obtains the prior consent of the Representatives, and each Underwriter represents and agrees that, unless it obtains the prior consent of the Company and the Representatives, it has not made and will not make any offer relating to the Offered Securities that would constitute an Issuer Free Writing Prospectus, or that would otherwise constitute a “free writing prospectus,” as defined in Rule 405, required to be filed with the Commission. Any such free writing prospectus consented to by the Company and Representatives is hereinafter referred to as a “Permitted Free Writing Prospectus.” The Company represents that it has treated and agrees that it will treat each Permitted Free Writing Prospectus as an “issuer free writing prospectus,” as defined in Rule 433, and has complied and will comply with the requirements of Rules 164 and 433 applicable to any Permitted Free Writing Prospectus, including timely Commission filing where required, legending and record keeping. The Company represents that it has satisfied and agrees that it will satisfy the conditions in Rule 433 to avoid a requirement to file with the Commission any electronic road show.

7. Conditions of the Obligations of the Underwriters. The obligations of the several Underwriters to purchase and pay for the Firm Securities on the First Closing Date and the Optional Securities to be purchased on each Optional Closing Date will be subject to the accuracy of the representations and warranties on the part of the

10

Company herein, it being understood and agreed by the Company that all references to Holdings in each instance where it appears in the representations and warranties shall be deemed to refer to the Company, to the accuracy of the statements of Company and Holdings’ officers made pursuant to the provisions hereof, to the performance by the Company and Holdings of their respective obligations hereunder and to the following additional conditions precedent:

(a) The Representatives shall have received a letter, dated the date of delivery thereof (which, if the Effective Time of the Initial Registration Statement is prior to the execution and delivery of this Agreement, shall be on or prior to the date of this Agreement or, if the Effective Time of the Initial Registration Statement is subsequent to the execution and delivery of this Agreement, shall be prior to the filing of the amendment or post-effective amendment to the registration statement to be filed shortly prior to such Effective Time), of KPMG LLP confirming that they are independent public accountants with respect to each of the Company and Holdings within the meaning of the Act and the applicable published Rules and Regulations thereunder and stating to the effect that:

(i) in their opinion the financial statements and schedules examined by them and included in the Registration Statements and each Statutory Prospectus comply as to form in all material respects with the applicable accounting requirements of the Act and the related published Rules and Regulations;

(ii) they have performed the procedures specified by the American Institute of Certified Public Accountants for a review of interim financial information as described in Statement of Auditing Standards No. 100, Interim Financial Information, on the unaudited financial statements included in the Registration Statements;

(iii) on the basis of the review referred to in clause (ii) above, a reading of the latest available interim financial statements of the Company and Holdings inquiries of officials of the Company and Holdings who have responsibility for financial and accounting matters and other specified procedures, nothing came to their attention that caused them to believe that:

(A) the unaudited financial statements and schedules included in the Registration Statements and each Statutory Prospectus do not comply as to form in all material respects with the applicable accounting requirements of the Act and the related published Rules and Regulations or any material modifications should be made to such unaudited financial statements and schedules for them to be in conformity with generally accepted accounting principles;

(B) with respect to Holdings, (i) at the date of the latest available balance sheet read by such accountants, or at a subsequent specified date not more than three business days prior to the date of this Agreement, there was any change in the capital stock or any increase in long-term debt of Holdings and its consolidated subsidiaries or, at the date of the latest available balance sheet read by such accountants, there was any decrease in consolidated net current assets or member’s equity, as compared with amounts shown on the latest balance sheet included in the General Disclosure Package; or (ii) for the period from the closing date of the latest income statement included in the General Disclosure Package to the closing date of the latest available income statement read by such accountants there were any decreases, as compared with the corresponding period of the previous year, in consolidated revenues, or in the total or per share amounts of net income; or

(C) with respect to the Company, at the date of the latest available balance sheet read by such accountants, or at a subsequent specified date not more than three business days prior to the date of this Agreement, there was any change in the capital stock or any increase in long-term debt of the Company or, at the date of the latest available balance sheet read by such accountants, there was any decrease in consolidated

11

net current assets or shareholder’s equity, as compared with amounts shown on the latest balance sheet included in the General Disclosure Package,

except in all cases set forth in clauses (B) and (C) above for changes, increases or decreases which the General Disclosure Package discloses have occurred or may occur or which are described in such letter;

(iv) they have read the unaudited pro forma condensed consolidated financial statements of the Company and have performed specified procedures in connection therewith; and

(v) they have compared specified dollar amounts (or percentages derived from such dollar amounts) and other financial information contained in the Registration Statements, each Statutory Prospectus and each Issuer Free Writing Prospectus (other than any Issuer Free Writing Prospectus that is an “electronic road show,” as defined in Rule 433(h)) and the General Disclosure Package (in each case to the extent that such dollar amounts, percentages and other financial information are derived from the general accounting records of the Company and its subsidiaries subject to the internal controls of the Company’s accounting system or are derived directly from such records by analysis or computation) with the results obtained from inquiries, a reading of such general accounting records and other procedures specified in such letter and have found such dollar amounts, percentages and other financial information to be in agreement with such results, except as otherwise specified in such letter.

For purposes of this subsection, (i) if the Effective Time of the Initial Registration Statement is subsequent to the execution and delivery of this Agreement, “Registration Statements” shall mean the initial registration statement as proposed to be amended by the amendment or post-effective amendment to be filed shortly prior to its Effective Time, (ii) if the Effective Time of the Initial Registration Statement is prior to the execution and delivery of this Agreement but the Effective Time of the Additional Registration is subsequent to such execution and delivery, “Registration Statements” shall mean the Initial Registration Statement and the additional registration statement as proposed to be filed or as proposed to be amended by the post-effective amendment to be filed shortly prior to its Effective Time, and (iii) “Prospectus” shall mean the prospectus included in the Registration Statements.

(b) If the Effective Time of the Initial Registration Statement is not prior to the execution and delivery of this Agreement, such Effective Time shall have occurred not later than 10:00 P.M., New York time, on the date of this Agreement or such later date as shall have been consented to by the Representatives. If the Effective Time of the Additional Registration Statement (if any) is not prior to the execution and delivery of this Agreement, such Effective Time shall have occurred not later than 10:00 P.M., New York time, on the date of this Agreement or, if earlier, the time the Prospectus is printed and distributed to any Underwriter, or shall have occurred at such later date as shall have been consented to by the Representatives. If the Effective Time of the Initial Registration Statement is prior to the execution and delivery of this Agreement, the Prospectus shall have been filed with the Commission in accordance with the Rules and Regulations and Section 5(a) of this Agreement. Prior to such Closing Date, no stop order suspending the effectiveness of a Registration Statement shall have been issued and no proceedings for that purpose shall have been instituted or, to the knowledge of the Company or the Representatives, shall be contemplated by the Commission.

(c) On or after the Applicable Time, there shall not have occurred (i) any change, or any development or event involving a prospective change, in the condition (financial or other), business, properties or results of operations of the Company, Holdings and their subsidiaries taken as one enterprise which, in the judgment of the Representatives, is material and adverse and makes it impractical or inadvisable to proceed with completion of the public offering or the sale of and payment for the Offered Securities; (ii) any downgrading in the rating of any debt securities of the Company or Holdings by any “nationally recognized statistical rating organization” (as defined for purposes of Rule 436(g) under the Act), or any public announcement that any such organization has under surveillance or review its rating of any debt securities of the Company or Holdings (other than an announcement with positive implications of a possible upgrading, and no implication of a possible downgrading, of such rating); (iii) any change in

12

U.S. or international financial, political or economic conditions or currency exchange rates or exchange controls as would, in the judgment of the Representatives, be likely to prejudice materially the success of the proposed issue, sale or distribution of the Offered Securities, whether in the primary market or in respect of dealings in the secondary market; (iv) any material suspension or material limitation of trading in securities generally on the New York Stock Exchange, or any setting of minimum prices for trading on such exchange; (v) any suspension of trading of any securities of the Company or Holdings on any exchange or in the over-the-counter market; (vi) any banking moratorium declared by U.S. Federal or New York authorities; (vii) any major disruption of settlements of securities or clearance services in the United States; or (viii) any attack on, outbreak or escalation of hostilities or act of terrorism involving the United States, any declaration of war by Congress or any other national or international calamity or emergency if, in the judgment of the Representatives, the effect of any such attack, outbreak, escalation, act, declaration, calamity or emergency makes it impractical or inadvisable to proceed with completion of the public offering or the sale of and payment for the Offered Securities.

(d) The Representatives shall have received an opinion and negative assurance, dated such Closing Date, of Baker Botts L.L.P., counsel for the Company, to the effect that:

(i) The Company is a corporation duly incorporated and validly existing in good standing under the laws of the State of Delaware, with corporate power and authority to own its properties and conduct its business as described in each of the General Disclosure Package and the Prospectus; and the Company has been duly qualified as a foreign corporation for the transaction of business and is in good standing under the laws of the State of Texas;

(ii) The Offered Securities delivered on such Closing Date have been duly and validly authorized and issued, are fully paid and nonassessable and conform as to legal matters in all material respects to the description thereof contained in each of the General Disclosure Package and the Prospectus; and the stockholders of the Company have no preemptive rights under the Certificate of Incorporation and Bylaws of the Company, the Delaware General Corporation Law or, to the knowledge of such counsel, any other agreement or instrument to which the Company is a party, with respect to the Offered Securities;

(iii) Except for the Registration Rights Agreement between Halliburton Company and the Company to be entered into on or prior to the First Closing Date and as described under the caption, “Our Relationship With Halliburton—Registration Rights Agreement” in the General Disclosure Package, there are no contracts, agreements or understandings known to such counsel between the Company and any person granting such person the right to require the Company to file a registration statement under the Act with respect to any securities of the Company owned or to be owned by such person or to require the Company to include such securities in the securities registered pursuant to the Registration Statement or in any securities being registered pursuant to any other registration statement filed by the Company under the Act;

(iv) The Company is not an “investment company”, as such term is defined in the Investment Company Act of 1940;

(v) No consent, approval, authorization, order, registration or qualification of or with any U.S. court or governmental agency or body is required for the sale of the Offered Securities or the consummation by the Company of the transactions contemplated by the Underwriting Agreement, except the registration under the Act of the Offered Securities and such consents, approvals, authorizations, registrations or qualifications as may be required under state securities or Blue Sky laws in connection with the purchase and distribution of the Offered Securities by the Underwriters;

(vi) The Initial Registration Statement was declared effective under the Act as of the date and time specified in such opinion, the Additional Registration Statement (if any) was filed and became effective under the Act as of the date and time (if determinable) specified in such opinion, the Prospectus either was filed with the Commission pursuant to the subparagraph of

13

Rule 424(b) specified in such opinion on the date specified therein or was included in the Initial Registration Statement or the Additional Registration Statement (as the case may be), and, to the knowledge of such counsel, no stop order suspending the effectiveness of a Registration Statement or any part thereof has been issued and no proceedings for that purpose have been instituted or are pending or contemplated by the Commission under the Act;

(vii) Such counsel does not know of any contracts or documents of a character required to be described in a Registration Statement or the Prospectus or to be filed as exhibits to a Registration Statement which are not described and filed as required;

(viii) To such counsel’s knowledge and other than as disclosed in each of the General Disclosure Package and the Prospectus, (i) there are no legal or governmental proceedings pending by or before any court or governmental agency, authority or body to which the Company or any of its Material Subsidiaries is a party or of which any property of the Company or any of its Material Subsidiaries is subject that is required to be described in a Registration Statement or the Prospectus that is not so described and (ii) there are no legal or governmental proceedings pending or threatened by governmental authorities or others against the Company or any of its subsidiaries with respect to any United States antitrust laws, or under the FCPA or analogous applicable foreign statutes and regulations, in either case of the nature described in the General Disclosure Package and the Prospectus under the headings “Business—Legal Proceedings—Bidding Investigations” and “—FCPA Investigations”, which, if determined adversely to the Company or any of its subsidiaries, would individually or in the aggregate have a Material Adverse Effect;

(ix) The statements set forth in each of the General Disclosure Package and the Prospectus under the caption “Description of Capital Stock”, insofar as they purport to constitute a summary of the terms of the Securities, fairly and accurately summarize in all material respects the terms of the Offered Securities;

(x) Although the discussion set forth in each of the General Disclosure Package and the Prospectus under the caption “Material United States Federal Tax Considerations for Non-U.S. Holders” does not purport to discuss all possible United States Federal income tax consequences of the purchase, ownership and disposition of the Offered Securities, in such counsel’s opinion, such discussion constitutes in all material respects, a fair and accurate summary of the United States federal income tax consequences of the purchase, ownership and disposition of the Offered Securities by the non-U.S. holders addressed therein based upon current law and subject to the qualifications set forth therein;

(xi) Each Registration Statement and the Prospectus and any further amendments and supplements thereto made by the Company prior to the date hereof (other than the financial statements and related schedules therein, and the notes thereto and the auditors’ report thereon and other financial data included therein, or omitted therefrom, as to which such counsel need express no opinion) as of their respective effective or issue dates, appeared on their face to have complied as to form in all material respects with the requirements of the Act and the rules and regulations thereunder;

(xii) The Company has authorized capital stock as set forth in each of the General Disclosure Package and the Prospectus, and all of the issued shares of capital stock of the Company (including the Offered Securities being delivered on the Closing Date when issued and delivered to the Underwriters against payment therefor in accordance with the terms of this Agreement) have been duly and validly authorized and issued and are fully paid and non-assessable; and

(xiii) This Agreement has been duly authorized, executed and delivered by each of the Company and Holdings.

14

Such counsel shall also include, in a separate paragraph of its opinion, statements to the following effect: such counsel has participated in conferences with officers and other representatives of the Company and Holdings, with representatives of the independent registered public accounting firm of the Company and Holdings, with Special Counsel to the Company, and with representatives of and counsel for the Underwriters, at which the contents of the Registration Statement, the Prospectus, the General Disclosure Package and related matters were discussed, and although such counsel did not independently verify such information, and is not passing upon and does not assume any responsibility for the accuracy, completeness or fairness of the statements contained in, the Prospectus, the Registration Statement or the General Disclosure Package (except to the extent stated in Sections 7(d)(ix) and (x) above), on the basis of the foregoing, no facts have come to such counsel’s attention that lead such counsel to believe that (A) the Registration Statement (other than (i) the financial statements and schedules contained therein, including the notes thereto and the independent registered public accounting firm’s reports thereon and (ii) the other financial data included therein or omitted therefrom), as of its effective date, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, (B) that the Prospectus (other than (i) the financial statements and schedules contained therein, including the notes thereto and the independent registered public accounting firm’s reports thereon, and (ii) the other financial data included therein or omitted therefrom), as of its date or as of such Closing Date, contained an untrue statement of a material fact or omitted to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, or (C) that the General Disclosure Package (consisting collectively of the documents specified in a schedule to such counsel’s opinion) (other than (i) the financial statements and schedules contained therein, including the notes thereto and the independent registered public accounting firm’s reports thereon, and (ii) the other financial data included therein or omitted therefrom), as of the Applicable Time, contained an untrue statement of a material fact or omitted to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading.

Such counsel may state that the opinions expressed are based on and are limited to the laws of the State of Texas, the General Corporation Law of the State of Delaware, the contract law of the State of New York and the federal laws of the United States, as currently in effect.

(e) The Representatives shall have received an opinion, dated such Closing Date, of Andrew D. Farley, Senior Vice President and General Counsel of the Company, to the effect that:

(i) Each Material Subsidiary has been duly formed and is validly existing and in good standing under the laws of the jurisdiction of its formation, and each of the Company and each Material Subsidiary has been duly qualified to do business and is in good standing under the laws of each jurisdiction in which it owns or leases properties, or conducts any business, so as to require such qualification, other than where the failure to be so qualified and in good standing could not have a Material Adverse Effect; and all of the issued ownership interests of each Material Subsidiary have been duly and validly authorized and issued in accordance with the organizational documents of such Material Subsidiary, are fully paid and non-assessable, if applicable, and (except for directors’ qualifying shares, if applicable) the ownership interests of each Material Subsidiary owned by the Company directly or indirectly are owned, free and clear of all liens, encumbrances, equities or claims, except as set forth in each of the General Disclosure Package and the Prospectus (such counsel being entitled to rely in respect of the opinion in this clause upon opinions of local counsel and in respect of matters of fact upon certificates of officers of the Company and public officials, provided that such counsel shall state that they believe that both the Representatives and they are justified in relying upon such opinions and certificates);

(ii) Except as disclosed in each of the General Disclosure Package and the Prospectus, to such counsel’s knowledge, no legal or governmental proceedings are pending, threatened or contemplated by governmental authorities or pending or threatened by others against the Company or any of its subsidiaries which, if determined adversely to the Company or any of its subsidiaries, would individually or in the aggregate have a Material Adverse Effect; provided, however, such counsel expresses no opinion with respect to any pending, threatened or contemplated proceedings under any United States antitrust laws, or under the FCPA or analogous applicable foreign statutes

15

and regulations, in either case of the nature described in the General Disclosure Package and the Prospectus under the headings “Business—Legal Proceedings—Bidding Investigations” and “—FCPA Investigations”;

(iii) The compliance by each of the Company and Holdings with all of the provisions of this Agreement and the consummation of the transactions herein contemplated (a) will not conflict with or result in a breach or violation of any of the terms or provisions of, or constitute a default under, any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument to which the Company, Holdings or any of their subsidiaries is a party or by which the Company, Holdings or any of their subsidiaries is bound or to which any of the property or assets of the Company, Holdings or any of their subsidiaries is subject, which conflict, breach, violation or default would individually, or in the aggregate, have a Material Adverse Effect, (b) will not result in any violation of the provisions of the Amended and Restated Certificate of Incorporation or Amended and Restated By-laws of the Company or the Certificate of Formation or Limited Liability Company Agreement of Holdings, each as amended to date, and (c) will not result in any violation of any statute or any order, rule or regulation of any court or governmental agency or body having jurisdiction over the Company, Holdings or any of their subsidiaries or any of their properties, which violation of any such statute, order or regulation would individually, or in the aggregate, have a Material Adverse Effect; and

(iv) Neither the Company nor any of its Material Subsidiaries is in violation of its organizational or governing documents or, except as set forth in each of the General Disclosure Package and the Prospectus, is in default in the performance or observance of any material obligation, covenant or condition contained in any indenture, mortgage, deed of trust, loan agreement, lease or other agreement or instrument to which it is a party or by which it or any of its properties may be bound.

Such counsel may state that the opinions expressed are limited in all respects to the federal laws of the United States, the laws of the State of Texas and the General Corporation Law of the State of Delaware, all as in effect on the date thereof. Further, such counsel may state that such counsel expresses no opinion with respect to the Act, the Securities Exchange Act of 1934, as amended, or as to any consent, approval, authorization, statute, order, rule or regulation of any governmental agency or regulatory body as may be required under any state securities or “blue-sky” laws.

(f) The Representatives shall have received from Simpson Thacher & Bartlett LLP, counsel for the Underwriters, such opinion or opinions and negative assurance letter, dated such Closing Date, with respect to the incorporation of the Company, the validity of the Offered Securities delivered on such Closing Date, the Registration Statements, the Prospectus and other related matters as the Representatives may require, and the Company shall have furnished to such counsel such documents as they reasonably request for the purpose of enabling them to pass upon such matters.

(g) The Representatives shall have received a certificate, dated such Closing Date, of the President or any Vice President and a principal financial or accounting officer of the Company in which such officers, to the best of their knowledge after reasonable investigation, shall state that: the representations and warranties of the Company in this Agreement are true and correct, it being understood and agreed by the Company that all references to Holdings in each instance where it appears in the representations and warranties shall be deemed to refer to the Company; each of the Company and Holdings have complied with all agreements and satisfied all conditions on their respective parts to be performed or satisfied hereunder at or prior to such Closing Date; no stop order suspending the effectiveness of any Registration Statement has been issued and no proceedings for that purpose have been instituted or are contemplated by the Commission; the Additional Registration Statement (if any) satisfying the requirements of subparagraphs (1) and (3) of Rule 462(b) was filed pursuant to Rule 462(b), including payment of the applicable filing fee in accordance with Rule 111(a) or (b) under the Act, in accordance with Section 5(a) of this Agreement; and, subsequent to the date of the most recent financial statements of each of Holdings and the Company in the General Disclosure Package, there has been no material adverse change, nor any development or event involving a prospective material adverse change, in the condition

16

(financial or other), business, properties or results of operations of the Company, Holdings and their subsidiaries taken as a whole except as set forth in the General Disclosure Package or as described in such certificate.

(h) The Representatives shall have received a letter, dated such Closing Date, of KPMG LLP which meets the requirements of subsection (a) of this Section, except that the specified date referred to in such subsection will be a date not more than three days prior to such Closing Date for the purposes of this subsection.

(i) On or prior to the date of this Agreement, the Representatives shall have received lockup letters from Halliburton Company and each of the executive officers and directors of the Company.

The Company will furnish the Representatives with such conformed copies of such opinions, certificates, letters and documents as the Representatives reasonably request. The Representatives may in their sole discretion waive on behalf of the Underwriters compliance with any conditions to the obligations of the Underwriters hereunder, whether in respect of an Optional Closing Date or otherwise.

8. Indemnification and Contribution. (a) The Company and Holdings, jointly and severally, will indemnify and hold harmless each Underwriter, its partners, members, directors, officers, affiliates and each person, if any, who controls such Underwriter within the meaning of Section 15 of the Act, against any losses, claims, damages or liabilities, joint or several, to which such Underwriter may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any Registration Statement, each Statutory Prospectus, the Prospectus, any Issuer Free Writing Prospectus, or any amendment or supplement thereto, or any related preliminary prospectus, or any “issuer information” filed or required to be filed pursuant to Rule 433(d) under the Act, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse each Underwriter for any legal or other expenses reasonably incurred by such Underwriter in connection with investigating or defending any such loss, claim, damage, liability or action as such expenses are incurred; provided, however, that the Company and Holdings will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement in or omission or alleged omission from any of such documents in reliance upon and in conformity with written information furnished to the Company by any Underwriter through the Representatives specifically for use therein, it being understood and agreed that the only such information furnished by any Underwriter consists of the information described as such in subsection (b) below.

(b) Each Underwriter will severally and not jointly indemnify and hold harmless the Company and Holdings, their respective directors and the officers of the Company who have signed a Registration Statement and each person, if any who controls the Company or Holdings, as applicable, within the meaning of Section 15 of the Act, against any losses, claims, damages or liabilities to which the Company or Holdings may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any Registration Statement, each Statutory Prospectus, the Prospectus, any Issuer Free Writing Prospectus, or any amendment or supplement thereto, or any related preliminary prospectus, or any “issuer information” filed or required to be filed pursuant to Rule 433(d) under the Act, or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company by such Underwriter through the Representatives specifically for use therein, and will reimburse any legal or other expenses reasonably incurred by the Company or Holdings in connection with investigating or defending any such loss, claim, damage, liability or action as such expenses are incurred, it being understood and agreed that the only such information furnished by any Underwriter consists of the following information in the Prospectus furnished on behalf of each Underwriter: (i) the concession and reallowance figures appearing in the fourth paragraph under the caption “Underwriting”, (ii) the information contained in the sixth paragraph under the caption “Underwriting”, (iii) the information contained in the thirteenth paragraph under the caption “Underwriting” related to stabilizing transactions, syndicate covering transactions and penalty bids and (iv)

17

the information in the fourteenth paragraph under the caption “Underwriting” related to prospectuses in electronic format and Internet distributions.

(c) Promptly after receipt by an indemnified party under this Section of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against the indemnifying party under subsection (a) or (b) above, notify the indemnifying party of the commencement thereof; but the failure to notify the indemnifying party shall not relieve it from any liability that it may have under subsection (a) or (b) above except to the extent that it has been materially prejudiced (through the forfeiture of substantive rights or defenses) by such failure; and provided further that the failure to notify the indemnifying party shall not relieve it from any liability that it may have to an indemnified party otherwise than under subsection (a) or (b) above. In case any such action is brought against any indemnified party and it notifies the indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate therein and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel satisfactory to such indemnified party (who shall not, except with the consent of the indemnified party, be counsel to the indemnifying party), and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party will not be liable to such indemnified party under this Section for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened action in respect of which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party unless such settlement (i) includes an unconditional release of such indemnified party from all liability on any claims that are the subject matter of such action and (ii) does not include a statement as to, or an admission of, fault, culpability or a failure to act by or on behalf of an indemnified party.

(d) If the indemnification provided for in this Section is unavailable or insufficient to hold harmless an indemnified party under subsection (a) or (b) above, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of the losses, claims, damages or liabilities referred to in subsection (a) or (b) above (i) in such proportion as is appropriate to reflect the relative benefits received by the Company and Holdings on the one hand and the Underwriters on the other from the offering of the Securities or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company and Holdings on the one hand and the Underwriters on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities as well as any other relevant equitable considerations. The relative benefits received by the Company and Holdings on the one hand and the Underwriters on the other shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by the Company and Holdings bear to the total underwriting discounts and commissions received by the Underwriters. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company and Holdings or the Underwriters and the parties’ relative intent, knowledge, access to information and opportunity to correct or prevent such untrue statement or omission. The amount paid by an indemnified party as a result of the losses, claims, damages or liabilities referred to in the first sentence of this subsection (d) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any action or claim which is the subject of this subsection (d). Notwithstanding the provisions of this subsection (d), no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Securities underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters’ obligations in this subsection (d) to contribute are several in proportion to their respective underwriting obligations and not joint.

(e) The obligations of the Company and Holdings under this Section shall be in addition to any liability which the Company or Holdings may otherwise have and shall extend, upon the same terms and conditions, to the partners, members, directors, officers and affiliates of, and each person, if any, who controls, any Underwriter within the meaning of the Act; and the obligations of the Underwriters under this Section shall be in addition to any liability which the respective Underwriters may otherwise have and shall extend, upon the same terms and

18

conditions, to each director of the Company and Holdings, to each officer of the Company who has signed a Registration Statement and to each person, if any, who controls the Company or Holdings, as applicable, within the meaning of the Act.

9. Default of Underwriters. If any Underwriter or Underwriters default in their obligations to purchase Offered Securities hereunder on either the First or any Optional Closing Date and the aggregate number of shares of Offered Securities that such defaulting Underwriter or Underwriters agreed but failed to purchase does not exceed 10% of the total number of shares of Offered Securities that the Underwriters are obligated to purchase on such Closing Date, the Representatives may make arrangements satisfactory to the Company for the purchase of such Offered Securities by other persons, including any of the Underwriters, but if no such arrangements are made by such Closing Date, the non-defaulting Underwriters shall be obligated severally, in proportion to their respective commitments hereunder, to purchase the Offered Securities that such defaulting Underwriters agreed but failed to purchase on such Closing Date. If any Underwriter or Underwriters so default and the aggregate number of shares of Offered Securities with respect to which such default or defaults occur exceeds 10% of the total number of shares of Offered Securities that the Underwriters are obligated to purchase on such Closing Date and arrangements satisfactory to the Representatives and the Company for the purchase of such Offered Securities by other persons are not made within 36 hours after such default, this Agreement will terminate without liability on the part of any non-defaulting Underwriter or the Company, except as provided in Section 10 (provided that if such default occurs with respect to Optional Securities after the First Closing Date, this Agreement will not terminate as to the Firm Securities or any Optional Securities purchased prior to such termination). As used in this Agreement, the term “Underwriter” includes any person substituted for an Underwriter under this Section. Nothing herein will relieve a defaulting Underwriter from liability for its default.

10. Survival of Certain Representations and Obligations. The respective indemnities, agreements, representations, warranties and other statements of the Company, Holdings and their respective officers and of the several Underwriters set forth in or made pursuant to this Agreement will remain in full force and effect, regardless of any investigation, or statement as to the results thereof, made by or on behalf of any Underwriter, the Company, Holdings or any of their respective representatives, officers or directors or any controlling person, and will survive delivery of and payment for the Offered Securities. If this Agreement is terminated pursuant to Section 9 or if for any reason the purchase of the Offered Securities by the Underwriters is not consummated, the Company shall remain responsible for the expenses to be paid or reimbursed by it pursuant to Section 5 and the respective obligations of the Company, Holdings and the Underwriters pursuant to Section 8 shall remain in effect, and if any Offered Securities have been purchased hereunder the representations and warranties in Section 2 and all obligations under Section 5 shall also remain in effect. If the purchase of the Offered Securities by the Underwriters is not consummated for any reason other than solely because of the termination of this Agreement pursuant to Section 9, the Company will reimburse the Underwriters for all out-of-pocket expenses (including fees and disbursements of counsel) reasonably incurred by them in connection with the offering of the Offered Securities.

11. Notices. All communications hereunder will be in writing and, if sent to the Underwriters, will be mailed, delivered or telegraphed and confirmed to the Representatives at Credit Suisse Securities (USA) LLC, Eleven Madison Avenue, New York, N.Y. 10010-3629, Attention: Transactions Advisory Group; Goldman, Sachs & Co., One New York Plaza, 42nd Floor, New York, N.Y. 10004, Attention: Registration Department; and UBS Securities LLC, 299 Park Avenue, New York, N.Y. 10171-0026, Attention: Syndicate Department, or, if sent to the Company or Holdings will be mailed, delivered or telegraphed and confirmed to them at KBR, Inc., 4100 Clinton Drive, Houston, TX 77002-6237, Attention: Chief Financial Officer, with a copy to the General Counsel; provided, however, that any notice to an Underwriter pursuant to Section 8 will be mailed, delivered or telegraphed and confirmed to such Underwriter.

12. Successors. This Agreement will inure to the benefit of and be binding upon the parties hereto and their respective successors and the officers and directors and controlling persons referred to in Section 8, and no other person will have any right or obligation hereunder.

13. Representation of Underwriters. The Representatives will act for the several Underwriters in connection with this financing, and any action under this Agreement taken by the Representatives jointly will be binding upon all the Underwriters.

19

14. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, but all such counterparts shall together constitute one and the same Agreement.

15. Absence of Fiduciary Relationship. The Company acknowledges and agrees that:

(a) the Representatives have been retained solely to act as underwriters in connection with the sale of the Company’s Offered Securities and that no fiduciary, advisory or agency relationship between the Company and the Representatives has been created in respect of any of the transactions contemplated by this Agreement, irrespective of whether the Representatives have advised or are advising the Company on other matters;

(b) the price of the Offered Securities set forth in this Agreement was established by the Company following discussions and arms-length negotiations with the Representatives and the Company is capable of evaluating and understanding and understands and accepts the terms, risks and conditions of the transactions contemplated by this Agreement;

(c) it has been advised that the Representatives and their affiliates are engaged in a broad range of transactions which may involve interests that differ from those of the Company and that the Representatives have no obligation to disclose such interests and transactions to the Company by virtue of any fiduciary, advisory or agency relationship; and

(d) it waives, to the fullest extent permitted by law, any claims it may have against the Representatives for breach of fiduciary duty or alleged breach of fiduciary duty and agrees that the Representatives shall have no liability (whether direct or indirect) to the Company in respect of such a fiduciary duty claim or to any person asserting a fiduciary duty claim on behalf of or in right of the Company, including stockholders, employees or creditors of the Company.

16. Applicable Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York, without regard to principles of conflicts of laws.

Each of Holdings and the Company hereby submits to the non-exclusive jurisdiction of the Federal and state courts in the Borough of Manhattan in The City of New York in any suit or proceeding arising out of or relating to this Agreement or the transactions contemplated hereby. Each Underwriter, the Company (on its behalf and, to the extent permitted by applicable law, on behalf of its stockholders and affiliates) and Holdings (on its behalf and, to the extent permitted by applicable law, on behalf of its members and affiliates) each waive all right to trial by jury in any action, proceeding or counterclaim (whether based upon contract, tort or otherwise) in any way arising out of or relating to this Agreement.

20

If the foregoing is in accordance with the Representatives’ understanding of our agreement, kindly sign and return to the Company and Holdings one of the counterparts hereof, whereupon it will become a binding agreement among the Company, Holdings and the several Underwriters in accordance with its terms.

Very truly yours,
	KBR, INC.
		By
			[title]
	KBR HOLDINGS, LLC
		By
			[title]

The foregoing Underwriting Agreement is hereby confirmed and accepted as of the date first above written.
	CREDIT SUISSE SECURITIES (USA) LLC GOLDMAN, SACHS & CO. UBS SECURITIES LLC
		Acting on behalf of themselves and as the Representatives of the several Underwriters
	By	CREDIT SUISSE SECURITIES (USA) LLC
	By
		[title]
		(GOLDMAN, SACHS & CO.)
	UBS SECURITIES LLC
	By
		[title]
	By
		[title]

21

SCHEDULE A

Underwriter	Number of Firm Securities
Credit Suisse Securities (USA) LLC
Goldman, Sachs & Co.
UBS Securities LLC
Citigroup Global Markets Inc.
HSBC Securities (USA) Inc.
Lehman Brothers Inc.
Merrill Lynch, Pierce, Fenner & Smith Incorporated
Scotia Capital (USA) Inc.
Wachovia Capital Markets, LLC
D.A. Davidson & Co.
Pickering Energy Partners, Inc.
Simmons & Company International
Total

22

SCHEDULE B

Pricing Information

The pricing information set forth below was conveyed orally:

Number of Firm Securities Offered: [            ]

Price per Security: [            ]

23

SCHEDULE C

Material Subsidiaries

BITC (US) LLC

Brown & Root Toll Road Investment Partners, Inc.

Devonport Royal Dockyard Limited

KBR Group Holdings, LLC

KBR Holdings, LLC*

Kellogg Brown & Root (Canada)

Kellogg Brown & Root Holdings (U.K.) Limited

Kellogg Brown & Root Holdings Limited

Kellogg Brown & Root Limited

Kellogg Brown & Root Services, Inc.

Kellogg Brown & Root LLC

* KBR Holdings, LLC will be a Material Subsidiary of the Company as of the date it becomes a subsidiary of the Company, which will be on or prior to the First Closing Date.

EX-4.1

Exhibit 4.1

COUNTERSIGNED AND REGISTERED:
MELLON INVESTOR SERVICES LLC
TRANSFER AGENT AND REGISTRAR
BY
	AUTHORIZED SIGNATURE

COMMON STOCK Incorporated under the laws of the State of Delaware	KBR, Inc.	CUSIP 48242W 10 6 SEE REVERSE FOR CERTAIN DEFINITIONS
this certifies that
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK OF THE PAR VALUE OF $0.001 EACH OF
KBR, Inc.
transferable on the books of the Corporation by the holder hereof in person or by duly authorized attorney upon surrender of this certificate properly endorsed. This certificate is not valid until countersigned by the Transfer Agent and registered by the Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers.
Dated:

SENIOR VICE PRESIDENT AND SECRETARY		PRESIDENT AND CHIEF EXECUTIVE OFFICER

THE CORPORATION WILL FURNISH WITHOUT CHARGE TO EACH STOCKHOLDER WHO SO REQUESTS, A FULL STATEMENT OF THE DESIGNATIONS, RELATIVE RIGHTS, PREFERENCES AND LIMITATIONS OF EACH CLASS OF STOCK OR SERIES THEREOF AUTHORIZED TO BE ISSUED AND THE AUTHORITY OF THE BOARD OF DIRECTORS OF THE CORPORATION TO DESIGNATE AND FIX THE RELATIVE RIGHTS, PREFERENCES AND LIMITATIONS OF CLASSES OF PREFERRED STOCK IN SERIES.

The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations:
		UNIF GIFT MIN ACT –		Custodian
TEN COM	– as tenants in common		(Cust)		(Minor)
TEN ENT	– as tenants by the entireties		under Uniform Gifts to Minors
JT TEN	– as joint tenants with right of survivorship    and not as tenants in common		Act
				(State)
	Additional abbreviations may also be used though not in the above list.

For value received,              hereby sell, assign and transfer unto

PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE

(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING ZIP CODE OF ASSIGNEE)
	shares
of the capital stock represented by the within Certificate, and do hereby irrevocably constitute and appoint
	Attorney
to transfer the said stock on the books of the within named Corporation with full power of substitution in the premises.

Dated
		X
NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.	è		(SIGNATURE)
		X
			(SIGNATURE)
			THE SIGNATURE(S) MUST BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15.
			SIGNATURE(S) GUARANTEED BY:

EX-5.1

Exhibit 5.1

ONE SHELL PLAZA	AUSTIN
910 LOUISIANA	DALLAS
HOUSTON, TEXAS	DUBAI
77002-4995	HONG KONG
	HOUSTON
TEL +1	LONDON
713.229.1234	MOSCOW
FAX +1	NEW YORK
713.229.1522	RIYADH
www.bakerbotts.com	WASHINGTON

October 30, 2006

KBR, Inc.

601 Jefferson Street

Houston, Texas 77002

Ladies and Gentlemen:

As set forth in the Registration Statement on Form S-1 (File No. 333-133302) (the “Registration Statement”), filed with the Securities and Exchange Commission (the “Commission”) by KBR, Inc., a Delaware corporation (the “Company”), under the Securities Act of 1933, as amended (the “Act”), relating to the proposed offering and sale of 27,840,000 shares (the “Shares”) of the Company’s common stock, par value $0.001 per share (“Common Stock”), together with up to 4,176,000 additional shares of Common Stock (the “Additional Shares”) pursuant to the underwriters’ over-allotment option as described in the Registration Statement, certain legal matters in connection with the Shares and the Additional Shares are being passed upon for you by us. We understand, and have assumed in the opinion set forth below, that the Shares and any Additional Shares are to be sold by the Company pursuant to the terms of an Underwriting Agreement (the “Underwriting Agreement”) in substantially the form filed as Exhibit 1.1 to the Registration Statement.

In our capacity as your counsel in the connection referred to above, we have examined the Registration Statement and its exhibits, the form of Underwriting Agreement filed as an exhibit to the Registration Statement, the Restated Certificate of Incorporation and Bylaws of the Company, in each case as amended to date, and originals, or copies certified or otherwise identified, of corporate records of the Company, including minute books of the Company as furnished to us by the Company, certificates of public officials and of representatives of the Company, statutes and other instruments and documents as a basis for the opinions hereafter expressed. In giving such opinions, we have relied on certificates of officers of the Company with respect to the accuracy of the factual matters contained in such certificates. In making our examination, we have assumed that all signatures on all documents examined by us are genuine, that all documents submitted to us as originals are accurate and complete, that all documents submitted to us as copies are true and correct copies of the originals thereof and that all information submitted to us was accurate and complete. We have assumed in the opinion set forth below, that the Board of Directors of the Company has authorized the issuance and sale of the Shares and any Additional Shares and has authorized a special pricing committee of the Board of Directors of the Company to determine the price at which the Shares and any Additional Shares are to be sold to the underwriters by the Company, and that the special pricing committee of the Board of Directors of the Company has determined the price at which the Shares and any Additional Shares are to be sold to the underwriters by the Company pursuant to the terms of the Underwriting Agreement.

KBR, Inc. October 30, 2006

On the basis of the foregoing, and subject to the assumptions, limitations and qualifications set forth herein, we are of the opinion that, upon the issuance and sale by the Company of the Shares and any Additional Shares in accordance with the terms and provisions of the Underwriting Agreement and as described in the Registration Statement, the Shares and any Additional Shares will be duly authorized by all necessary corporate action on the part of the Company, validly issued, fully paid and nonassessable.

We limit the opinions we express above in all respects to matters of the General Corporation Law of the State of Delaware, as in effect on the date hereof.

We hereby consent to the filing of this opinion of counsel as Exhibit 5.1 to the Registration Statement. We also consent to the reference to our Firm under the heading “Legal Matters” in the prospectus forming a part of the Registration Statement. In giving this consent, we do not thereby admit that we are in the category of persons whose consent is required under Section 7 of the Act and the rules and regulations of the Commission thereunder.

Very truly yours,

/s/ Baker Botts L.L.P.

2

EX-10.1

Exhibit 10.1

FORM OF

MASTER SEPARATION AGREEMENT

BETWEEN

HALLIBURTON COMPANY

AND KBR, INC.

Dated as of                             , 2006

TABLE OF CONTENTS

ARTICLE I DEFINITIONS			2
ARTICLE II SEPARATION AND RELATED TRANSACTIONS			16
	2.1	Separation Date; Separation Time	16
	2.2	Instruments of Transfer and Assumption	16
	2.3	Ancillary Agreements	17
	2.4	Performance of Non-Novated Contracts	17
	2.5	Other Matters	17
ARTICLE III MUTUAL RELEASES; INDEMNIFICATION			18
	3.1	Mutual Release of Pre-IPO Closing Date Claims	18
	3.2	Indemnification by KBR	19
	3.3	Indemnification by Halliburton	20
	3.4	Indemnifications Relating to FCPA Subject Matters	21
	3.5	Indemnifications Relating to Barracuda-Caratinga Project	26
	3.6	Indemnification Obligations Net of Insurance Proceeds and Other Amounts	28
	3.7	Procedures for Indemnification of Third Party Claims	29
	3.8	Additional Matters	30
	3.9	Remedies Cumulative	31
	3.10	Survival of Indemnities	31
	3.11	Indemnification of Directors and Officers	31
	3.12	Mitigation of Damages	31
ARTICLE IV THE IPO AND ACTIONS PENDING THE IPO			31
	4.1	Transactions Prior to the IPO	31
	4.2	Use of Proceeds	32
	4.3	Cooperation for IPO	32
	4.4	Conditions Precedent to Consummation of the IPO	32
ARTICLE V CORPORATE GOVERNANCE AND OTHER MATTERS			34
	5.1	Charter and Bylaws	34
	5.2	KBR Board Representation	34
	5.3	Committees	36
	5.4	Subscription Right	36
	5.5	Issuance of Stock	38
	5.6	Settlement of KBR Benefit Plan Awards	38
	5.7	Applicability of Rights to Parent in the Event of an Acquisition	39
	5.8	Transfer of Halliburton’s Rights Under Article V	39
	5.9	Restricted Opportunities Under KBR Charter	39
ARTICLE VI SUBSEQUENT TRANSACTION			39
	6.1	Sole Discretion of Halliburton	39
	6.2	Cooperation for Halliburton Transfers	40

- i -

	6.3	Cooperation for Halliburton Distribution	40
	6.4	Registration Rights Agreement	41
ARTICLE VII ARBITRATION; DISPUTE RESOLUTION			41
	7.1	Agreement to Arbitrate	41
	7.2	Escalation	41
	7.3	Demand for Arbitration	42
	7.4	Arbitrators	43
	7.5	Hearings	43
	7.6	Discovery and Certain Other Matters	44
	7.7	Certain Additional Matters	45
	7.8	Continuity of Service and Performance	45
	7.9	Law Governing Arbitration Procedures	45
ARTICLE VIII COVENANTS AND OTHER MATTERS			45
	8.1	Other Agreements	45
	8.2	Further Instruments	46
	8.3	Provision of Corporate Records	46
	8.4	Agreement For Exchange of Information	47
	8.5	Auditors and Audits; Annual and Quarterly Statements and Accounting	49
	8.6	Audit Rights	52
	8.7	Preservation of Legal Privileges	52
	8.8	Payment of Expenses	53
	8.9	Governmental Approvals	53
	8.10	Continuance of Halliburton Credit Support	53
	8.11	Confidentiality	56
	8.12	Receipt of Notices	57
	8.13	Non Solicitation of Employees	58
	8.14	Halliburton Policies and Procedures	58
	8.15	Antitrust Matters	58
	8.16	Cooperation for Litigation	59
	8.17	Performance Standard	60
ARTICLE IX MISCELLANEOUS			60
	9.1	Limitation of Liability	60
	9.2	Conflicting Agreements; Entire Agreement	60
	9.3	Governing Law	61
	9.4	Termination	61
	9.5	Notices	61
	9.6	Counterparts	61
	9.7	No Third Party Beneficiaries; Assignment	61
	9.8	Severability	62
	9.9	Failure or Indulgence Not Waiver; Remedies Cumulative	62
	9.10	Amendment	62
	9.11	Authority	62
	9.12	Interpretation	62

- ii -

MASTER SEPARATION AGREEMENT

THIS MASTER SEPARATION AGREEMENT (this “Agreement”) is entered into as of [            ], 2006 by and between Halliburton Company, a Delaware corporation (“Halliburton”), and KBR, Inc., a Delaware corporation (“KBR”). Capitalized terms used herein and not otherwise defined shall have the meanings set forth in Article I hereof.

RECITALS

WHEREAS, KBR is an indirect wholly-owned subsidiary of Halliburton;

WHEREAS, KBR, together with its direct and indirect U.S. and foreign subsidiaries, provides a wide range of services, including global engineering, procurement, construction, technology and other services, to energy and industrial customers and government entities worldwide;

WHEREAS, the Board of Directors of Halliburton has determined that it is appropriate and desirable, on the terms and conditions contemplated hereby, to initiate the separation of the KBR Group from the Halliburton Group, and has approved this Agreement and the transactions contemplated hereby;

WHEREAS, Halliburton currently contemplates that KBR will effect an initial public offering (“IPO”) of less than 20% of the shares of KBR Common Stock pursuant to a registration statement on Form S-1 filed with the Commission pursuant to the Securities Act;

WHEREAS, the parties intend to set forth in this Agreement, including the Schedules hereto and the Ancillary Agreements contemplated hereby, the principal arrangements between and among them and the members of their respective Groups regarding the separation of the KBR Group from the Halliburton Group, the IPO and certain future transactions.

NOW, THEREFORE, in consideration of the foregoing and the covenants and agreements set forth below, the parties hereto agree as follows:

1

ARTICLE I

DEFINITIONS

The following terms used in this Agreement are defined as set forth below or in the sections indicated, as applicable:

“AAA” has the meaning set forth in Section 7.4.

“Action” means any demand, action, suit, countersuit, arbitration, inquiry, proceeding or investigation by or before any federal, state, local, foreign or international Governmental Authority or any arbitration or mediation tribunal.

An “Affiliate” of any Person means another Person that directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with, such Person. For this purpose “control” means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of the Person controlled, whether through ownership of voting securities, by contract or otherwise. Notwithstanding anything herein to the contrary, no member of the KBR Group shall be deemed an Affiliate of any member of the Halliburton Group, and no member of the Halliburton Group shall be deemed an Affiliate of any member of the KBR Group.

“Agreement” has the meaning given such term in the Preamble.

“Ancillary Agreements” has the meaning set forth in Section 2.3.

“Antitrust Matters” are alleged or actual violations of antitrust, competition or other applicable Law that occurred prior to the date of this Agreement relating to investigations by the DOJ or other Governmental Authorities into whether in the conduct of the KBR Business (including, without limitation, conduct by a member of the KBR Group or its current or former directors, officers, employees, agents or representatives) coordinated bidding with one or more competitors on projects occurred, as described under the heading “Bidding Practices Investigation” in the section “Forward Looking Information and Risk Factors” of the Halliburton Quarterly Report on Form 10-Q for the quarter ended [September 30,] 2006 and under the heading “Bidding Practices Investigation” in Note 12 of the condensed consolidated financial statements included in such report.

“Applicable FCPA Law” means (a) the Council of Europe Criminal Law Convention on Corruption entered into force July 1, 2002, (b) Council of Europe Civil Law Convention on Corruption entered into force November 1, 2003, (c) Organization of American States Inter-American Convention against Corruption adopted on March 29, 1996, (d) African Union Convention on Preventing and Combating Corruption adopted July 11, 2003, (e) United Nations Convention against Corruption adopted October 31, 2003, (f) OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions adopted November 21, 1997, (g) the FCPA and (h) any and all implementing legislation in respect of

2

clauses (a) through (g) above, including, without limitation, any laws, statutes, regulations and rules issued by any Governmental Authority of similar purpose and scope.

“Applicable Deadline” has the meaning set forth in Section 7.3.

“Arbitration Demand Date” has the meaning set forth in Section 7.3.

“Arbitration Demand Notice” has the meaning set forth in Section 7.3.

“Barracuda-Caratinga Bolts Matter” means threatened, pending or future claims against any KBR B-C Indemnitee by Barracuda & Caratinga Leasing Company B.V. and/or Petrobras or its Affiliates, and threatened, pending or future claims by any KBR B-C Indemnitee against Barracuda & Caratinga Leasing Company B.V. and/or Petrobras or its Affiliates, arising out of the subsea flow-line bolts installed in connection with the Barracuda-Caratinga Project.

“Barracuda-Caratinga Project” means the turnkey engineering, procurement and construction contract, dated as of June 30, 2000, as amended, and related agreements by and among members of the KBR Group, Barracuda & Caratinga Leasing Company B.V., Petrobras or its Affiliates relating to the development of the Barracuda and Caratinga oilfields located in the Campos Basin offshore of Brazil.

“best efforts” means a Person’s good faith best efforts to achieve such goal as expeditiously as possible, which may require the incurrence of expense or hardship in order to achieve the reasonable expectations of the parties as agreed hereunder.

“Business Day” means a day other than a Saturday, a Sunday or a day on which banking institutions located in the State of Texas are authorized or obligated by law or executive order to close.

“Code” means the Internal Revenue Code of 1986, as amended, or any successor statute.

“Commission” means the U.S. Securities and Exchange Commission.

“Confidential Information” has the meaning set forth in Section 8.11.

“Credit Support Agreements” means any and all surety bonds, letters of credit, reimbursement agreements, surety contracts, performance guarantees, financial guarantees, indemnities and other credit support instruments and agreements relating to or for the benefit of the KBR Business or a customer or lender thereof for which a member of the Halliburton Group is a primary obligor, secondary obligor, guarantor, indemnitor, account party or otherwise may become liable (i) entered into or obtained prior to the Separation Date and (ii) entered into or obtained following the Separation Date as provided under Section 8.10(b) hereof or at Halliburton’s sole discretion. Non-exclusive lists of certain Credit Support Agreements are set forth on Schedule C-1 (Surety Bonds and Related Indemnity Agreements), Schedule C-2 (Letters of Credit and Related Reimbursement Agreements), Schedule C-3 (Performance and Financial Guarantees) and Schedule C-4 (Other Credit Support Agreements).

3

“Current Investigations” means the investigations ongoing as of the date hereof by (a) the DOJ, (b) the Commission, (c) the Tribunal de Grande Instance de Paris (investigation number: 25/03 and Public Prosecution Service ID: P 02/29192509) in the French Republic, (d) the Serious Frauds Office in the United Kingdom, (e) officials at the Federal Police Office (proceeding B 0152492 BOT) of the Swiss Confederation, (f) the Economic and Financial Crimes Commission, an agency of the executive branch of the government of the Federal Republic of Nigeria, (g) the Committee on Public Petitions of the House of Representatives of the Federal Republic of Nigeria, and (h) a public prosecutor or an investigating judge in the People’s Democratic Republic of Algeria with respect to contracts awarded to Brown & Root-Condor Spa.

“Disposition” means any resolution or termination of any Proceeding, whether adjudicated or consensual.

“Distribution” means a tax-free distribution under Section 355 of the Code or any corresponding provision of any successor statute of all or any portion of the KBR Common Stock beneficially owned by Halliburton to Halliburton stockholders by way of a dividend, exchange or otherwise.

“DOJ” means the United States Department of Justice.

“Employee Matters Agreement” means the Employee Matters Agreement dated the date hereof between Halliburton and KBR.

“Environmental Law” means any and all Laws or determinations of any Governmental Authority (including common law duties established by courts or other Governmental Authorities) pertaining to pollution or the protection of human health, the environment, natural resources or plant or animal species including Laws relating to emissions, discharges, releases or threatened releases of pollutants, contaminants or chemical, industrial, hazardous, radioactive, or toxic materials or wastes into ambient or indoor air, surface water, ground water or lands or otherwise relating to the manufacture, processing, distribution (including the sale or marketing of goods containing), use, treatment, storage, disposal, transportation or handling of pollutants, contaminants or chemical, industrial, hazardous. radioactive, or toxic materials or wastes, in any jurisdiction, federal, state, local or foreign, in which the Halliburton Business or KBR Business is or has operated; including, without limitation, in United States jurisdictions the Comprehensive Environmental Response, Compensation, and Liability Act, 42 U.S.C. Section 9601 et seq. (“CERCLA”), the Superfund Amendments Reauthorization Act, 42 U.S.C. Section 11001 et seq., the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901 et seq., the Clean Air Act, 42 U.S.C. Section 7401 et seq., the Federal Water Pollution Control Act, 33 U.S.C. Section 1251 et seq., the Oil Pollution Act of 1990, 33 U.S.C. Section 2701 et seq., the Toxic Substances Control Act, 15 U.S.C. Section 2601 et seq., and the Safe Drinking Water Act, 42 U.S.C. Section 300f et seq., other similar state or local laws or laws or decrees in non-U.S. jurisdictions, and all other environmental conservation and protection laws, both foreign and domestic, and any applicable state or local statutes, and the regulations promulgated thereto, as each has been and may be amended and supplemented from time to time, provided, however, that Environmental Laws shall not include Laws pertaining primarily to workplace safety, such as the Occupational Safety

4

and Health Act, except to the extent such Laws govern environmental conditions, including the management of asbestos-containing materials, or employee exposure or potential exposure to pollutants, contaminants or chemical, industrial, hazardous, radioactive, or toxic materials or wastes.

“Escalation Notice” has the meaning set forth in Section 7.2.

“Excess Director Number” has the meaning set forth in Section 5.2.

“Exchange Act” means the Securities Exchange Act of 1934, as amended, or any successor statute.

“Existing Authority” has the meaning set forth in Section 8.9.

“FCPA” means the United States Foreign Corrupt Practices Act of 1977, as amended.

“FCPA Subject Matters” are alleged or actual violations of the FCPA or other Applicable FCPA Law that occurred prior to the date of this Agreement in the conduct of the KBR Business (including, without limitation, conduct by a member of the KBR Group or its current or former directors, officers, employees, agents or representatives) in connection with (a) the construction and subsequent expansion by TSKJ of a natural gas liquefaction complex and related facilities at Bonny Island in Rivers State, Nigeria or (b) such other projects, whether located inside or outside of Nigeria, in each case including without limitation the use of agents in connection with such projects, that are identified by Governmental Authorities of the United States, France, the United Kingdom, Switzerland, Nigeria or Algeria in connection with the Current Investigations and the continuation of such Current Investigations after the date hereof.

“Governmental Approvals” means any notices, reports or other filings to be made, or any consents, registrations, approvals, permits or authorizations to be obtained from, any Governmental Authority.

“Governmental Authority” means any nation or government, any state, province, city, municipal entity or other political subdivision thereof, and any governmental, executive, legislative, judicial, administrative or regulatory agency, department, authority, instrumentality, commission, board, bureau or similar body, whether federal, state, provincial, territorial, local or foreign.

“Governmental FCPA Claim” means a claim, whether civil or criminal, made by any Governmental Authority of the United States, France, the United Kingdom, Switzerland, Nigeria or Algeria or by a court of competent jurisdiction therein relating to the FCPA Subject Matters.

“Group” means either the Halliburton Group or the KBR Group, as the context requires.

“Halliburton” has the meaning given such term in the Preamble.

5

“Halliburton’s Auditors” means Halliburton’s independent certified public accountants.

“Halliburton Books and Records” means originals or true and complete copies thereof, including electronic copies (if available) of (a) minute books, corporate charters and bylaws or comparable constitutive documents, records of share issuances and related corporate records, of the Halliburton Group; (b) all books and records primarily relating to (i) Persons who are employees of the Halliburton Group as of the IPO Closing Date, (ii) the purchase of materials, supplies and services for the Halliburton Business and (iii) dealings with customers of the Halliburton Business; and (c) all files relating to any Action the Liability with respect to which is a Halliburton Liability.

“Halliburton Business” means any business of the Halliburton Group (whether conducted independently or in association with one or more third parties through a partnership, joint venture or other mutual enterprise) other than the KBR Business, including without limitation the Non-Novated ESG Contracts. The parties intend that each member of the KBR Group which is party to a Non-Novated ESG Contract shall remain a party thereto following the Separation, and the parties hereby agree that each Non-Novated ESG Contract shall be considered to be part of the Halliburton Business for all purposes under this Agreement.

“Halliburton Cash Management Note” means the promissory note dated as of December 1, 2005 made by Halliburton Energy Services, Inc. to KBR Holdings, LLC.

“Halliburton Designee” has the meaning set forth in Section 5.2.

“Halliburton Environmental Liabilities” means all Liabilities arising under or relating to Environmental Law to the extent, as between the Halliburton Group and the KBR Group, such Liabilities relate to, arise out of or result from: (a) the ownership, operation or conduct of the Halliburton Business at any time prior to, on or after the Separation Time except for those Liabilities included in clause (ii) of the definition of “KBR Environmental Liabilities” below, or (b) any properties or assets owned, leased, used or held for use in connection with any terminated, divested or discontinued business or other activities which, at the time of such termination, divestiture or discontinuation, related to the Halliburton Business as then conducted. It is understood that, consistent with the foregoing, Halliburton Environmental Liabilities shall include without limitation all Liabilities arising under or relating to Environmental Law attributable to (1) investigation or remediation activities involving the sites listed on Part 1 of the attached Schedule D; and (2) the transportation, treatment, storage, or disposal of waste generated by the operations of members of the Halliburton Group, including liability under CERCLA or a comparable law allocated by the applicable Governmental Authority or potentially responsible party group, as appropriate, to members of the Halliburton Group, which shall include the liability ultimately allocated to members of the Halliburton Group at the sites listed on Part 2 of Schedule D.

“Halliburton Group” means Halliburton, each current and former subsidiary of Halliburton (other than any member of the KBR Group), including the subsidiaries set forth in Schedule A, and each Person that becomes a subsidiary of Halliburton after the Separation Time.

6

“Halliburton Indemnified Barracuda-Caratinga Matters” has the meaning set forth in Section 3.5.

“Halliburton Indemnified FCPA Matters” has the meaning set forth in Section 3.4.

“Halliburton Indemnitees” has the meaning set forth in Section 3.2.

“Halliburton Liabilities” shall mean (a) any and all Liabilities that are expressly contemplated by this Agreement or any Ancillary Agreement as Liabilities to be retained or assumed by Halliburton or any other member of the Halliburton Group, (b) all agreements and obligations of any member of the Halliburton Group under this Agreement or any of the Ancillary Agreements, (c) any liability arising under or relating to a claim made against Halliburton by a Halliburton stockholder in its capacity as such other than a claim for which KBR and the KBR Group have agreed to indemnify Halliburton and the Halliburton Group pursuant to Section 3.2(f) hereof and (d) any Liability of any member of the Halliburton Group other than the KBR Liabilities.

“Halliburton Transferee” has the meaning set forth in Section 5.7.

“Indebtedness” of any Person means (a) all obligations of such Person for borrowed money, (b) all obligations of such Person evidenced by bonds, debentures, notes or similar instruments, (c) all obligations of such Person upon which interest charges are customarily paid, (d) all obligations of such Person under conditional sale or other title retention agreements relating to property or assets purchased by such Person, (e) all obligations of such Person issued or assumed as the deferred purchase price of property or services, (f) all Indebtedness of others secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any mortgage, lien, pledge, or other encumbrance on property owned or acquired by such Person, whether or not the obligations secured thereby have been assumed, (g) all guarantees by such Person of Indebtedness of others, (h) all capital lease obligations of such Person and (i) all securities or other similar instruments convertible or exchangeable into any of the foregoing, but excluding daily cash overdrafts associated with routine cash operations.

“Indemnifying Party” has the meaning set forth in Section 3.6.

“Indemnitee” shall have the meaning set forth in Section 3.6.

“Indemnity Payment” has the meaning set forth in Section 3.6.

“Information” means information, whether or not patentable or copyrightable, in written, oral, electronic or other tangible or intangible forms, stored in any medium, including studies, reports, records, books, contracts, instruments, surveys, discoveries, ideas, concepts, know-how, techniques, designs, specifications, drawings, blueprints, diagrams, models, prototypes, samples, flow charts, data, computer data, disks, diskettes, tapes, computer programs or other software, marketing plans, customer names, communications by or to attorneys (including attorney-client privileged communications), memos and other materials prepared by attorneys or under their direction (including attorney work product), and other technical,

7

financial, employee or business information or data, but excluding the Halliburton Books and Records and the KBR Books and Records.

“Insurance Proceeds” means those monies:

(a) received by an insured from an insurance carrier; or

(b) paid by an insurance carrier on behalf of the insured;

in any such case net of any applicable premium adjustments (including reserves and retrospectively rated premium adjustments) and net of any costs or expenses (including allocated costs of in-house counsel and other personnel) incurred in the collection thereof.

“Intercompany Notes” means, collectively, (i) the promissory note dated as of December 1, 2005 made by KBR Holdings, LLC to Halliburton Energy Services, Inc. in an amount not to exceed $489 million and (ii) the promissory note dated as of December 1, 2005 made by Georgetown Financial Ltd. to Avalon Financial Services Ltd. in an amount not to exceed $285 million.

“IP Matters Agreement” means the IP Matters Agreement dated the date hereof between Halliburton and KBR.

“IPO” has the meaning given such term in the Recitals.

“IPO Closing Date” means the first date on which the proceeds of any sale of KBR Common Stock to the Underwriters are received.

“IPO Prospectus” means the prospectus included in the IPO Registration Statement, including any prospectus subject to completion, final prospectus or any supplement to or amendment of any of the foregoing.

“IPO Registration Statement” means the Registration Statement on Form S-1 (Registration No. 333-133302) of KBR filed with the Commission pursuant to the Securities Act, registering the shares of KBR Common Stock to be issued in the IPO, together with all amendments thereto.

“Issuance Event” has the meaning set forth in Section 5.4.

“Issuance Event Date” has the meaning set forth in Section 5.4.

“KBR” has the meaning given such term in the Preamble.

“KBR Auditors” means KBR’s independent certified public accountants.

“KBR Balance Sheets” means (a) the KBR Holdings, LLC Consolidated Balance Sheet as of December 31, 2005 and (b) the KBR Holdings, LLC Consolidated Balance Sheet as of September 30, 2006.

8

“KBR B-C Indemnitees” shall mean KBR and its Majority Owned Subsidiaries as of the date hereof.

“KBR Books and Records” means originals or true and complete copies thereof, including electronic copies (if available), of (a) all minute books, corporate charters and bylaws or comparable constitutive documents, records of share issuances and related corporate records of the KBR Group; (b) all books and records primarily relating to (i) Persons who are employees of the KBR Group as of the IPO Closing Date, (ii) the purchase of materials, supplies and services for the KBR Business and (iii) dealings with customers of the KBR Business; and (c) all files relating to any Action the Liability with respect to which is a KBR Liability; except that no portion of the Halliburton Books and Records shall be included in the “KBR Books and Records.”

“KBR Business” means (a) the business and operations conducted by KBR and the members of the KBR Group (whether conducted independently or in association with one or more third parties through a partnership, joint venture or other mutual enterprise) prior to, on and after the Separation Time, including without limitation the following global engineering, procurement, construction, technology and other services provided to energy and industrial customers and government entities worldwide as conducted by the Energy and Chemicals and the Government and Infrastructure segments of Halliburton (such segments as referenced in the Halliburton Form 10-K for the year ended December 31, 2005) prior to the Separation:

(i) construction, maintenance and logistics services for government operations, facilities and installations;

(ii) civil engineering, construction, consulting and project management services for state and local government agencies and private industries;

(iii) integrated security solutions, including threat definition assessments, mitigation and consequence management; design, engineering and program management; construction and delivery; and physical security, operations and maintenance;

(iv) dockyard operation and management, with services that include design, construction, surface/subsurface fleet maintenance, nuclear engineering and refueling, and weapons engineering;

(v) privately financed initiatives such as a facility, service or infrastructure for a government client, and the ownership, operation and maintenance of same;

(vi) downstream engineering and construction capabilities, including global engineering execution centers, as well as engineering, construction and program management of liquefied natural gas, ammonia, petrochemicals, crude oil refineries and natural gas plants;

(vii) upstream oil and gas engineering, marine technology and project management;

9

(viii) operations, maintenance and start-up services to the oil and gas, petrochemical, forest product, power and commercial markets;

(ix) technology licensing in the areas of fertilizers and synthesis gas, olefins, refining and chemicals and polymers;

(x) consulting services in the form of expert technical and management advice that includes studies, conceptual and detailed engineering, project management, construction supervision and design, and construction verification or certification in upstream, midstream and downstream markets;

(xi) effective from and after April 11, 2006, the business and operations of MMM-SS Holdings, LLC and its subsidiaries MMM S.R.L. de C.V., AGRH S.R. L. de C.V. and CCC Cayman Ltd.; and

(xii) the Non-Novated KBR Contracts. The parties intend that each member of the Halliburton Group which is party to a Non-Novated KBR Contract shall remain a party thereto following the Separation, and the parties hereby agree that each Non-Novated KBR Contract shall be considered to be part of the KBR Business for all purposes under this Agreement;

and (b) except as otherwise specifically provided herein, any terminated, divested or discontinued business or operations that at the time of such termination, divestiture or discontinuation related primarily to the KBR Business as then conducted.

“KBR Cash Management Note” means the promissory note dated as of December 1, 2005 made by KBR Holdings, LLC to Halliburton Company and Halliburton Energy Services, Inc.

“KBR Charter” means the Amended and Restated Certificate of Incorporation of KBR as in effect on the date hereof.

“KBR Common Stock” means Common Stock, par value $0.001 per share, of KBR.

“KBR Credit Agreement” means the $850 million Five Year Revolving Credit Agreement dated as of December 16, 2005 among KBR Holdings, LLC, as borrower, and the issuing banks named therein, as amended by Amendment No. 1 thereto dated April 13, 2006, and as further amended from time to time.

“KBR Debt Obligations” means all Indebtedness of KBR or any other member of the KBR Group, including without limitation the Intercompany Notes but excluding all Indebtedness of any member of the Halliburton Group to the extent it constitutes Indebtedness of KBR by virtue of clause (f) or clause (g) of the definition of Indebtedness. KBR Debt Obligations shall include, as of the date of the most recent balance sheet of KBR Holdings, LLC included in the IPO Prospectus, the Indebtedness of KBR Holdings, LLC reflected on such balance sheet.

10

“KBR Environmental Liabilities” means all Liabilities arising under or relating to Environmental Law to the extent, as between the Halliburton Group and the KBR Group, such Liabilities relate to, arise out of, or result from (i) the ownership, operation or conduct of the KBR Business at any time prior to, on or after the Separation Time except for those Liabilities included in clause (b) of the definition of “Halliburton Environmental Liabilities” above, or (ii) any properties or assets owned, leased, used or held for use in connection with any terminated, divested or discontinued business or other activities which, at the time of such termination, divestiture or discontinuation, related to the KBR Business as then conducted. It is understood that, consistent with the foregoing, KBR Environmental Liabilities shall include without limitation all Liabilities arising under or relating to Environmental Law attributable to (1) investigation or remediation activities involving the sites listed on Part 1 of the attached Schedule E; and (2) the transportation, treatment, storage, or disposal of waste generated by the operations of members of the KBR Group, including liability under CERCLA or a comparable law allocated by the applicable Governmental Authority or potentially responsible party group, as appropriate, to members of the KBR Group, which shall include the liability ultimately allocated to members of the KBR Group at the sites listed on Part 2 of Schedule E.

“KBR FCPA Indemnitees” shall mean KBR and its Majority Owned Subsidiaries as of the date hereof.

“KBR Group” means KBR, each current and former subsidiary of KBR, including the subsidiaries set forth in Schedule B, and each Person that becomes a subsidiary of KBR after the Separation Time.

“KBR Indemnitees” has the meaning assigned to that term in Section 3.3.

“KBR Liabilities” shall mean (without duplication):

(i) any and all Liabilities that are expressly contemplated by this Agreement or any Ancillary Agreement to be assumed by KBR or any member of the KBR Group, and all agreements, obligations and Liabilities of any member of the KBR Group under this Agreement or any of the Ancillary Agreements;

(ii) all Liabilities (other than Taxes that are not treated as liabilities of KBR under the Tax Sharing Agreement) primarily relating to, arising out of or resulting from the operation of the KBR Business, as conducted at any time prior to, on or after the Separation Time including, without limitation:

(A) any Liability relating to, arising out of or resulting from any act or failure to act by any director, officer, employee, agent or representative of KBR (whether or not such act or failure to act is or was within such Person’s authority);

(B) any KBR Environmental Liabilities;

(C) liabilities primarily relating to, arising out of or resulting from any KBR Assets;

11

(D) the KBR Debt Obligations; and

(E) any liability arising under or relating to a claim made against KBR by a KBR stockholder in its capacity as such (other than Halliburton) other than a claim for which Halliburton and the Halliburton Group have agreed to indemnify KBR and the KBR Group pursuant to Section 3.3(f) hereof; and

(iii) all Liabilities reflected as liabilities or obligations of KBR in the KBR Balance Sheets, subject to any discharge of such Liabilities subsequent to the date of such KBR Balance Sheets.

Notwithstanding the foregoing, the KBR Liabilities shall not include the Halliburton Liabilities.

“KBR Non-Voting Stock” means any class or series of KBR capital stock, and any warrant, option or right in such stock, other than KBR Voting Stock.

“KBR Voting Stock” means the KBR Common Stock and any other capital stock of KBR entitled to vote generally in the election of directors but excluding any class or series of capital stock only entitled to vote in the event of dividend arrearages thereon, whether or not at the time of determination there are any such dividend arrearages.

“Law” means any law, statute, ordinance, rule, regulation, order, writ, judgment, injunction or decree of any Governmental Authority.

“Liabilities” shall mean any and all Indebtedness, liabilities and obligations of any nature, whether accrued, fixed or contingent, mature or inchoate, known or unknown, reflected on a balance sheet or otherwise, including, but not limited to, those arising under any law, rule, regulation, Action, order, injunction or consent decree of any Governmental Authority or any judgment of any court of any kind or any award of any arbitrator of any kind, and those arising under any contract, commitment or undertaking.

“Losses” shall mean any and all damages, losses, deficiencies, Liabilities, obligations, penalties, judgments, settlements, claims, payments, fines, interest costs and expenses (including, without limitation, the costs and expenses of any and all Actions and demands, assessments, judgments, settlements and compromises relating thereto, and attorneys’, accountants’, consultants’ and other professionals’ fees and expenses incurred in the investigation or defense thereof or the enforcement of rights hereunder), excluding losses that are special, indirect, derivative or consequential, lost profits or punitive damages (other than punitive damages awarded to any third party against an Indemnified Party).

“Majority Owned Subsidiary” of any Person means any corporation (including a business trust), partnership, joint stock company, trust, unincorporated association, joint venture or other entity of which more than 50% of the outstanding capital stock, securities or other ownership interests having ordinary voting power to elect directors of such corporation or, in the case of any other entity, other persons performing similar functions (irrespective of whether or not at the time capital stock, securities or other ownership interests of any other class or classes of such corporation or such other entity shall or might have voting power upon the occurrence of

12

any contingency) is, as of the date hereof, directly or indirectly owned by such Person, by such Person and one or more other subsidiaries of such Person or by one or more other subsidiaries of such Person.

“Market Price” of any shares of KBR Voting Stock or KBR Non-Voting Stock on any date means (i) the last sale price during regular trading hours of such shares on such date on the New York Stock Exchange, Inc. or, if such shares are not listed thereon, on the principal national securities exchange or automated interdealer quotation system on which such shares are traded or (ii) if such sale price is unavailable or such shares are not so traded, the value of such shares on such date determined in accordance with agreed-upon procedures reasonably satisfactory to Halliburton and KBR.

“Non-Novated ESG Contracts” means those contracts and other agreements entered into by the Energy Services Group segments of Halliburton (such segments as referenced in the Halliburton Form 10-K for the year ended December 31, 2005) prior to the Separation Date for which a member of the KBR Group is a signator or contract party, including without limitation certain contracts entered into by Kellogg Brown & Root LLC (and its predecessor), Kellogg Brown & Root Limited, Rockwell B.V., Kellogg Brown & Root International, Inc., Halliburton AS, Asian Marine Contractors Limited, KBR Overseas, Inc., Breswater Marine Contracting B.V., Corporación Mexicana de Mantenimiento Integral, S. de R.L. de C.V., PT KBR Indonesia and Halliburton Australia Pty. Ltd. (B&R Div.). A non-exclusive list of outstanding contract jobs associated with the Non-Novated ESG Contracts is set forth on Schedule G hereto.

“Non-Novated KBR Contracts” means those contracts and other agreements entered into by the Energy and Chemicals or the Government and Infrastructure segments of Halliburton (such segments as referenced in the Halliburton Form 10-K for the year ended December 31, 2005) prior to the Separation Date for which a member of the Halliburton Group is a signator or contract party, including without limitation certain contracts entered into by Servicios Professionales Petroleros, S. de R.L. de C.V., a Mexican company, Halliburton Far East Pte Ltd., a Singapore company, Halliburton International, Inc., a U.S. company, Servicios Halliburton De Venezuela, S.R.L., a Venezuelan company, Halliburton West Africa Ltd., a Cayman Islands company, Halliburton Operations Nigeria Limited, a Nigerian company, and Halliburton SAS, a French company. A non-exclusive list of outstanding contract jobs associated with the Non-Novated KBR Contracts is set forth on Schedule F hereto.

“NYSE” means the New York Stock Exchange.

“Ownership Percentage” means with respect to any class or series of KBR Non-Voting Stock, at any time, the fraction, expressed as a percentage and rounded to the nearest thousandth of a percent, whose numerator is the number of shares of such class or series of KBR Non-Voting Stock beneficially owned by the Halliburton Group and whose denominator is the total number of outstanding shares of such class or series of KBR Non-Voting Stock; provided, however, that any shares of such KBR Non-Voting Stock issued by KBR in violation of its obligations under Article V of this Agreement shall not be deemed outstanding for the purpose of determining the Ownership Percentage.

13

“Penalty” means a fine or other monetary penalty or direct monetary damage, including disgorgement, in each case as a result of a Governmental FCPA Claim, assessed against a KBR FCPA Indemnitee or paid by a KBR FCPA Indemnitee.

“Person” means an individual, a partnership, a corporation, a limited liability company, an association, a joint stock company, a trust, a joint venture, an unincorporated organization and a Governmental Authority or any department, agency or political subdivision thereof.

“Prior Transfer” means a transfer prior to the Separation Date of any part of the KBR Business contained in the Halliburton Group to the KBR Group and an assumption prior to the Separation Date by the KBR Group of any of the KBR Liabilities, and the transfer prior to the Separation Date of any part of the Halliburton Business contained in the KBR Group to the Halliburton Group and an assumption prior to the Separation Date by the Halliburton Group of any of the Halliburton Liabilities.

“Privilege” has the meaning set forth in Section 8.7.

“Providing Company” has the meaning set forth in Section 8.6.

“reasonable best efforts” means a Person’s good faith best efforts to achieve such goal as soon as reasonably practicable and consistent with reasonable commercial practice and without payment of any assignment, consent or similar fee requested by any person or the incurrence of unreasonable expense or hardship, and/or the requirement to engage in litigation.

“Receiving Company” has the meaning set forth in Section 8.6.

“Registration Rights Agreement” means the Registration Rights Agreement dated the date hereof between Halliburton and KBR.

“Regulatory Proceedings” shall mean filings, notices, adjudicatory proceedings, rulemakings, enforcement actions before a Governmental Authority relating to regulatory activity, any other proceedings at or before any regulatory or administrative agency, and any investigation instituted by the Audit Committee of the Board of Directors of a Party in response to or in anticipation of the foregoing. The term shall also refer to appellate activities relating to any of the foregoing, including actions seeking injunctions, writs of mandamus and appeals.

“Securities Act” means the Securities Act of 1933, as amended, or any successor statute.

“Separation” means (i) the transfer of those assets (including funds relating to the KBR Business) relating primarily to the KBR Business as conducted immediately prior to the IPO that are contained in the Halliburton Group immediately prior to the IPO to the KBR Group and the assumption by KBR and the members of the KBR Group of the KBR Liabilities, and (ii) the transfer of those assets (including funds relating to the Halliburton Business) relating primarily to the Halliburton Business as conducted immediately prior to the IPO that are contained in the KBR Group immediately prior to the IPO to the Halliburton Group and the

14

assumption by the Halliburton Group of the Halliburton Liabilities, all as more fully described in this Agreement and the Ancillary Agreements.

“Separation Date” has the meaning set forth in Section 2.1.

“Separation Time” has the meaning set forth in Section 2.1.

“Silica Note” means the Senior Secured Note dated January 20, 2005 made jointly and severally by DII Industries, LLC and Kellogg Brown & Root LLC (as successor to Kellogg Brown & Root, Inc., a Delaware corporation) to the DII Industries, LLC Silica PI Trust.

“Subscription Right” has the meaning set forth in Section 5.4.

“Subscription Right Notice” has the meaning set forth in Section 5.4.

“Tax Sharing Agreement” means the Tax Sharing Agreement dated as of January 1, 2006 by and among Halliburton and its affiliated companies and KBR and its affiliated companies.

“Taxes” has the meaning set forth in the Tax Sharing Agreement.

“Third Party Claim” has the meaning set forth in Section 3.7.

“Third-Party FCPA Claim” means a claim resulting in a monetary judgment against a KBR FCPA Indemnitee, or a settlement in lieu thereof, to the extent relating to the FCPA Subject Matters and as a result of demands or claims made against a KBR FCPA Indemnitee by a Person other than a Governmental Authority, including without limitation by Persons who are customers of, joint venture partners in or financing parties of projects of a KBR FCPA Indemnitee.

“Transition Services Agreements” means the two Transition Services Agreements dated the date hereof between Halliburton Energy Services, Inc. and KBR.

“TSKJ” means the private limited liability company registered in Madiera, Portugal whose members are Technip, SA, Snamprogetti Netherlands B.V., JGC Corporation and Kellogg, Brown and Root.

“Underwriters” means the several underwriters of the IPO named in the Underwriting Agreement.

“Underwriting Agreement” has the meaning set forth in Section 4.1.

“Voting Percentage” means, at any time, the fraction, expressed as a percentage and rounded to the nearest thousandth of a percent, whose numerator is the number of votes entitled to be cast with respect to all of the outstanding shares of KBR Voting Stock beneficially owned by the Halliburton Group and whose denominator is the number of votes entitled to be cast with respect to all of the outstanding shares of KBR Voting Stock; provided, however, that any shares of such KBR Voting Stock issued by KBR in violation of its obligations under Article V of this Agreement shall not be deemed outstanding for the purpose of determining the Voting Percentage.

15

ARTICLE II

SEPARATION AND RELATED TRANSACTIONS

2.1 Separation Date; Separation Time. Unless otherwise provided in this Agreement, or in any agreement to be executed in connection with this Agreement, the effective time and date of each action in connection with the Separation shall be as of 11:59 p.m., Houston, Texas time (the “Separation Time”), on the date that is immediately prior to the IPO Closing Date, or such other date as may be fixed by Halliburton (the “Separation Date”). Notwithstanding the Separation, each of the KBR Cash Management Note and the Halliburton Cash Management Note shall continue in full force and effect pursuant to Section 9.2 hereof.

2.2 Instruments of Transfer and Assumption. Halliburton and KBR agree that (a) transfers of assets required to be transferred by this Agreement or an Ancillary Agreement shall be effected by delivery by Halliburton or the other transferring entity, as applicable, to the transferee, of (i) with respect to those assets that constitute stock, certificates endorsed in blank or evidenced or accompanied by stock powers or other instruments of transfer endorsed in blank, against receipt, (ii) with respect to any real property interest or any improvements thereon, a special warranty deed with general warranty of limited application limiting recourse and remedies to title insurance and warranties by predecessors in title to the transferor, and (iii) with respect to all other assets, such good and sufficient instruments of contribution, conveyance, assignment and transfer, in form and substance reasonably satisfactory to Halliburton and KBR, as shall be necessary to vest in the designated transferee, all of the title and ownership interest of the transferor in and to any such asset, and (b) to the extent necessary, the assumption of the Liabilities contemplated hereby shall be effected by delivery by the transferee to the transferor of such good and sufficient instruments of assumption, in form and substance reasonably satisfactory to Halliburton and KBR, as shall be necessary for the assumption by the transferee of such Liabilities. Each of the parties hereto also agrees to deliver to the other party hereto such other documents, instruments and writings as may be reasonably requested by such other party hereto in connection with the transactions contemplated hereby. Except as set forth in this Section 2.2, (x) THE TRANSFERS AND ASSUMPTIONS REFERRED TO HEREIN WILL BE MADE WITHOUT ANY REPRESENTATION OR WARRANTY OF ANY NATURE (A) AS TO THE VALUE OR FREEDOM FROM ENCUMBRANCE OF, ANY ASSETS, (B) AS TO MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OF, OR ANY OTHER MATTER CONCERNING, ANY ASSETS OR (C) AS TO THE LEGAL SUFFICIENCY TO CONVEY TITLE TO ANY ASSETS, and (y) the instruments of transfer or assumption referred to herein shall not include any representations and warranties other than as specifically provided herein. Halliburton and KBR hereby acknowledge and agree that ALL ASSETS ARE BEING TRANSFERRED “AS IS, WHERE IS.”

16

2.3 Ancillary Agreements. On or prior to the Separation Date, Halliburton and KBR shall execute and deliver (or shall cause the appropriate members of their respective Groups to execute and deliver, as applicable) the agreements between them designated as follows:

(a) the Transition Services Agreements;

(b) the Employee Matters Agreement;

(c) the Tax Sharing Agreement;

(d) the Registration Rights Agreement;

(e) the IP Matters Agreement; and

(f) such other agreements, documents or instruments as the parties may agree are necessary or desirable and which specifically state that they are Ancillary Agreements within the meaning of this Agreement

(collectively, the “Ancillary Agreements”). To the extent such documents are not executed and delivered on the Separation Date, they shall be executed and delivered as soon as practicable thereafter and (except as otherwise provided therein) shall be effective as of the Separation Time.

2.4 Performance of Non-Novated Contracts.

(a) Non-Novated KBR Contracts. The parties intend that each member of the Halliburton Group which is party to a Non-Novated KBR Contract shall remain a party thereto following the Separation Date, and the parties hereby agree that each Non-Novated KBR Contract shall be considered to be part of the KBR Business for all purposes under this Agreement. Notwithstanding the foregoing, Halliburton will cause each member of the Halliburton Group which is a party to a Non-Novated KBR Contract to continue to timely perform such Non-Novated KBR Contract on behalf of the KBR Group. The benefits and/or liabilities of the performance of each such Non-Novated KBR Contract, and the costs associated with such performance, from and after the Separation Time shall be for the account of the KBR Group.

(b) Non-Novated ESG Contracts. The parties intend that each member of the KBR Group which is party to a Non-Novated ESG Contract shall remain a party thereto following the Separation Date, and the parties hereby agree that each Non-Novated ESG Contract shall be considered to be part of the Halliburton Business for all purposes under this Agreement. Notwithstanding the foregoing, KBR will cause each member of the KBR Group which is a party to a Non-Novated ESG Contract to continue to timely perform such Non-Novated ESG Contract on behalf of the Halliburton Group. The benefits and/or liabilities of the performance of each such Non-Novated ESG Contract, and the costs associated with such performance, from and after the Separation Time shall be for the account of the Halliburton Group.

(c) Settlement of Intercompany Balances. From time to time following the Separation Date, the parties shall settle the intercompany account balances relating to the Non-Novated KBR Contracts and the Non-Novated ESG Contracts with cash payments.

2.5 Other Matters. From and after the Separation Date, except as contemplated under this Agreement or any Ancillary Agreement, KBR covenants and agrees that it will not, and will

17

not permit any member of the KBR Group to, enter into any commitment or agreement that binds or purports to bind Halliburton or any member of the Halliburton Group.

ARTICLE III

MUTUAL RELEASES; INDEMNIFICATION

3.1 Mutual Release of Pre-IPO Closing Date Claims.

(a) KBR Release. Except as expressly provided in this Agreement, effective as of the Separation Time, KBR does hereby, for itself and each other member of the KBR Group and their respective successors and assigns, remise, release and forever discharge Halliburton, each member of the Halliburton Group and their respective successors and assigns, from any and all Liabilities whatsoever to KBR and each other member of the KBR Group, whether at law or in equity (including any right of contribution), whether arising under any contract or agreement, by operation of law or otherwise, existing or arising from any acts or events occurring or failing to occur or alleged to have occurred or to have failed to occur or any conditions existing or alleged to have existed on or before the Separation Time, including in connection with the transactions and all other activities to implement any Prior Transfers, the Separation, the IPO and any Distribution.

(b) Halliburton Release. Except as expressly provided in this Agreement, effective as of the Separation Time, Halliburton does hereby, for itself and each other member of the Halliburton Group and their respective successors and assigns, remise, release and forever discharge KBR, each member of the KBR Group and their respective successors and assigns, from any and all Liabilities whatsoever to Halliburton and each other member of the Halliburton Group, whether at law or in equity (including any right of contribution), whether arising under any contract or agreement, by operation of law or otherwise, existing or arising from any acts or events occurring or failing to occur or alleged to have occurred or to have failed to occur or any conditions existing or alleged to have existed on or before the Separation Time, including in connection with the transactions and all other activities to implement any Prior Transfers, the Separation, the IPO and any Distribution.

(c) Surviving Liabilities. Nothing contained in Section 3.1(a) or (b) shall impair any right of any Person to enforce this Agreement, any Ancillary Agreement or any agreements, arrangements, commitments or understandings that are specified in, or are contemplated to continue pursuant to, this Agreement or in any Ancillary Agreement. Furthermore, nothing contained in Section 3.1(a) or (b) shall release any Person from:

(i) any Liability, contingent or otherwise, assumed, transferred, assigned or allocated to the Group of which such Person is a member in accordance with, or any other Liability of any member of any Group under, this Agreement or any Ancillary Agreement;

(ii) any Liability for unpaid amounts for the sale, lease, construction or receipt of goods, property or services purchased, obtained or used in the ordinary

18

course of business by a member of one Group from a member of any other Group within 180 days prior to the IPO Closing Date;

(iii) any Liability for unpaid amounts for products or services or refunds owing on products or services for work done by a member of one Group at the request or on behalf of a member of another Group within 180 days prior to the IPO Closing Date;

(iv) any Liability that the parties may have with respect to indemnification or contribution pursuant to this Agreement and the Ancillary Agreements, which Liability shall be governed by the provisions of this Article III and, if applicable, the appropriate provisions of the Ancillary Agreements; or

(v) any Liability the release of which would result in the release of any Person other than a Person released pursuant to this Section 3.1; provided that the parties agree not to bring suit, seek to collect any amounts or file any liens or encumbrances against any Person, or permit any member of their Group to bring suit, seek to collect any amounts or file any liens or encumbrances against any Person, with respect to any Liability to the extent that such Person would be released with respect to such Liability by this Section 3.1 but for the provisions of this clause (v).

(d) Agreement to Make No Claims. Except as provided in this Article III, KBR shall not make, and shall not permit any member of the KBR Group to make, any claim or demand, or commence any Action asserting any claim or demand, including any claim of contribution or any indemnification, against Halliburton or any member of the Halliburton Group, or any other Person released pursuant to Section 3.1(a), with respect to any Liabilities released pursuant to Section 3.1(a). Except as provided in this Article III, Halliburton shall not make, and shall not permit any member of the Halliburton Group to make, any claim or demand, or commence any Action asserting any claim or demand, including any claim of contribution or any indemnification, against KBR or any member of the KBR Group, or any other Person released pursuant to Section 3.1(b), with respect to any Liabilities released pursuant to Section 3.1(b).

(e) Further Assurances. Except as expressly set forth in Section 3.1(c), it is the intent of each of Halliburton and KBR by virtue of the provisions of this Section 3.1 to provide for a full and complete release and discharge of all Liabilities existing or arising from all acts and events occurring or failing to occur or alleged to have occurred or to have failed to occur and all conditions existing or alleged to have existed on or before the Separation Time, between or among KBR or any member of the KBR Group, on the one hand, and Halliburton or any member of the Halliburton Group, on the other hand (including any contractual agreements or arrangements existing or alleged to exist between or among any such members on or before the Separation Time). At any time, at the request of any other party, each party shall cause each member of its respective Group to execute and deliver releases reflecting the provisions hereof.

3.2 Indemnification by KBR. Except as provided in this Article III, KBR and the Appropriate Members of the KBR Group shall indemnify, defend and hold harmless Halliburton,

19

each member of the Halliburton Group and their respective successors and assigns (collectively, the “Halliburton Indemnitees”), from and against any and all Losses of the Halliburton Indemnitees relating to, arising out of or resulting from any of the following (without duplication):

(a) any KBR Liability, including the failure of KBR or any other member of the KBR Group or any other Person to pay, perform or otherwise promptly discharge any KBR Liabilities in accordance with their respective terms, whether prior to or after the Separation Time;

(b) the KBR Business;

(c) any breach by KBR or any member of the KBR Group of this Agreement or any of the Ancillary Agreements;

(d) the Credit Support Agreements;

(e) certain pending or threatened litigation described on Schedule 3.2(e) hereto; and

(f) any untrue statement or alleged untrue statement of a material fact or omission or alleged omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading, with respect to all information (i) contained in the IPO Registration Statement or any IPO Prospectus (other than information provided by Halliburton to KBR specifically for inclusion in the IPO Registration Statement or any IPO Prospectus and set forth on Schedule 3.3(f)), (ii) contained in any public filings made by KBR with the Commission following the IPO Closing Date and (iii) provided by KBR to Halliburton specifically for inclusion in Halliburton’s annual or quarterly reports following the IPO Closing Date.

As used in this Section 3.2, “Appropriate Members of the KBR Group” means the member or members of the KBR Group, if any, whose acts, conduct or omissions or failures to act caused, gave rise to or resulted in the Loss from and against which indemnity is provided.

3.3 Indemnification by Halliburton. Except as provided in this Article III, Halliburton and the Appropriate Members of the Halliburton Group shall indemnify, defend and hold harmless KBR, each member of the KBR Group and their respective successors and assigns (collectively, the “KBR Indemnitees”), from and against any and all Losses of the KBR Indemnitees relating to, arising out of or resulting from any of the following (without duplication):

(a) the Halliburton Liabilities, including the failure of Halliburton or any other member of the Halliburton Group or any other Person to pay, perform or otherwise promptly discharge any Halliburton Liabilities, in accordance with their respective terms, whether prior to or after the Separation Time;

(b) the Halliburton Business;

20

(c) any breach by Halliburton or any member of the Halliburton Group of this Agreement or any of the Ancillary Agreements;

(d) any Halliburton Environmental Liabilities;

(e) certain pending or threatened litigation described on Schedule 3.3(e) hereto;

(f) any untrue statement or alleged untrue statement of a material fact or omission or alleged omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading, with respect to all information contained in the IPO Registration Statement or any IPO Prospectus provided by Halliburton specifically for inclusion therein and set forth on Schedule 3.3(f); and

(g) the Silica Note and any reimbursement obligations of the Halliburton Group to the KBR Group with respect thereto.

As used in this Section 3.3, “Appropriate Members of the Halliburton Group” means the member or members of the Halliburton Group, if any, whose acts, conduct or omissions or failures to act caused, gave rise to or resulted in the Loss from and against which indemnity is provided.

3.4 Indemnifications Relating to FCPA Subject Matters

(a) Halliburton Indemnity. Halliburton agrees to indemnify and hold harmless the KBR FCPA Indemnitees from and against any Penalties (such Penalties hereinafter referred to as “Halliburton Indemnified FCPA Matters”); provided, that with respect to any KBR FCPA Indemnitee that is not wholly owned, directly or indirectly, by the KBR Group as of the date hereof (a “non-wholly owned majority subsidiary”), the Halliburton indemnity provided under this Section 3.4(a) shall be limited to that percentage of Penalties assessed against or paid by such non-wholly owned majority subsidiary attributable to the KBR Group’s ownership interest in such non-wholly owned majority subsidiary as of the date hereof.

For avoidance of doubt, the Halliburton indemnification provided under this Section 3.4(a) shall not apply to any losses, claims, liabilities or damages relating to the FCPA Subject Matters that are not Halliburton Indemnified FCPA Matters (and the indemnity provided under Section 3.4(a) will not include any such other losses, claims, liabilities or damages), regardless of how denominated or the cause of action, whether in tort, contract, a criminal proceeding or otherwise. Without limiting the foregoing, “Halliburton Indemnified FCPA Matters” shall not include, and the indemnity provided under this Section 3.4(a) shall not apply to: (x) Third-Party FCPA Claims; (y) losses, claims, liabilities or damages that (I) are special, indirect, derivative or consequential, (II) relate to or result in threatened or actual suspension or debarment from bidding or continued activity under government contracts, (III) relate to alleged or actual damage to business or other reputation or loss of, or adverse effect on, cash flow, assets, goodwill, results of operations, business, prospects, profits or business value, whether in the present or future, (IV) relate to alleged or actual adverse consequences in obtaining, continuing or termination of financing for current or future projects, and/or (V) are as a result of claims by directors, officers, employees, Affiliates, advisors, attorneys, agents, debt holders or other interest holders or constituents of KBR or any member of the KBR Group in their capacity as such; or (z) costs or

21

expenses incurred for any monitor required by or agreed to with, a Governmental Authority to review continued compliance by the KBR Group with Applicable FCPA Law.

(b) Sole Beneficiaries. The indemnity provided under Section 3.4(a) is solely for the benefit of the KBR FCPA Indemnitees, and no provision of this Agreement shall create any third party beneficiary or other rights in any Person or Persons other than the KBR FCPA Indemnitees.

(c) Control of Proceedings. Until such time, if ever, that KBR exercises its right to assume control over the investigation, defense and/or settlement of FCPA Subject Matters with respect to KBR pursuant to Section 3.4(e), Halliburton and its Majority Owned Subsidiaries shall at all times, in their sole discretion, have and maintain control over the investigation, defense and/or settlement of, any FCPA Subject Matter. Even if KBR exercises its right pursuant to Section 3.4(e) hereof, Halliburton and its Majority Owned Subsidiaries shall at all times, in their sole discretion, have and maintain control over the investigation, defense and/or settlement of FCPA Subject Matters with respect to Halliburton. Notwithstanding the foregoing, (i) no settlement by KBR of any claims relating to FCPA Subject Matters effected without the prior written consent of Halliburton will be effective or binding upon Halliburton, any member of the Halliburton Group or their respective successors or assigns, and (ii) no settlement by Halliburton of any claims relating to FCPA Subject Matters effected without the prior written consent of KBR will be effective or binding upon any KBR FCPA Indemnitee. The parties agree that Halliburton may terminate its indemnity provided under Section 3.4(a) upon the settlement by KBR of any claims relating to FCPA Subject Matters effected without the prior written consent of Halliburton.

(d) Cooperation. At all times during the term of this Agreement, including whether or not or before or after KBR exercises its right to assume control over the investigation, defense and/or settlement of FCPA Subject Matters pursuant to Section 3.4(e) hereof, KBR, at Halliburton’s expense, shall use best efforts to assist with Halliburton’s full cooperation with any Governmental Authority in Halliburton’s investigation of FCPA Subject Matters and its investigation, defense and/or settlement of any Governmental FCPA Claim. Without limiting the foregoing, KBR’s best efforts to assist with Halliburton’s full cooperation contemplated by the preceding sentence shall include:

(i) At the request of Halliburton, the voluntary and truthful disclosure to Halliburton, the DOJ, the Commission or other Governmental Authority of all information in KBR’s possession, custody or control (in any form or medium, including documents) respecting the activities of KBR, Halliburton and its or their current and former directors, officers, employees, agents, distributors and Affiliates relating to FCPA Subject Matters about which Halliburton inquires or which is material to the investigation conducted by Halliburton, the DOJ, the Commission or other Governmental Authority into the FCPA Subject Matters.

(ii) At the written request of Halliburton, the voluntary production to Halliburton, the DOJ, the Commission or other Governmental Authority, of all documents, records or other tangible evidence in KBR’s possession, custody or control relating to FCPA Subject Matters. Without limiting the foregoing, KBR

22

will assemble, organize and produce, or take reasonable steps to effectuate the production of, all documents, records, or other tangible evidence related to FCPA Subject Matters in KBR’s possession, custody, or control in such reasonable format as Halliburton, the DOJ, the Commission or other Governmental Authority requests. KBR shall preserve, maintain and retain all such documents, records and other tangible evidence related to FCPA Subject Matters. KBR shall provide Halliburton access to all electronic mail, metadata, computer hard drives, computer tape or other electronic data necessary to answer a subpoena of any Governmental Authority.

(iii) At the request of Halliburton, the provision of access to copies of KBR’s original documents and records relating to FCPA Subject Matters in KBR’s possession, custody or control and, using reasonable best efforts, in the custody or control of all current and former directors, officers, employees, agents, distributors, attorneys and Affiliates.

(iv) At the written request of Halliburton, using reasonable best efforts, (A) making available any of KBR’s current and former directors, officers, employees, agents, distributors, attorneys and Affiliates who may have been involved in FCPA Subject Matters and whose cooperation is requested by Halliburton, the DOJ, the Commission or other Governmental Authority; (B) recommending orally and in writing that any and all such Persons cooperate fully (including by appearing for interviews with Governmental Authorities or testimony, including sworn testimony before a grand jury) with (x) any investigation conducted by Halliburton, the DOJ, the Commission or other Governmental Authority with respect to FCPA Subject Matters, or (y) any prosecution of individuals (including without limitation the cooperation of current or former directors, officers or employees of KBR who are not defendants in the prosecution) or entities; and (C) taking appropriate disciplinary action with respect to such of KBR’s current and former directors, officers, employees, agents, distributors and Affiliates who do not cooperate, or who cease to cooperate, fully as contemplated herein.

(v) At the written request of Halliburton, the provision of testimony and other information deemed necessary by Halliburton to identify or establish the original location, authenticity or other evidentiary foundation necessary to admit into evidence documents in any criminal or other proceeding as requested by Halliburton related to FCPA Subject Matters.

(vi) At the written request of Halliburton, using reasonable best efforts, the provision of access to the outside accounting and legal consultants of KBR whose work includes or relates to FCPA Subject Matters, as well as the records, reports and documents of those outside consultants related to FCPA Subject Matters.

(vii) At the request of Halliburton, KBR shall not assert a claim of attorney-client or work-product privilege as to: (i) any KBR original documents

23

or records, or any copies thereof, in possession of attorneys of KBR relating to FCPA Subject Matters, (ii) any memoranda of witness interviews (including exhibits thereto) by attorneys or employees of KBR relating to FCPA Subject Matters; (iii) due diligence reports by attorneys of KBR relating to agents of KBR that are or have been created contemporaneously with and related to transactions or events underlying FCPA Subject Matters; or (iv) documents that are or have been created by attorneys of KBR in connection with internal investigations by Halliburton or KBR into FCPA Subject Matters.

Notwithstanding anything to the contrary contained in this Agreement, in making production of any documents, disclosure of any information or available any people, pursuant to this Section 3.4(d), KBR shall not be required to (1) expressly or implicitly waive its right to assert any privilege that is available under law against Persons other than the Governmental Authority at issue concerning the documents or information at issue or the subject matters thereof; or (2) produce, disclose or make available any legal advice or attorney work product relating to or given in connection with (A) internal investigations by Halliburton or KBR; (B) investigations conducted by any Governmental Authority, proceedings related thereto or resulting therefrom; or (C) any Third-Party Claims.

KBR shall promptly inform and disclose to Halliburton any developments, communications or negotiations between KBR, on the one hand, and any Governmental Authority or third party, on the other hand, with respect to FCPA Subject Matters, except as prohibited by law or lawful order of a Governmental Authority. Halliburton may terminate its indemnity provided under Section 3.4(a) upon the material breach by KBR of its obligations under this Section 3.4(d); provided, however, that if, despite using KBR’s best efforts or reasonable best efforts, as the case may be, to assist with Halliburton’s full cooperation in accordance with this Section 3.4(d), KBR is unable to achieve the desired goal contemplated by any of the foregoing subsections (i)-(vii), Halliburton shall not have grounds to terminate such indemnity. Termination of Halliburton’s indemnity provided under Section 3.4(a) pursuant to this Section 3.4(d) shall not preclude Halliburton from pursuing any other rights or seeking any and all other available remedies against KBR for material breach by KBR of its obligations under this Section 3.4(d).

(e) Assumption of Control by KBR; Refusal of Settlement. KBR, by written notice to Halliburton, may (i) take control over the investigation, defense and/or settlement of FCPA Subject Matters with respect to KBR or (ii) refuse (in KBR’s sole discretion) to agree to a settlement of FCPA Subject Matters negotiated and presented by Halliburton. In either such event, Halliburton may terminate its indemnity provided under Section 3.4(a). Notwithstanding the foregoing, a member of the KBR Group that is not a Majority Owned Subsidiary as of the date hereof may control the investigation, defense and/or settlement of FCPA Subject Matters solely with respect to such subsidiary, and may agree to a settlement of FCPA Subject Matters solely with respect to such subsidiary without the prior written consent of Halliburton, and any such control or agreement to a settlement shall not allow Halliburton to terminate its indemnity provided under Section 3.4(a).

(f) No Admission. Each of Halliburton and KBR do not, by the making of the indemnities in this Section 3.4 or by any other provision of this Agreement, concede that it or any of its Affiliates have violated applicable Law.

24

(g) Expenses. Until such time, if ever, that KBR exercises its right to assume control over the investigation, defense and/or settlement of FCPA Subject Matters pursuant to Section 3.4(e), Halliburton shall bear, at its sole expense, all attorneys’, accountants’, consultants’ and other professionals’ fees and expenses and all other costs incurred on behalf of Halliburton and KBR in the investigation, defense, and/or settlement of FCPA Subject Matters, except as contemplated by Section 3.11. After such time, if ever, that KBR exercises its right to assume control over the investigation, defense and/or settlement of FCPA Subject Matters pursuant to Section 3.4(e), Halliburton shall continue to bear, at its sole expense, all attorneys’, accountants’, consultants’, and other professionals’ fees and expenses and all other costs incurred on its own behalf in the investigation, defense, and/or settlement of FCPA Subject Matters, but shall no longer be responsible for such fees, expenses and costs incurred on behalf of KBR. Nothing in this Section 3.4(g) shall prohibit KBR from at any time engaging (at KBR’s own expense) its own legal advisors, accountants, consultants or other professionals with respect to the FCPA Subject Matters.

(h) Communication. Notwithstanding the rights and obligations set forth in Section 3.4(d), each of Halliburton and KBR agrees to provide, or cause to be provided, to each other as soon as reasonably practicable after written request therefor, any Information relating to FCPA Subject Matters in the possession or under the control of such party that the requesting party reasonably needs (i) to comply with reporting, disclosure, filing or other requirements imposed on the requesting party (including under applicable securities laws) by a Governmental Authority having jurisdiction over the requesting party, (ii) for use in any Regulatory Proceeding, judicial proceeding or other proceeding or in order to satisfy audit, accounting, claims, regulatory, litigation or other similar requirements, (iii) to allow the other party to investigate, defend and/or settle any Governmental FCPA Claim or Third-Party FCPA Claim for which such party is responsible under this Agreement, or (iv) to comply with its obligations under this Agreement or any Ancillary Agreement; provided, however, that in the event that any party determines that any such provision of Information could violate any Law or agreement, or waive any attorney-client or work-product privilege other than as contemplated by Section 3.4(d)(vii), the parties shall take all reasonable measures to permit the compliance with such obligations in a manner that avoids any such harm or consequence. Until such time, if ever, that KBR exercises its right pursuant to Section 3.4(e) hereof, Halliburton shall provide to KBR copies of all correspondence between Halliburton and any Governmental Authority with respect to the FCPA Subject Matters insofar as such correspondence relates to KBR. In addition, until such time, if ever, that KBR exercises its right pursuant to Section 3.4(e) hereof, from time to time and upon KBR’s reasonable request, the attorneys, accountants, consultants or other advisors of the Board of Directors of Halliburton or any special committee of independent directors thereof shall brief the Board of Directors of KBR, the special committee of independent directors formed pursuant to Section 5.3(c) or the agents or representatives of either of them, concerning the status of or issues arising under or relating to Halliburton’s investigation of FCPA Subject Matters and its defense and/or settlement of any Governmental FCPA Claim.

(i) Procedures for Foreign Agents. The parties agree that Halliburton may terminate its indemnity provided under Section 3.4(a) upon the material breach by KBR of its obligations under Section 8.14(b).

25

3.5 Indemnifications Relating to Barracuda-Caratinga Project.

(a) Halliburton Indemnity. Halliburton agrees to indemnify and hold harmless the KBR B-C Indemnitees from and against (i) all out-of-pocket cash costs and expenses they incur after the date hereof as a result of the replacement of the subsea flow-line bolts installed in connection with the development of the Barracuda-Caratinga Project, and (ii) any cash damages, losses, liabilities, obligations, judgments, claims, payments, interest costs, expenses or other award assessed against the KBR B-C Indemnitees in connection with the arbitration of the Barracuda-Caratinga Bolts Matter, and/or any cash settlement or compromise amounts agreed to in lieu thereof (the foregoing (i) and (ii), the “Halliburton Indemnified Barracuda-Caratinga Matters”).

For avoidance of doubt, the Halliburton indemnification provided under this Section 3.5(a) shall not apply to any other losses, claims, liabilities or damages relating to the Barracuda-Caratinga Project that are not Halliburton Indemnified Barracuda-Caratinga Matters (and the indemnity provided under Section 3.5(a) will not include any such other losses, claims, liabilities or damages), regardless of how denominated or the cause of action, whether in tort, contract, a criminal proceeding or otherwise. Without limiting the foregoing, “Halliburton Indemnified Barracuda-Caratinga Matters” shall not include, and the Halliburton indemnity provided under this Section 3.5(a) shall not apply to: (x) Third Party Claims other than claims commenced by Barracuda & Caratinga Leasing Company B.V. or Affiliates of Petrobras with respect to the Barracuda-Caratinga Bolts Matter, or (y) losses, claims, liabilities or damages that (I) are special, indirect, derivative or consequential, (II) relate to alleged or actual damage to business or other reputation or loss of, or adverse effect on, cash flow, assets, goodwill, results of operations, business, prospects, profits or business value, whether in the present or future, or (III) relate to alleged or actual adverse consequences in obtaining, continuing or termination of financing for current or future projects.

(b) Sole Beneficiaries. The indemnity provided under Section 3.5(a) is solely for the benefit of the KBR B-C Indemnitees, and no provision of this Agreement shall create any third party beneficiary or other rights in any Person or Persons other than the KBR B-C Indemnitees.

(c) Control of Proceedings. Until such time, if ever, that Halliburton exercises its right pursuant to Section 3.5(e) hereof, the KBR B-C Indemnitees shall at all times, in their sole discretion, have and maintain control over the defense, counterclaim and/or settlement of the Barracuda-Caratinga Bolts Matter in respect of which indemnity may be sought under Section 3.5(a). Notwithstanding the foregoing, (i) no settlement by KBR of any claims relating to the Barracuda-Caratinga Bolts Matter effected without the prior written consent of Halliburton will be effective or binding upon Halliburton, any member of the Halliburton Group or their respective successors and assigns, and (ii) no settlement by Halliburton of any claims relating to the Barracuda-Caratinga Bolts Matter effected without the prior written consent of KBR will be effective or binding upon any KBR B-C Indemnitee. The parties agree that Halliburton may terminate its indemnity provided under Section 3.5(a) upon the settlement by KBR of any claims relating to the Barracuda-Caratinga Bolts Matter effected without the prior written consent of Halliburton.

(d) Cooperation; Provision of Information. Upon such time, if ever, that Halliburton exercises its right pursuant to Section 3.5(e), KBR shall use best efforts to fully

26

cooperate with Halliburton in the defense, counterclaim and/or settlement of the Barracuda-Caratinga Bolts Matter. At all times under this Agreement, KBR shall promptly inform and disclose to Halliburton any developments, communications or negotiations between KBR, on the one hand, and Petrobras, its Affiliates or any third party, on the other hand, with respect to the Barracuda-Caratinga Bolts Matter, except as prohibited by law or lawful order of a government or Governmental Authority or a court of competent jurisdiction. Halliburton may terminate its indemnity provided under Section 3.5(a) upon the material breach by KBR of its obligations under this Section 3.5(d). Termination of the Halliburton indemnity provided under Section 3.5(a) pursuant to this Section 3.5(d) shall not preclude Halliburton from pursuing any other rights or seeking any and all other available remedies against KBR for material breach by KBR of its obligations under this Section 3.5(d).

(e) Assumption of Control by Halliburton; Refusal of Settlement. Halliburton, by written notice to KBR, may (i) take control over the defense, counterclaim and/or settlement of the Barracuda-Caratinga Bolts Matter or (ii) refuse (in Halliburton’s sole discretion) to agree to a settlement of the Barracuda-Caratinga Bolts Matter negotiated and presented by KBR. If Halliburton exercises its right pursuant to this Section 3.5(e) to control the defense, counterclaim and/or settlement of the Barracuda-Caratinga Bolts Matter, and KBR refuses to agree to a settlement of the Barracuda-Caratinga Bolts Matter negotiated and presented by Halliburton, Halliburton may terminate its indemnity provided under Section 3.5(a).

(f) Expenses. Until such time, if ever, that Halliburton exercises its right to assume control over the defense, counterclaim and/or settlement of the Barracuda-Caratinga Bolts Matter pursuant to Section 3.5(e), KBR shall bear, at its sole expense, all attorney’s, accountants’, consultants’ and other professionals’ fees and expenses and other costs incurred on behalf of Halliburton and KBR in the defense, counterclaim and/or settlement of the Barracuda-Caratinga Bolts Matter, except as contemplated by Section 3.11. Nothing in this Section 3.5(f) shall prohibit Halliburton from at any time engaging (at Halliburton’s own expense) its own legal advisors, accountants, consultants or other professionals with respect to the Barracuda-Caratinga Bolts Matter.

(g) Master Intercompany Reimbursement Agreement. The parties agree that the rights and obligations set forth in this Section 3.5 shall supersede the rights and obligations of the parties under, and control over, the Master Intercompany Reimbursement Agreement dated as of December 16, 2005 between Halliburton and KBR Holdings, LLC solely with respect to the Barracuda-Caratinga Bolts Matter.

(h) Communication. Each of Halliburton and KBR agrees to provide, or cause to be provided, to each other as soon as reasonably practicable after written request therefor, any Information relating to the Barracuda-Caratinga Bolts Matters in the possession or under the control of such party that the requesting party reasonably needs (i) to comply with reporting, disclosure, filing or other requirements imposed on the requesting party (including under applicable securities laws) by a Governmental Authority having jurisdiction over the requesting party, (ii) for use in any Regulatory Proceeding, judicial proceeding or other proceeding or in order to satisfy audit, accounting, claims, regulatory, litigation or other similar requirements, (iii) to allow the other party to defend, counterclaim and/or settle the Barracuda-Caratinga Bolts Matter or any Third Party Claim relating to the Barracuda-Caratinga Bolts

27

Matter for which such party is responsible under this Agreement, or (iv) to comply with its obligations under this Agreement or any Ancillary Agreement; provided, however, that in the event that any party determines that any such provision of Information could violate any law or agreement, or waive any attorney-client or work-product privilege, the parties shall take all reasonable measures to permit the compliance with such obligations in a manner that avoids any such harm or consequence. In addition, until such time, if ever, that Halliburton exercises its right pursuant to Section 3.5(e) hereof, from time to time and upon Halliburton’s reasonable request, the attorneys, accountants, consultants or other advisors of the Board of Directors of KBR or any special committee of independent directors thereof shall brief members of Halliburton senior management, the Board of Directors of Halliburton or any special committee of independent directors thereof concerning the status of or issues arising under or relating to KBR’s defense, counterclaim and/or settlement of the Barracuda-Caratinga Bolts Matters.

(i) Arbitration Recovery. The parties agree that KBR shall be entitled to retain the cash proceeds of any judgment, decision or award entered in favor of a member of the Halliburton Group and/or the KBR Group (including any judgment, decision or award for any counterclaim), or any cash settlement or compromise in lieu thereof received from Petrobras or its Affiliate by a member of the Halliburton Group and/or the KBR Group, in connection with the Barracuda-Caratinga Bolts Matter; provided, however, that Halliburton shall be entitled to any portion of such judgment, decision or award or any settlement or compromise amount (i) which is designated by an arbitration panel or otherwise agreed by Petrobras or its Affiliate with Halliburton and/or KBR to constitute recovery of legal fees, costs or expenses paid by Halliburton or advanced to KBR by Halliburton and (ii) which constitutes recovery by KBR of out-of-pocket cash costs and expenses advanced to KBR by Halliburton or paid by Halliburton pursuant to the Halliburton indemnity provided under Section 3.5(a).

3.6 Indemnification Obligations Net of Insurance Proceeds and Other Amounts.

(a) The parties intend that any Loss subject to indemnification or reimbursement pursuant to this Article III will be net of Insurance Proceeds that actually reduce the amount of the Loss. Accordingly, the amount which any party (an “Indemnifying Party”) is required to pay to any Person entitled to indemnification under this Article III (an “Indemnitee”) will be reduced by any Insurance Proceeds theretofore actually recovered by or on behalf of the Indemnitee in reduction of the related Loss. If an Indemnitee receives a payment (an “Indemnity Payment”) required by this Agreement from an Indemnifying Party in respect of any Loss and subsequently receives Insurance Proceeds, then the Indemnitee will pay to the Indemnifying Party an amount equal to the excess of the Indemnity Payment received over the amount of the Indemnity Payment that would have been due if the Insurance Proceeds recovery had been received, realized or recovered before the Indemnity Payment was made. Notwithstanding anything to the contrary in the Transition Services Agreements, the parties agree that if any such Insurance Proceeds were paid by an insurance company under a plan, such as a retrospective premium or large deductible program, where such Insurance Proceeds are subsequently billed back to one of the parties by the insurance company, then (i) if billed to the Indemnifying Party, it will pay the insurance company and will not charge such amount to the Indemnitee, or (ii) if billed to the Indemnitee, the Indemnifying Party will pay on behalf of or reimburse, as appropriate, the Indemnitee for such amount.

28

(b) An insurer who would otherwise be obligated to pay any claims shall not be relieved of the responsibility with respect thereto or, solely by virtue of the indemnification provisions hereof, have any subrogation rights with respect thereto, it being expressly understood and agreed that no insurer or any other third party shall be entitled to a “windfall” (i.e., a benefit they would not be entitled to receive in the absence of these indemnification provisions) by virtue of the indemnification provisions herein. Nothing contained in this Agreement or any Ancillary Agreement shall obligate any member of any Group to seek to collect or recover any Insurance Proceeds.

3.7 Procedures for Indemnification of Third Party Claims.

(a) If an Indemnitee shall receive notice or otherwise learn of the assertion by a Person (including any Governmental Authority) who is not a member of the Halliburton Group or the KBR Group of any claims or of the commencement by any such Person of any Action (collectively, a “Third Party Claim”) with respect to which an Indemnifying Party may be obligated to provide indemnification to such Indemnitee pursuant to this Article III, such Indemnitee shall give such Indemnifying Party written notice thereof within 20 days after becoming aware of such Third Party Claim. Any such notice shall describe the Third Party Claim in reasonable detail. Notwithstanding the foregoing, the failure of any Indemnitee or other Person to give notice as provided in this Section 3.7(a) shall not relieve the related Indemnifying Party of its obligations under this Article III, except to the extent that such Indemnifying Party is actually prejudiced by such failure to give notice.

(b) An Indemnifying Party may elect to defend (and, unless the Indemnifying Party has specified any reservations or exceptions, to seek to settle or compromise), at such Indemnifying Party’s own expense and by such Indemnifying Party’s own counsel, any Third Party Claim for which indemnification is available under this Article III. Within 30 days after the receipt of notice from an Indemnitee in accordance with Section 3.7(a) (or sooner, if the nature of such Third Party Claim so requires), the Indemnifying Party shall notify the Indemnitee of its election whether the Indemnifying Party will assume responsibility for defending such Third Party Claim, which election shall specify any reservations or exceptions. After notice from an Indemnifying Party to an Indemnitee of its election to assume the defense of a Third Party Claim, such Indemnitee shall have the right to employ separate counsel and to participate in (but not control) the defense, compromise or settlement thereof, but the fees and expenses of such counsel shall be the expense of such Indemnitee except as set forth in the next sentence. In the event that the Indemnifying Party has elected to assume the defense of a Third Party Claim for which indemnification is available under this Article III but has specified, and continues to assert, any reservations or exceptions in such notice, then, in any such case, the reasonable fees and expenses of one separate counsel for all Indemnitees shall be borne by the Indemnifying Party.

(c) If an Indemnifying Party elects not to assume responsibility for defending a Third Party Claim for which indemnification is available under this Article III, or fails to notify an Indemnitee of its election as provided in Section 3.7(b), such Indemnitee may defend such Third Party Claim at the cost and expense (including allocated costs of in-house counsel and other personnel) of the Indemnifying Party.

29

(d) Unless the Indemnifying Party has failed to assume the defense of the Third Party Claim for which indemnification is available under this Article III in accordance with the terms of this Agreement, no Indemnitee may settle or compromise such Third Party Claim without the consent of the Indemnifying Party.

(e) Except with respect to Halliburton Indemnified FCPA Matters and the Barracuda-Caratinga Bolts Matter, which shall be governed by Section 3.4 and Section 3.5 respectively, no Indemnifying Party shall consent to entry of any judgment or enter into any settlement of the Third Party Claim without the consent of an Indemnitee if the effect thereof is to permit any injunction, declaratory judgment, other order or other nonmonetary relief to be entered, directly or indirectly, against such Indemnitee.

(f) In the event of payment by or on behalf of any Indemnifying Party to any Indemnitee in connection with any Third Party Claim under this Article III, such Indemnifying Party shall be subrogated to and shall stand in the place of such Indemnitee as to any events or circumstances in respect of which such Indemnitee may have any right, defense or claim relating to such Third Party Claim against any claimant or plaintiff asserting such Third Party Claim or against any other person. Such Indemnitee shall cooperate with such Indemnifying Party in a reasonable manner, and at the cost and expense (including allocated costs of in-house counsel and other personnel) of such Indemnifying Party, in prosecuting any subrogated right, defense or claim. In the event of an Action in which the Indemnifying Party is not a named defendant, if either the Indemnitee or Indemnifying Party shall so request, the parties shall endeavor to substitute the Indemnifying Party for the named defendant, if at all practicable. If such substitution or addition cannot be achieved for any reason or is not requested, the named defendant shall allow the Indemnifying Party to manage the Action as set forth in this Section 3.7 and the Indemnifying Party shall fully indemnify the named defendant against all costs of defending the Action (including court costs, sanctions imposed by a court, attorneys’ fees, experts’ fees and all other external expenses, and the allocated costs of in-house counsel and other personnel), the costs of any judgment or settlement, and the costs of any interest or penalties relating to any judgment or settlement.

3.8 Additional Matters. (a) Any claim under this Article III on account of a Loss which does not result from a Third Party Claim shall be asserted by written notice given by the Indemnitee to the Indemnifying Party. Such Indemnifying Party shall have a period of 30 days after the receipt of such notice within which to respond thereto. If such Indemnifying Party does not respond within such 30-day period, such Indemnifying Party shall be deemed to have refused to accept responsibility to make payment. If such Indemnifying Party does not respond within such 30-day period or rejects such claim in whole or in part, such Indemnitee shall be free to pursue such remedies as may be available to such party as contemplated by this Agreement and the Ancillary Agreements.

(b) THE PARTIES UNDERSTAND AND AGREE THAT THE INDEMNIFICATION OBLIGATIONS HEREUNDER AND UNDER THE ANCILLARY AGREEMENTS MAY INCLUDE INDEMNIFICATION FOR LOSSES RESULTING FROM, OR ARISING OUT OF, DIRECTLY OR INDIRECTLY, AN INDEMNIFIED PARTY’S OWN NEGLIGENCE OR STRICT LIABILITY.

30

(c) The provisions of Sections 3.2 through 3.8 shall not apply with respect to indemnification or indemnification procedures concerning: Taxes (which are governed exclusively by the Tax Sharing Agreement), employee benefits matters (which are governed exclusively by the Employee Matters Agreement), intellectual property matters (which are governed exclusively by the IP Matters Agreement) or services provided under the Transition Services Agreements (which are governed exclusively by the Transition Services Agreements).

3.9 Remedies Cumulative. The remedies provided in this Article III shall be cumulative and, subject to the provisions of Article VII, shall not preclude assertion by any Indemnitee of any other rights or the seeking of any and all other remedies against any Indemnifying Party.

3.10 Survival of Indemnities. The rights and obligations of each of Halliburton and KBR and their respective Indemnitees under this Article III shall survive the sale or other transfer by any party of any assets or businesses or the assignment by it of any Liabilities.

3.11 Indemnification of Directors and Officers. It is the parties’ intent that each of KBR and Halliburton, as applicable, shall be responsible for the costs and expenses incurred pursuant to any indemnification obligations to its current and former officers, directors, employees and agents. To the extent that a party’s current or former officer, director, employee or agent shall receive indemnification or an advancement of funds from the other party (the party so indemnifying or advancing funds, the “advancing party”) pursuant to an indemnification obligation of the advancing party to such person under its certificate of incorporation or by-laws, an employment agreement or otherwise, then the advancing party shall be reimbursed promptly and in full by the other party. The parties agree that reimbursement pursuant to this Section 3.11 shall not be construed to expand or limit the parties’ respective indemnification rights and obligations under this Article III or to confer upon any Person any rights of indemnification. For purposes of this Section 3.11, persons who serve on the Board of Directors of KBR and who serve as officers of Halliburton after the IPO Closing Date shall be deemed to be directors and officers of Halliburton.

3.12 Mitigation of Damages. The parties each agree to attempt to mitigate, and to cause each of the members of their respective Groups to attempt to mitigate, any Losses that such party may suffer as a consequence of any matter giving rise to a right to indemnification under this Article III by taking all actions which a reasonable person would undertake to minimize or alleviate the amount of Losses and the consequences thereof, as if such person would be required to suffer the entire amount of such Losses and the consequences thereof by itself, without recourse to any remedy against another person, including pursuant to any right of indemnification hereunder.

ARTICLE IV

THE IPO AND ACTIONS PENDING THE IPO

4.1 Transactions Prior to the IPO. Subject to the conditions specified in Section 4.4, Halliburton and KBR shall use their reasonable best efforts to consummate the IPO on or before

31

____________, 2006. Such efforts shall include, but not necessarily be limited to, those specified in this Section 4.1 (to the extent not previously accomplished):

(a) KBR has filed the IPO Registration Statement, and shall use its reasonable best efforts to cause such IPO Registration Statement to become effective, including by filing such amendments thereto as may be necessary or appropriate, responding promptly to any comments of the Commission and taking such other action with respect to the IPO Registration Statement as may be reasonably requested by Halliburton. Halliburton and KBR shall also cooperate in preparing, filing with the Commission and causing to become effective a registration statement registering the KBR Common Stock under the Exchange Act, and any information statement or registration statement or amendments thereto which are required to reflect the establishment of, or amendments to, any employee benefit and other plans necessary or appropriate in connection with the IPO, any Prior Transfers, the Separation or the other transactions contemplated by this Agreement.

(b) KBR shall enter into an underwriting agreement with the Underwriters (the “Underwriting Agreement”), in form and substance reasonably satisfactory to Halliburton, and shall comply with its obligations thereunder.

(c) Halliburton and KBR shall consult with each other and the Underwriters regarding the timing, pricing and other material matters with respect to the IPO, it being understood that decisions on such matters may be dictated by Halliburton in its sole discretion.

(d) KBR shall take all such action as may be necessary or appropriate under state securities and blue sky laws of the United States (and any comparable laws under any foreign jurisdictions) in connection with the IPO.

(e) KBR shall prepare, file and use reasonable best efforts to seek to make effective, an application for listing of the KBR Common Stock issued in the IPO on the NYSE, subject to official notice of issuance.

4.2 Use of Proceeds. KBR shall use the net proceeds from the IPO (after deduction of all expenses in connection with the IPO payable by KBR as provided in Section 8.8) as described under the heading “Use of Proceeds” in the IPO Prospectus.

4.3 Cooperation for IPO. KBR shall, at Halliburton’s direction, promptly take any and all actions necessary or desirable to consummate the IPO as contemplated by the IPO Registration Statement and the Underwriting Agreement. Notwithstanding anything to the contrary contained herein, as between Halliburton and KBR, Halliburton may in its sole discretion choose to terminate, abandon or amend any aspect of the IPO at any time prior to the IPO Closing Date, and KBR promptly shall take all actions directed by Halliburton in that regard.

4.4 Conditions Precedent to Consummation of the IPO. The parties hereto shall use their reasonable best efforts to satisfy the conditions listed below to the consummation of the IPO as soon as practicable. The obligations of the parties to use their reasonable best efforts to consummate the IPO shall be conditioned on the satisfaction, or waiver by Halliburton, of the following conditions. The conditions set forth below are for the sole benefit of Halliburton and

32

shall not give rise to or create any duty on the part of Halliburton or the Halliburton Board of Directors to waive or not waive any such condition.

(a) The IPO Registration Statement shall have been filed and declared effective by the Commission, and there shall be no stop order in effect with respect thereto.

(b) The actions and filings with regard to state securities and blue sky laws of the United States (and any comparable laws under any foreign jurisdictions) described in Section 4.1(d) shall have been taken and, where applicable, have become effective or been accepted.

(c) The KBR Common Stock to be issued in the IPO shall have been accepted for listing on the NYSE, subject to official notice of issuance.

(d) KBR shall have entered into the Underwriting Agreement and all conditions to the obligations of KBR and the Underwriters shall have been satisfied or waived.

(e) Halliburton shall be satisfied, in its sole discretion, that (i) following the IPO, Halliburton and other members of the Halliburton Group will collectively own KBR Common Stock representing control of KBR within the meaning of Section 368(c) of the Code and (ii) to Halliburton’s actual knowledge (with no duty to investigate), all other conditions to permit any future Distribution to qualify as a tax-free distribution to Halliburton, KBR and Halliburton’s stockholders shall, to the extent applicable as of the time of the IPO, be satisfied, and there shall be no event or condition that is likely to cause any of such conditions not to be satisfied as of the time of the Distribution or thereafter.

(f) Any material Governmental Approvals necessary to consummate the IPO shall have been obtained and be in full force and effect.

(g) No order, injunction or decree issued by any court or agency of competent jurisdiction or other legal restraint or prohibition preventing the consummation of the IPO or any of the other transactions contemplated by this Agreement or any Ancillary Agreement shall be in effect.

(h) The Separation shall have become effective.

(i) Such other actions as the parties hereto may, based upon the advice of underwriters, accountants or counsel, reasonably request to be taken prior to the IPO in order to assure the successful completion of the IPO shall have been taken.

(j) This Agreement and all Ancillary Agreements shall have been executed and shall not have been terminated.

(k) A pricing committee for the IPO designated by the Board of Directors of KBR shall have determined that the terms of the IPO are acceptable to KBR.

(l) Halliburton shall have determined that the terms of the IPO are acceptable to Halliburton.

33

ARTICLE V

CORPORATE GOVERNANCE AND OTHER MATTERS

5.1 Charter and Bylaws. As of the IPO Closing Date, the KBR Charter and Amended and Restated Bylaws of KBR shall be in the forms of Schedule 5.1(a) and Schedule 5.1(b), respectively, with such changes therein as may be agreed to in writing by Halliburton.

5.2 KBR Board Representation.

(a) Beginning on the IPO Closing Date, and for so long as the Halliburton Group beneficially owns shares of KBR Common Stock representing a majority of the total voting power of all of the outstanding KBR Voting Stock, Halliburton shall have the right to designate for nomination by the KBR Board (or any nominating committee thereof) for election to the KBR Board (each person so designated, a “Halliburton Designee”) a majority of the members of the KBR Board, including the Chairman of the Board. For so long as the Halliburton Group beneficially owns shares of KBR Common Stock representing less than a majority but at least 15% of the total voting power of all of the outstanding shares of KBR Voting Stock, Halliburton shall have the right to designate for nomination by the KBR Board (or any nominating committee thereof) for election to the KBR Board a proportionate number of Halliburton Designees to the KBR Board, as calculated in accordance with Section 5.2(d). Notwithstanding anything to the contrary set forth herein, (i) KBR’s obligations with respect to the election or appointment of Halliburton Designees shall be limited to the obligations set forth under this Section 5.2 and (ii) shall be further limited by KBR’s compliance with Law and any applicable Commission or stock exchange director independence requirements.

(b) For so long as the Halliburton Group beneficially owns shares of KBR Common Stock representing a majority of the total voting power of all of the outstanding shares of KBR Voting Stock, KBR shall use reasonable best efforts to avail itself of the “Controlled Companies” exemption set forth in Rule 303A of the NYSE Listed Company Manual, and any exemption to any analogous Commission rule or requirement, to exempt KBR from compliance with corporate governance requirements relating to director independence other than with respect to membership of the KBR Compensation Committee. For so long as the Halliburton Group beneficially owns shares of KBR Common Stock representing a majority of the total voting power of all of the outstanding shares of KBR Voting Stock, commencing with the annual meeting of stockholders of KBR to be held in 2007 and prior to each annual meeting of stockholders of KBR thereafter, Halliburton shall be entitled to present to the KBR Board or any nominating committee thereof for nomination thereby such number of Halliburton Designees for election to the KBR Board (or if there is a classified board, the class of directors up for election) at such annual meeting as would result in Halliburton having the appropriate number of Halliburton Designees on the KBR Board as determined pursuant to this Section 5.2.

(c) KBR shall at all such times exercise all authority under applicable Law and use reasonable best efforts to cause all such Halliburton Designees to be nominated for election as KBR Board members by the KBR Board (or any nominating committee thereof). KBR shall cause each Halliburton Designee for election to the KBR Board to be included in the slate of nominees recommended by the KBR Board to holders of KBR Common Stock

34

(including at any special meeting of stockholders held for the election of directors) and shall use reasonable best efforts to cause the election of each such Halliburton Designee, including soliciting proxies in favor of the election of such persons. In the event that any Halliburton Designee elected to the KBR Board shall cease to serve as a director for any reason, the vacancy resulting therefrom shall be filled by the KBR Board with a substitute Halliburton Designee. In the event that as a result of any increase in the size of the KBR Board, Halliburton is entitled to have one or more additional Halliburton Designees elected to the KBR Board pursuant to this Section 5.2, the Halliburton Board shall appoint the appropriate number of such additional Halliburton Designees.

(d) If at any time the Halliburton Group beneficially owns shares of KBR Common Stock representing less than a majority but at least 15% of the total voting power of all of the outstanding shares of KBR Voting Stock, the number of persons Halliburton shall be entitled to designate for nomination by the KBR Board (or any nominating committee thereof) for election to the KBR Board shall be equal to the number of directors computed using the following formula (rounded to the nearest whole number): the product of (i) the percentage of the total voting power of all of the outstanding shares of KBR Voting Stock beneficially owned by the Halliburton Group and (ii) the number of directors then on the KBR Board (assuming no vacancies exist). Notwithstanding the foregoing, if the calculation set forth in the foregoing sentence would result in Halliburton being entitled to elect a majority of the members of the KBR Board, the formula will be recalculated with the product being rounded down to the nearest whole number; provided, however, that if the Halliburton Group, at any time, acquires additional shares of KBR Common Stock so that the Halliburton Group beneficially owns shares of KBR Common Stock representing a majority of the total voting power of all of the outstanding shares of KBR Voting Stock, then the number of persons Halliburton shall be entitled to designate for nomination by the KBR Board (or any nominating committee thereof) for election to the KBR Board shall be adjusted upward, if appropriate as a result of rounding, in accordance with the provisions of this Section 5.2(d). If the number of Halliburton Designees serving on the KBR Board exceeds the number determined pursuant to the foregoing sentences of this Section 5.2(d) (such difference being herein called the “Excess Director Number”), then Halliburton in its sole discretion shall instruct such Halliburton Designees (the number of which designees shall be equal to the Excess Director Number) to promptly resign from the KBR Board, and, to the extent such persons do not so resign, Halliburton shall assist KBR in increasing the size of the KBR Board, so that after giving effect to such increase, the number of Halliburton Designees on the KBR Board is in accordance with the provisions of this Section 5.2(d).

(e) The parties hereto agree that the KBR Board shall consist of seven directors as of the IPO Closing Date, including at least four Halliburton Designees consisting of Messrs. Albert O. Cornelison, Jr., C. Christopher Gaut, Andrew R. Lane and Mark A. McCollum, and including Mr. William Utt, the KBR President and CEO.

(f) For so long as the Halliburton Group beneficially owns shares of KBR Common Stock representing a majority of the total voting power of all of the outstanding shares of KBR Voting Stock, the parties agree that the Halliburton Board of Directors will review and approve all KBR Group projects with an estimated value in excess of $250 million.

35

5.3 Committees.

(a) Effective as of the IPO Closing Date and for so long as the Halliburton Group beneficially owns shares of KBR Common Stock representing a majority of the total voting power of all of the outstanding shares of KBR Voting Stock, any committee of the Board of Directors of KBR (other than the Audit Committee and a special committee of independent directors of KBR to be formed pursuant to Section 5.3(c) hereof) shall be composed of directors at least a majority of which are Halliburton Designees. Effective as of the IPO Closing Date and for so long as the Halliburton Group beneficially owns shares of KBR Common Stock representing less than a majority but at least 15% of the total voting power of all of the outstanding shares of KBR Voting Stock, each committee of the KBR Board of Directors (other than the Audit Committee and the special committee of independent directors of KBR to be formed pursuant Section 5.3(c) hereof) shall, unless Halliburton consents otherwise, include at least one Halliburton Designee to the extent permitted by Law or applicable Commission or stock exchange requirement.

(b) The parties agree that the KBR Board shall form and maintain an executive committee, which committee shall exercise the authority of the KBR Board of Directors when the KBR Board of Directors is not in session in reviewing and approving the analysis, preparation and submission of significant project bids, managing the review, negotiation and implementation of significant project contracts, and reviewing the business and affairs of the KBR Group to ensure that Halliburton’s business practices and standards with respect to internal controls and the Halliburton Code of Business Conduct are consistently implemented and maintained by the KBR Group. For so long as the Halliburton Group beneficially owns shares of KBR Common Stock representing a majority of the total voting power of all outstanding shares of KBR Voting Stock, the executive committee shall consist solely of Halliburton Designees. If at any time the Halliburton Group beneficially owns shares of KBR Common Stock representing less than a majority but at least 15% of the total voting power of all of the outstanding shares of KBR Voting Stock, then Halliburton shall be entitled to designate for appointment by the Board to the executive committee at least one Halliburton Designee.

(c) The parties agree that the KBR Board shall form a special committee of independent directors of KBR which shall exercise the authority of the KBR Board of Directors with respect to FCPA Subject Matters and the rights and obligations of KBR under Section 3.4 hereof. The members of such special committee shall satisfy in all material respects the independence standards of Rule 303A of the NYSE Listed Company Manual, as if those standards applied.

5.4 Subscription Right.

(a) KBR hereby grants to Halliburton, on the terms and conditions set forth herein, a continuing right (the “Subscription Right”) to purchase from KBR, at the times set forth herein:

(i) with respect to the issuance of a class or series of shares of KBR Voting Stock, the number of such shares as is necessary to allow Halliburton to

36

maintain its Voting Percentage (or, in the case of a class or series not outstanding prior to such issuance, 80% of the total number of shares of such class or series being issued); and

(ii) with respect to the issuance of a class or series of shares of KBR Non-Voting Stock, the number of such shares as is necessary to allow Halliburton to maintain its Ownership Percentage with respect to such class or series of shares (or, in the case of a class or series not outstanding prior to such issuance, 80% of the total number of shares of such class or series being issued).

The Subscription Right shall be assignable, in whole or in part and from time to time, by Halliburton to any member of the Halliburton Group or to a Halliburton Transferee pursuant to Section 5.7. The exercise price for each share purchased pursuant to an exercise of the Subscription Right shall be: (i) in the event of the issuance by KBR of shares in exchange for cash consideration, the per share price paid to KBR in the related Issuance Event (defined below); and (ii) in the event of the issuance by KBR of shares for consideration other than cash, the per share Market Price of such shares at the Issuance Event Date (defined below).

(b) The provisions of Section 5.4(a) hereof notwithstanding, and subject to Section 5.6 hereof, the Subscription Right granted pursuant to Section 5.4(a) shall not apply and shall not be exercisable in connection with the issuance by KBR of any shares of KBR Common Stock pursuant to any stock option or other executive, director or employee benefit, compensation or incentive plan maintained by KBR, to the extent such issuance: (i) would not result in Halliburton and other members of the Halliburton Group losing collective control of KBR within the meaning of Section 368(c) of the Code, (ii) would not cause Halliburton to fail to satisfy the stock ownership requirements of Section 1504(a)(2) of the Code with respect to the stock of KBR or (iii) would not cause a change of control under the provisions of Section 355(e) of the Code. The Subscription Right granted pursuant to Section 5.4(a) shall terminate if at any time the Voting Percentage, or the Ownership Percentage with respect to any class or series of KBR Non-Voting Stock, is less than 80%.

(c) At least 20 Business Days prior to the issuance of any shares of KBR Stock (other than pursuant to any stock option or other executive or employee benefit or compensation plan maintained by KBR in the circumstances described in Section 5.4(b) above and other than issuances of shares to any member of the Halliburton Group) or the first date on which any event could occur that, in the absence of a full or partial exercise of the Subscription Right, would result in a reduction in the Voting Percentage, a reduction in any Ownership Percentage or the issuance of any shares of a class or series of KBR Non-Voting Stock not outstanding prior to such issuance, KBR will notify Halliburton in writing (a “Subscription Right Notice”) of any plans it has to issue such shares and the date on which such issuance could first occur (such issuance being referred to herein as an “Issuance Event” and the closing date of such issuance an “Issuance Event Date”). The Subscription Right Notice shall also specify the number of shares KBR intends to issue or may issue (or, if an exact number is not known, a good faith estimate of the range of shares KBR may issue) and the other terms and conditions of such Issuance Event.

37

(d) The Subscription Right may be exercised by Halliburton (or any member of the Halliburton Group to which all or any part of the Subscription Right has been assigned) for a number of shares equal to or less than the number of shares the Halliburton Group is entitled to purchase pursuant to Section 5.4(a). The Subscription Right may be exercised at any time after receipt of an applicable Subscription Right Notice and prior to the applicable Issuance Event Date by the delivery to KBR of a written notice to such effect specifying (i) the number of shares to be purchased by Halliburton or any member of the Halliburton Group, and (ii) a determination of the exercise price for such shares. Upon any such exercise of the Subscription Right, KBR will, on or prior to the applicable Issuance Event Date, deliver to Halliburton (or any member of the Halliburton Group designated by Halliburton), against payment therefor, certificates (issued in the name of Halliburton or its permitted assignee hereunder or as directed by Halliburton) representing the shares being purchased upon such exercise. Payment for such shares shall be made by wire transfer or intrabank transfer of immediately-available funds to such account as shall be specified by KBR, for the full purchase price of such shares.

(e) Except as provided in Section 5.4(f), any failure by Halliburton to exercise the Subscription Right, or any exercise for less than all shares purchasable under the Subscription Right, in connection with any particular Issuance Event shall not affect Halliburton’s right to exercise the Subscription Right in connection with any subsequent Issuance Event; provided, however, that the Voting Percentage and any Ownership Percentage following such Issuance Event in connection with which Halliburton so failed to exercise such Subscription Right in full or in part shall be recalculated to account for the dilution of Halliburton’s interest.

(f) The Subscription Right, or any part thereof, assigned to any member of the Halliburton Group other than Halliburton, shall terminate in the event that such member ceases to be a Majority Owned Subsidiary of Halliburton for any reason whatsoever.

5.5 Issuance of Stock. Notwithstanding anything to the contrary in this Article V, following the IPO Closing Date and until the earliest to occur of (i) the date of any Distribution or (ii) the date that Halliburton ceases to control KBR within the meaning of Section 368(c) of the Code, without the prior written consent of Halliburton, KBR shall not issue any stock of KBR or any securities, securities-based awards, options, warrants or rights convertible into or exercisable or exchangeable for stock of KBR if such issuance would cause Halliburton to fail to control KBR within the meaning of Section 368(c) of the Code, would cause Halliburton to fail to satisfy the stock ownership requirements of Section 1504(a)(2) of the Code with respect to the stock of KBR or would cause a change of control under the provisions of Section 355(e) of the Code.

5.6 Settlement of KBR Benefit Plan Awards. Following the IPO Closing Date and until the earliest to occur of (i) the date of any Distribution or (ii) the date that Halliburton ceases to control KBR within the meaning of Section 368(c) of the Code, without the prior written consent of Halliburton, KBR shall not issue any stock of KBR (or any securities, security-based awards, options, warrants or rights convertible into or exercisable or exchangeable for stock of KBR) in settlement of any award, including without limitation any KBR restricted stock unit, phantom stock, option, stock appreciation right or other securities-based award, granted pursuant to any stock option or other executive, director or employee benefit, compensation or incentive

38

plan maintained by KBR. The parties hereby acknowledge and agree that it is their mutual intent that settlement of any such KBR award shall be made in cash, in treasury shares or via purchase by KBR of KBR Common Stock in the open marketplace.

5.7 Applicability of Rights to Parent in the Event of an Acquisition. In the event KBR merges into, consolidates, sells substantially all of its assets to or otherwise becomes an Affiliate of a Person (other than Halliburton), pursuant to a transaction or series of related transactions in which Halliburton or any member of the Halliburton Group receives equity securities of such Person (or of any Affiliate of such Person) in exchange for KBR Common Stock held by Halliburton or any member of the Halliburton Group, all of the rights of Halliburton set forth in this Article V and in Section 8.5 shall continue in full force and effect and shall apply to the Person the equity securities of which are received by Halliburton pursuant to such transaction or series of related transactions (it being understood that all other provisions of this Agreement will apply to KBR notwithstanding this Section 5.6). KBR agrees that, without the consent of Halliburton, it will not enter into any agreement which will have the effect set forth in the first clause of the preceding sentence, unless such Person agrees to be bound by the foregoing provision.

5.8 Transfer of Halliburton’s Rights Under Article V. Halliburton may transfer all or any portion of its rights under this Article V to a transferee of any KBR Common Stock from any member of the Halliburton Group (a “Halliburton Transferee”) holding at least 15% of the voting power of all of the outstanding shares of KBR Common Stock. Halliburton shall give written notice to KBR of its transfer of rights under this Article V no later than 30 days after Halliburton enters into a binding agreement for such transfer of rights. Such notice shall state the name and address of the Halliburton Transferee and identify the amount of KBR Common Stock transferred and the scope of rights being transferred under this Article V. In connection with any such transfer, the term “Halliburton” as used in this Article V shall, where appropriate to give effect to the assignment of rights and obligations hereunder to such Halliburton Transferee, be deemed to refer to such Halliburton Transferee. Halliburton and any Halliburton Transferee may exercise the rights under this Article V in such priority, as among themselves, as they shall agree upon among themselves, and KBR shall observe any such agreement of which it shall have notice as provided above.

5.9 Restricted Opportunities Under KBR Charter. For so long as Article Eighth of the KBR Charter remains in effect in accordance with its current terms, Halliburton, on behalf of itself and each member of the Halliburton Group, hereby agrees to renounce, to the fullest extent permitted by applicable Law, any and all rights, interest or expectancy with respect to each investment, commercial activity or other opportunity that, in each case, is a “Restricted Opportunity” (as such term is defined in the KBR Charter as in effect on the date hereof).

39

ARTICLE VI

SUBSEQUENT TRANSACTION

6.1 Sole Discretion of Halliburton.

(a) Halliburton shall, in its sole and absolute discretion, determine whether one or more transfers of its KBR Common Stock or a Distribution shall occur, the date of the consummation of such transfer(s) or Distribution and all terms of such transfer(s) or Distribution, including, without limitation, the form, structure and terms of any transaction(s), exchange(s) and/or offering(s) to effect such transfer(s) or Distribution and the timing of and conditions to the consummation of such transfer(s) or Distribution. In addition, Halliburton may at any time decide to abandon such transfer(s) or Distribution or to modify or change the terms of such transfer(s) or Distribution, including, without limitation, by accelerating or delaying the timing of the consummation of all or part of such transfer(s) or Distribution. In the case of a Distribution, this Agreement is intended to be, and is hereby adopted as, a plan of reorganization under Section 368 of the Code.

(b) Halliburton shall select any investment banker(s) and manager(s) in connection with the transfer(s) or Distribution, as well as any financial printer, solicitation and/or exchange agent and outside counsel; provided, however, that nothing herein shall prohibit KBR from engaging (at its own expense) its own financial, legal, accounting and other advisors in connection with such transfer or Distribution.

6.2 Cooperation for Halliburton Transfers. KBR agrees, at KBR’s sole expense, that it, and the members of the KBR Group, will use reasonable best efforts to assist Halliburton in any transfer of all or any portion of its KBR Common Stock, whether in a public or private sale, exchange or other transaction to a Halliburton Transferee, including the execution and delivery of instruments of conveyance, assignment, assumption and delivery of stock certificates, stock powers and other agreements or documents, in form and substance reasonably satisfactory to Halliburton, as shall be necessary to transfer such KBR Common Stock to the Halliburton Transferee and to vest in such Halliburton Transferee all related rights and obligations as shall be assigned to it by Halliburton hereunder and under any Ancillary Agreement. The rights and obligations of the parties in this Section 6.2 are in addition to any rights and obligations set forth in any Ancillary Agreement.

6.3 Cooperation for Halliburton Distribution. KBR agrees, at KBR’s sole expense, to take all actions requested by Halliburton to facilitate a Distribution, including, without limitation, internal restructurings and continuation of businesses necessary to achieve such tax-free Distribution. KBR shall cooperate with Halliburton in all respects to accomplish any Distribution and shall, at Halliburton’s direction, promptly take any and all actions necessary or desirable to effect such Distribution, including, without limitation, the following actions:

(a) Halliburton and KBR shall prepare, file with the Commission and mail, prior to the date of the Distribution to the holders of common stock of Halliburton such information statement, registration statement or other information concerning KBR and the Distribution (and such other matters as Halliburton shall reasonably determine) as is necessary and as may be required by Law and applicable stock exchange requirement. Halliburton and KBR will prepare, and KBR will, to the extent required under applicable Law, file with the Commission any such registration statement or other documentation which Halliburton and KBR determine is necessary or desirable to effectuate the Distribution, and Halliburton and KBR shall each use reasonable best efforts to respond promptly to any comments of the Commission thereto

40

and to obtain all necessary approvals from the Commission with respect thereto as soon as practicable.

(b) Halliburton and KBR shall take all such actions as may be necessary or appropriate under the securities or blue sky laws of the United States (and any comparable laws under any foreign jurisdiction) in connection with the Distribution.

(c) KBR shall prepare and file, and shall use its reasonable best efforts to have approved, an application for the listing of the KBR Common Stock to be distributed in the Distribution on the NYSE or such other exchange on which KBR Common Stock shall then be listed, subject to official notice of distribution.

(d) Halliburton and KBR shall enter into a Distribution Agreement in form and substance acceptable to Halliburton, a form of which is attached hereto as Schedule 6.3.

6.4 Registration Rights Agreement. The Registration Rights Agreement sets forth the rights and obligations of the parties with respect to the registration and subsequent offering of shares of KBR Common Stock held by the Halliburton Group.

ARTICLE VII

ARBITRATION; DISPUTE RESOLUTION

7.1 Agreement to Arbitrate. The procedures for discussion, negotiation and arbitration set forth in this Article VII shall be the final, binding and exclusive means to resolve, and shall apply to all disputes, controversies or claims (whether in contract, tort or otherwise) that may rise out of or relate to, or arise under or in connection with: (a) this Agreement and/or any Ancillary Agreement, (b) the transactions contemplated hereby or thereby, including all actions taken in furtherance of the transactions contemplated hereby or thereby on or prior to the date hereof, or (c) for a period of ten years after the IPO Closing Date, the commercial or economic relationship of the parties, in each case between or among any member of the Halliburton Group and the KBR Group. Each party agrees on behalf of itself and each member of its respective Group that the procedures set forth in this Article VII shall be the final, binding and exclusive remedy in connection with any dispute, controversy or claim relating to any of the foregoing matters and irrevocably waives any right to commence any Action in or before any Governmental Authority, except as expressly provided in Section 7.7(b) and except to the extent provided under the Federal Arbitration Act in the case of judicial review of arbitration results or awards. Each party on behalf of itself and each member of its respective Group irrevocably waives any right to any trial by jury with respect to any dispute, controversy or claim covered by this Section 7.1.

7.2 Escalation. (a) It is the intent of the parties to use their respective reasonable best efforts to resolve expeditiously any dispute, controversy or claim between or among them with respect to the matters covered by this Article VII pursuant to Section 7.1 that may arise from time to time on a mutually acceptable negotiated basis. In furtherance of the foregoing, any party involved in a dispute, controversy or claim may deliver a notice (an “Escalation Notice”) demanding an in-person meeting involving representatives of the parties at a senior level of

41

management (or if the parties agree, of the appropriate business function or division within such entity) who have not previously been directly engaged in asserting or responding to the dispute. A copy of any such Escalation Notice shall be delivered addressed to the General Counsel, or like chief legal officer or official, of each party involved in the dispute, controversy or claim (which copy shall state that it is an Escalation Notice pursuant to this Agreement). Any agenda, location or procedures for such discussions or negotiations between the parties may be established by agreement of the parties from time to time; provided, however, that the parties shall use their reasonable best efforts to meet within 20 days of the Escalation Notice.

(b) Following delivery of an Escalation Notice, the parties shall undertake good faith, diligent efforts to negotiate a commercially reasonable resolution of the dispute, controversy or claim. The parties may, by mutual consent, retain a mediator to aid the parties in their discussions and negotiations by informally providing advice to parties. Any opinion expressed by the mediator shall be strictly advisory and shall not be binding on the parties, nor shall any opinion expressed by the mediator be admissible in any arbitration proceedings. The mediator may be chosen from a list of mediators previously selected by the parties or by other agreement of the parties. Costs of the mediation shall be borne equally by the parties involved in the matter, except that each party shall be responsible for its own expenses. Mediation is not a prerequisite to an Arbitration Demand Notice under Section 7.3.

7.3 Demand for Arbitration. (a) At any time following 60 days after the date of an Escalation Notice (the “Arbitration Demand Date”), any party involved in the dispute, controversy or claim (regardless of whether such party delivered the Escalation Notice) may deliver a notice demanding arbitration of such dispute, controversy or claim (an “Arbitration Demand Notice”). Delivery of an Escalation Notice by a party shall be a prerequisite to delivery of an Arbitration Demand Notice by either party, provided, however, that in the event that any party shall deliver an Arbitration Demand Notice to another party, such other party may itself deliver an Arbitration Demand Notice to such first party with respect to any related dispute, controversy or claim with respect to which the Applicable Deadline has not passed without the requirement of delivering an Escalation Notice. No party may assert that the failure to resolve any matter during any prior discussions or negotiations, the course of conduct during such prior discussions or negotiations, or the failure to agree on a mutually acceptable time, agenda, location or procedures for a meeting is a prerequisite to an Arbitration Demand Notice under Section 7.3. In the event that any party delivers an Arbitration Demand Notice with respect to any dispute, controversy or claim that is the subject of any then pending arbitration proceeding or of a previously delivered Arbitration Demand Notice, all such disputes, controversies and claims shall be resolved in the arbitration proceeding for which an Arbitration Demand Notice was first delivered unless the arbitrators in their sole discretion determine that it is impracticable or otherwise inadvisable to do so.

(b) Except as may be expressly provided in any Ancillary Agreement, any Arbitration Demand Notice may be given until the date that is two years after the later of the occurrence of the act or event giving rise to the underlying claim or the date on which such act or event was, or should have been, in the exercise of reasonable due diligence, discovered by the party asserting the claim (as applicable and as it may in a particular case be specifically extended by the parties in writing, the “Applicable Deadline”). Any discussions, negotiations or mediations between the parties pursuant to this Agreement or otherwise will not toll the

42

Applicable Deadline unless expressly agreed in writing by the parties. Each of the parties agrees on behalf of itself and each member of its Group that if an Arbitration Demand Notice with respect to a dispute, controversy or claim is not given prior to the expiration of the Applicable Deadline, as between or among the parties and the members of their Groups, such dispute, controversy or claim will be barred. Subject to Section 7.7(b) and Section 7.9, upon delivery of an Arbitration Demand Notice pursuant to Section 7.3(a) prior to the Applicable Deadline, the dispute, controversy or claim, and all substantive and procedural issues related thereto, shall be decided by a three member panel of arbitrators in accordance with this Article VII.

7.4 Arbitrators. (a) The party delivering the Arbitration Demand Notice shall notify the American Arbitration Association (“AAA”) and the other parties in writing describing in reasonable detail the nature of the dispute. Within 20 days of the date of the Arbitration Demand Notice, each party to the dispute shall select one arbitrator from the members of a panel of arbitrators of the AAA. The selected arbitrators shall then jointly select a third arbitrator from the members of a panel of arbitrators of the AAA, and such third arbitrator shall be disinterested with respect to each of the parties and shall be experienced in complex commercial arbitration. In the event that the parties’ selected arbitrators are unable to agree on the selection of the third arbitrator, the AAA shall select the third arbitrator, within 45 days of the date of the Arbitration Demand Notice. In the event that any arbitrator is unable to serve, his replacement will be selected in the same manner as the arbitrator to be replaced. The vote of two of the three arbitrators shall be required for any decision under this Article VII.

(b) The arbitrators will set a time for the hearing of the matter which will commence no later than 180 days after the date of appointment of the third arbitrator and which hearing will be no longer than 30 days (unless in the judgment of the arbitrators the matter is unusually complex and sophisticated and thereby requires a longer time, in which event such hearing shall be no longer than 90 days). The final decision of such arbitrators will be rendered in writing to the parties not later than 60 days after the last day of the hearing, unless otherwise agreed by the parties in writing.

(c) The place of any arbitration hereunder will be Houston, Texas and the language of any arbitration hereunder will be English, unless otherwise agreed by the parties. Unless otherwise agreed by the parties, the arbitration hearing shall be conducted on consecutive days.

7.5 Hearings. Within the time period specified in Section 7.4(b), the matter shall be presented to the arbitrators at a hearing by means of written submissions of memoranda and verified witness statements, filed simultaneously, and responses, if necessary in the judgment of the arbitrators or both of the parties. If the arbitrators deem it to be essential to a fair resolution of the dispute, live cross-examination or direct examination may be permitted, but is not generally contemplated to be necessary. The arbitrators shall actively manage the arbitration with a view to achieving a just, speedy and cost-effective resolution of the dispute, claim or controversy. The arbitrators may, in their discretion, set time and other limits on the presentation of each party’s case, its memoranda or other submissions, and may refuse to receive any proffered evidence, which the arbitrators, in their discretion, find to be cumulative, unnecessary, irrelevant or of low probative nature. Any arbitration hereunder shall be conducted in accordance with the Commercial Arbitration Rules of the AAA in effect on the date the notice of

43

Arbitration Demand Notice is served. The decision of the arbitrators will be final and binding on the parties, and judgment thereon may be had and will be enforceable in any court having jurisdiction over the parties. Arbitration awards will bear interest at an annual rate of the then-prevailing prime rate plus 2% per annum, subject to any maximum amount permitted by applicable law. To the extent that the provisions of this Agreement and the prevailing rules of the AAA conflict, the provisions of this Agreement shall govern.

7.6 Discovery and Certain Other Matters. (a) Any party involved in a dispute, controversy or claim subject to this Article VII may request document production from the other party or parties of specific and expressly relevant documents, with the reasonable expenses of the producing party incurred in such production paid by the requesting party. Any such discovery shall be conducted in accordance with the International Bar Association Rules on the Taking of Evidence in International Commercial Arbitration, subject to the discretion of the arbitrators. Any such discovery shall be conducted expeditiously and shall not cause the hearing to be adjourned except upon consent of all parties involved in the applicable dispute or upon an extraordinary showing of cause demonstrating that such adjournment is necessary to permit discovery essential to a party to the proceeding. Disputes concerning the scope of document production and enforcement of the document production requests will be determined by written agreement of the parties involved in the applicable dispute or, failing such agreement, will be referred to the arbitrators for resolution. All discovery requests will be subject to the parties’ rights to claim any applicable privilege. The arbitrators will adopt procedures to protect the proprietary rights of the parties and to maintain the confidential treatment of the arbitration proceedings (except as may be required by law). Subject to the foregoing, the arbitrators shall have the power to issue subpoenas to compel the production or documents relevant to the dispute, controversy or claim.

(b) The arbitrators shall have full power and authority to determine issues of arbitrability but shall otherwise be limited to interpreting or construing the applicable provisions of this Agreement or any Ancillary Agreement, and will have no authority or power to limit, expand, alter, amend, modify, revoke or suspend any condition or provision of this Agreement or any Ancillary Agreement; it being understood, however, that the arbitrators will have full authority to implement the provisions of this Agreement or any Ancillary Agreement, and to fashion appropriate remedies for breaches of this Agreement (including interim or permanent injunctive relief); provided that the arbitrators shall not have (i) any authority in excess of the authority a court having jurisdiction over the parties and the controversy or dispute would have absent these arbitration provisions or (ii) any right or power to award punitive or treble damages. It is the intention of the parties that in rendering a decision the arbitrators give effect to the applicable provisions of this Agreement and the Ancillary Agreements and follow applicable law (it being understood and agreed that this sentence shall not give rise to a right of judicial review of the arbitrators’ award).

(c) If a party fails or refuses to appear at and participate in an arbitration hearing after due notice, the arbitrators may hear and determine the controversy upon evidence produced by the appearing party.

44

(d) Arbitration costs will be borne equally by each party involved in the matter, and each party will be responsible for its own attorneys’ fees and other costs and expenses, including the costs of witnesses selected by such party.

7.7 Certain Additional Matters. (a) Any arbitration award shall be a bare award limited to a holding for or against a party and shall be without findings as to facts, issues or conclusions of law (including with respect to any matters relating to the validity or infringement of patents or patent applications) and shall be without a statement of the reasoning on which the award rests, but must be in adequate form so that a judgment of a court may be entered thereupon. Judgment upon any arbitration award hereunder may be entered in any court having jurisdiction thereof.

(b) Prior to the time at which all of the arbitrators have been appointed pursuant to Section 7.4, any party may seek one or more temporary restraining orders in a court of competent jurisdiction if necessary in order to preserve and protect the status quo. Neither the request for, or grant or denial of, any such temporary restraining order shall be deemed a waiver of the obligation to arbitrate as set forth herein and the arbitrators may dissolve, continue or modify any such order. Any such temporary restraining order shall remain in effect until the first to occur of the expiration of the order in accordance with its terms or the dissolution thereof by the arbitrators.

(c) Except as required by law, the parties shall hold, and shall cause their respective officers, directors, employees, agents and other representatives to hold, the existence, content and result of mediation or arbitration in confidence in accordance with the provisions of Section 8.11 and except as may be required in order to enforce any award. Each of the parties shall request that any mediator or arbitrator comply with such confidentiality requirement.

7.8 Continuity of Service and Performance. Unless otherwise agreed in writing, the parties will continue to provide service and honor all other commitments under this Agreement, each Ancillary Agreement and any other agreement between or among any member of the Halliburton Group and the KBR Group during the course of the dispute resolution procedures pursuant to this Article VII with respect to all matters not subject to such dispute, controversy or claim.

7.9 Law Governing Arbitration Procedures. The interpretation of the provisions of this Article VII, only insofar as they relate to the agreement to arbitrate and any procedures pursuant thereto, shall be governed by the Federal Arbitration Act, as amended, and other applicable federal law. In all other respects, the interpretation of this Agreement shall be governed as set forth in Section 9.3.

ARTICLE VIII

COVENANTS AND OTHER MATTERS

8.1 Other Agreements. In addition to the specific agreements, documents and instruments annexed to this Agreement, Halliburton and KBR agree to execute or cause to be executed by the appropriate parties and deliver, as appropriate, such other agreements,

45

instruments and other documents as may be necessary or desirable in order to effect the purposes of this Agreement and the Ancillary Agreements.

8.2 Further Instruments. The parties intend to separate the KBR Business from the Halliburton Business hereby, and to convey, assign or otherwise transfer to the KBR Group the assets, rights and other items relating to the KBR Business, and to convey, assign or otherwise transfer to the Halliburton Group the assets, rights and other items relating to the Halliburton Business. At the request of either Halliburton or KBR following the Separation Date, and without further consideration, the other party will execute and deliver, and will cause the applicable members of its Group to execute and deliver, to the requesting party and the applicable members of its Group such other instruments of transfer, conveyance, assignment, substitution and confirmation and take such action as the requesting party may reasonably deem necessary or desirable in order more effectively to transfer, convey and assign to the requesting party and the members of its Group and confirm the requesting party’s and the members of its Group’s title to all of the assets, rights and other items contemplated to be transferred to the requesting party and the members of its Group pursuant to a Prior Transfer, this Agreement, the Ancillary Agreements, and any documents referred to therein, to put the requesting party and the members of its Group in actual possession and operating control thereof and to permit the requesting party and the members of its Group to exercise all rights with respect thereto (including, without limitation, rights under contracts and other arrangements as to which the consent of any third party to the transfer thereof shall not have previously been obtained). At the request of either Halliburton or KBR following the Separation Date, and without further consideration, the other party will execute and deliver, and will cause the applicable members of its Group to execute and deliver, to the requesting party and the applicable members of its Group all instruments, assumptions, novations, undertakings, substitutions or other documents and take such other action as the requesting party may reasonably deem necessary or desirable in order to have the other party fully and unconditionally assume and discharge the Liabilities contemplated to be assumed by the other party under a Prior Transfer, this Agreement, any Ancillary Agreement or any document in connection herewith and to relieve the Halliburton Group or the KBR Group, as applicable, of any liability or obligation with respect thereto and evidence the same to third parties. Neither the requesting party nor the other party shall be obligated, in connection with the foregoing, to expend money other than reasonable out-of-pocket expenses, attorneys’ fees and recording or similar fees. Furthermore, each party, at the request of another party hereto, shall execute and deliver such other instruments and do and perform such other acts and things as may be necessary or desirable for effecting completely the consummation of the transactions contemplated hereby.

8.3 Provision of Corporate Records. Except as contemplated by Sections 3.4 and 3.5, as soon as practicable after the Separation Date, subject to the provisions of this Section 8.3 and the provisions of Section 6.2 of the Transition Services Agreements, Halliburton shall use reasonable best efforts to deliver or cause to be delivered to KBR all KBR Books and Records in the possession of Halliburton or any member of the Halliburton Group, and KBR shall use reasonable best efforts to deliver or cause to be delivered to Halliburton all Halliburton Books and Records in the possession of KBR or any member of the KBR Group. The foregoing shall be limited by the following:

(a) To the extent any document (including computer files, as applicable) can be subdivided without unreasonable effort or cost into two portions, one of which constitutes a KBR Book and Record and the other of which constitutes a Halliburton Book and Record, such document (including computer files, as applicable) shall be so subdivided and the appropriate portions shall be delivered to the parties.

46

(b) In the case of this Section 8.3, “reasonable best efforts” shall require only deliveries of (i) specific and discrete books and records or a reasonably limited class of items requested by the other party and (ii) specific and discrete books and records identified by either party in the ordinary course of business and determined by such party to be material to the other’s business.

(c) Each party may retain copies of books and records delivered to the other, subject to holding in confidence in accordance with Section 8.11 information contained in such books and records.

(d) Each party may in good faith refuse to furnish any books and records under this Section 8.3 if it reasonably believes in good faith that doing so could materially adversely affect its ability to successfully assert a claim of Privilege.

(e) Neither party shall be required to deliver to the other books and records or portions thereof which are subject to any Law or confidentiality agreements which would by their terms prohibit such delivery; provided, however, that if requested by the other party, such party shall use reasonable best efforts to seek a waiver of or other relief from such confidentiality restriction.

(f) Nothing in this Section 8.3 shall affect the rights and obligations of any party to the Tax Sharing Agreement with respect to the sharing of information related to Taxes.

8.4 Agreement For Exchange of Information.

(a) Each of Halliburton and KBR agrees to provide, or cause to be provided, to each other as soon as reasonably practicable after written request therefor, any Information in the possession or under the control of such party that the requesting party reasonably needs: (i) to comply with reporting, disclosure, filing or other requirements imposed on the requesting party (including under applicable securities laws) by a Governmental Authority having jurisdiction over the requesting party, (ii) for use in any Regulatory Proceeding, judicial proceeding or other proceeding or in order to satisfy audit, accounting, claims, regulatory, litigation, subpoena or other similar requirements, (iii) to comply with its obligations under this Agreement or any Ancillary Agreement or (iv) in connection with its ongoing businesses as it relates to the conduct of such business, as the case may be; provided, however, that in the event that any party determines that any such provision of Information could be commercially detrimental, violate any Law or agreement, or waive any attorney-client privilege, the parties shall take all reasonable measures to permit the compliance with such obligations in a manner that avoids any such harm or consequence.

(b) After the Separation Date, notwithstanding the parties’ rights and obligations in Section 8.5 hereof, (i) each party shall maintain in effect at its own cost and

47

expense adequate systems and controls for its business to the extent necessary to enable the other party to satisfy its reporting, accounting, audit and other obligations in compliance with all applicable Law and stock exchange requirements, and (ii) each party shall provide, or cause to be provided, to the other party and the applicable members of its Group in such form as such requesting party shall request, at no charge to the requesting party, all financial and other data and information as the requesting party determines necessary or advisable in order to prepare its financial statements and reports or filings with any Governmental Authority.

(c) Any Information owned by a party that is provided to a requesting party pursuant to this Section 8.4 shall be deemed to remain the property of the providing party. Unless specifically set forth herein, nothing contained in this Agreement shall be construed as granting or conferring rights of license or otherwise in any such Information.

(d) To facilitate the possible exchange of Information pursuant to this Section 8.4 and other provisions of this Agreement, each party agrees to use reasonable best efforts to retain all Information in its respective possession or control substantially in accordance with its record retention policies as in effect on the Separation Date. For so long as the Halliburton Group collectively beneficially owns shares of KBR Common Stock representing at least 15% or more of the total voting power of all of the outstanding shares of KBR Voting Stock, KBR shall not amend its or any member of its Group’s record retention policies without the consent of Halliburton. However, except as set forth in the Tax Sharing Agreement, at any time after the date that the Halliburton Group collectively beneficially owns shares of KBR Common Stock representing less than 15% of the total voting power of all of the outstanding shares of KBR Voting Stock, KBR may amend its record retention policies at KBR’s discretion; provided, however, that KBR must give Halliburton thirty (30) days prior written notice of such change in the policy. No party will destroy, or permit any member of its Group to destroy, any Information that exists on the Separation Date (other than Information that is permitted to be destroyed under the Halliburton record retention policy in effect as of the date hereof) without first using its reasonable best efforts to notify the other party of the proposed destruction and giving the other party the opportunity to take possession of such Information prior to such destruction.

(e) No party shall have any liability to any other party in the event that any Information exchanged or provided pursuant to this Section 8.4 is found to be inaccurate, in the absence of willful misconduct by the party providing such Information. No party shall have any duty to update any Information exchanged or provided pursuant to this Section 8.4. No party shall have any liability to any other party if any Information is destroyed or lost after reasonable best efforts by such party to comply with the provisions of Section 8.4(d).

(f) The rights and obligations granted under this Section 8.4 are subject to any specific limitations, qualifications or additional provisions on the sharing, exchange or confidential treatment of Information set forth in Sections 3.4 and 3.5 of this Agreement and any Ancillary Agreement.

(g) Each party hereto shall, except in the case of a dispute subject to Article VII brought by one party against another party (which shall be governed by such discovery rules as may be applicable under Article VII or otherwise), use reasonable best efforts to make

48

available to each other party, upon written request, the former, current and future directors, officers, employees, other personnel and agents of such party as witnesses and any books, records or other documents within its control or which it otherwise has the ability to make available, to the extent that any such person (giving consideration to business demands of such directors, officers, employees, other personnel and agents) or books, records or other documents may reasonably be required by the other party in connection with any Regulatory Proceeding, judicial proceeding or other proceeding in which the requesting party may from time to time be involved, regardless of whether such Regulatory Proceeding, judicial proceeding or other proceeding is a matter with respect to which indemnification may be sought hereunder. The requesting party shall bear all costs and expenses in connection therewith; provided that witnesses shall be made available under this Section 8.4(g) without cost other than reimbursement of actual out-of-pocket expenses and reasonable attorneys’ fees and expenses incurred.

8.5 Auditors and Audits; Annual and Quarterly Statements and Accounting. (a) Each party agrees that, for so long as the Halliburton Group beneficially owns shares of KBR Common Stock representing 15% or more of the total voting power of all of the outstanding shares of KBR Voting Stock, and with respect to any financial reporting period during which the Halliburton Group collectively beneficially owns shares of KBR Common Stock representing 15% or more of the total voting power of all of the outstanding shares of KBR Voting Stock:

(i) Selection of Auditor. KBR shall not select a different accounting firm than the firm selected by Halliburton to audit its financial statements to serve as its independent certified public accountants for purposes of providing an opinion on its consolidated financial statements without Halliburton’s prior written consent (which shall not be unreasonably withheld). At all times, KBR shall retain a nationally recognized accounting firm to serve as its independent certified public accountants for purposes of providing an opinion on KBR’s consolidated financial statements (the “KBR Auditors”).

(ii) Annual and Quarterly Reviews. KBR shall use reasonable best efforts to enable the KBR Auditors to complete their audit such that they will date their opinion on KBR’s audited annual financial statements on the same date that Halliburton’s Auditors date their opinion on Halliburton’s audited annual financial statements, and to enable Halliburton to meet its timetable for the printing, filing and public dissemination of Halliburton’s annual financial statements, including press releases relating to earnings information. KBR shall use reasonable best efforts to enable the KBR Auditors to complete their quarterly review procedures such that they will provide clearance on KBR’s quarterly financial statements on the same date that Halliburton’s Auditors provide clearance on Halliburton’s quarterly financial statements, and to enable Halliburton to meet its timetable for the printing, filing and public dissemination of Halliburton’s quarterly financial statements, including press releases relating to earnings information.

49

(iii) Information for Preparation of Financial Statements. KBR shall provide to Halliburton on a timely basis all Information that Halliburton reasonably requires to meet its schedule for the preparation, printing, filing and public dissemination of Halliburton’s annual, quarterly and periodic financial statements, including press releases relating to earnings information. Without limiting the generality of the foregoing, KBR will provide all required financial information with respect to the KBR Group to the KBR Auditors in a sufficient and reasonable time and in sufficient detail to permit the KBR Auditors to take all steps and perform all reviews necessary to provide sufficient assurance to Halliburton’s Auditors with respect to Information to be included or contained in Halliburton’s annual, quarterly and periodic financial statements, including press releases relating to earnings information. Similarly, Halliburton shall provide to KBR on a timely basis all Information that KBR reasonably requires to meet its schedule for the preparation, printing, filing and public dissemination of KBR’s annual, quarterly and periodic financial statements, including press releases relating to earnings information. Without limiting the generality of the foregoing, Halliburton will provide all required financial Information with respect to the Halliburton Group to Halliburton’s Auditors in a sufficient and reasonable time and in sufficient detail to permit Halliburton’s Auditors to take all steps and perform all reviews necessary to provide sufficient assurance to the KBR Auditors with respect to Information to be included or contained in KBR’s annual, quarterly and periodic financial statements, including press releases relating to earnings information.

(iv) Access to Auditors and Work Papers. KBR shall authorize the KBR Auditors to make available to Halliburton’s Auditors both the personnel who performed or are performing the annual audits and quarterly reviews of KBR and work papers related to such reviews of KBR, in all cases within a reasonable time prior to the KBR Auditors’ opinion date, so that Halliburton’s Auditors are able to perform the procedures they consider necessary to take responsibility for the work of the KBR Auditors as it relates to Halliburton’s Auditors’ report on Halliburton’s financial statements, all within sufficient time to enable Halliburton to meet its timetable for the printing, filing and public dissemination of Halliburton’s annual and quarterly financial statements, including press releases relating to earnings information. Similarly, Halliburton shall authorize Halliburton’s Auditors to make available to the KBR Auditors both the personnel who performed or are performing the annual audits and quarterly reviews of Halliburton and work papers related to such reviews of Halliburton, in all cases within a reasonable time prior to Halliburton’s Auditors’ opinion date, so that the KBR Auditors are able to perform the procedures they consider necessary to take responsibility for the work of Halliburton’s Auditors as it relates to the KBR Auditors’ report on KBR’s financial statements, all within sufficient time to enable KBR to meet its timetable for the printing, filing and public dissemination of KBR’s annual and quarterly financial statements, including press releases relating to earnings information.

50

(v) Accounting Principles and Practices. Without the prior written consent of Halliburton, KBR may not change its accounting principles or practices if a change in such accounting principle or practice would be required to be disclosed in KBR’s financial statements as filed with the SEC or otherwise publicly disclosed, except for such changes which are required by GAAP and as to which there is no discretion on the part of KBR, as concurred in by the KBR Auditors prior to its implementation. KBR shall give Halliburton as much prior notice as reasonably practical of any proposed determination of, or any significant changes in, its accounting estimates or, subject as aforesaid, accounting principles from those in effect on the Separation Date. KBR will consult with Halliburton and, if requested by Halliburton, KBR will consult with Halliburton’s Auditors with respect thereto. Halliburton shall give KBR as much prior notice as reasonably practical of any proposed determination of, or any significant changes in, its accounting estimates or accounting principles pertaining to KBR from those in effect on the Separation Date.

(vi) Comfort Letters. Upon Halliburton’s request, KBR shall use reasonable best efforts to cause to be delivered “comfort letters” of the KBR Auditors with regard to KBR’s financial statements, dated as of the pricing dates and the closing dates and addressed to the underwriters, in any offering of securities by Halliburton or any member of the Halliburton Group for which such comfort letters are required by underwriters. Such “comfort letters” shall be in form reasonably satisfactory to Halliburton and customary in scope and substance for “comfort letters” delivered by independent public accountants in connection with public securities offerings.

(vii) Auditor Consents. KBR shall use reasonable best efforts to cause the KBR Auditors to consent to inclusion of the information described in this Section 8.5 and to be named in Halliburton’s filings with the Commission with respect to any such information as is customary for such consents.

(b) Provision of Financial Information. For so long as the Halliburton Group collectively beneficially owns 15% or more of the total voting power of all of the outstanding shares of KBR Voting Stock: (i) KBR will furnish Halliburton within ten (10) Business Days after the end of each quarter and ten (10) Business Days after the end of each fiscal year, the unaudited balance sheet, income statement and statement of cash flows of the KBR Group as at the end of such period, (ii) KBR shall furnish to Halliburton such financial information or documents in the possession of KBR and any member of its Group as Halliburton may reasonably request, and (iii) KBR shall furnish to Halliburton on a monthly basis such management and other periodic reports related to financial information in the form and substance consistent with the practice of KBR as of the date of this Agreement.

(c) Assignment to Halliburton Transferee. Halliburton may transfer all or any portion of its rights under this Section 8.5 to a Halliburton Transferee holding at least 15% of the voting power of all of the outstanding KBR Common Stock. Halliburton shall give written notice to KBR of its transfer of rights under this Section 8.5 no later than 30 days after Halliburton enters into a binding agreement for such transfer of rights. Such notice shall state

51

the name and address of the Halliburton Transferee and identify the amount of KBR Common Stock transferred and the scope of rights being transferred under this Section 8.5. In connection with any such transfer, the term “Halliburton” as used in this Section 8.5 shall, where appropriate to give effect to the assignment of rights and obligations hereunder to such Halliburton Transferee, be deemed to refer to such Halliburton Transferee. Halliburton and any Halliburton Transferee may exercise the rights under this Section 8.5 in such priority, as among themselves, as they shall agree upon among themselves, and KBR shall observe any such agreement of which it shall have notice as provided above.

8.6 Audit Rights. To the extent any member of the Halliburton Group provides goods or services to any member of the KBR Group, or any member of the KBR Group provides goods or services to a member of the Halliburton Group, under this Agreement or under any Ancillary Agreement (other than pursuant to the Transition Services Agreements), the company providing such goods or services (the “Providing Company”) shall maintain complete and accurate books and records relating to costs and charges made to the company receiving such goods and services (the “Receiving Company”). Books and accounts shall be maintained in accordance with generally accepted accounting principles, consistently applied. Annually, the Receiving Company, at its expense, shall be entitled to audit the Providing Company’s books and records related to the goods and services provided during the preceding year, using its own personnel or personnel from its independent auditing firm. Discrepancies identified as a result of any audit shall be promptly reconciled and agreed between the parties or, if no such reconciliation is agreed by the parties, shall be resolved in accordance with the dispute resolution provisions of Article VII of this Agreement. Any charge which is not questioned by the Receiving Company within the calendar year after the calendar year in which the charge was rendered shall be deemed incontestable.

8.7 Preservation of Legal Privileges. (a) Halliburton and KBR recognize that the members of their respective groups possess and will possess information and advice that has been previously developed but is legally protected from disclosure under legal privileges, such as the attorney-client privilege or work product exemption and other concepts of legal protection (“Privilege”). Each party recognizes that they shall be jointly entitled to the Privilege with respect to such privileged information and that each shall be entitled to maintain, preserve and assert for its own benefit all such information and advice, but both parties shall ensure that such information is maintained so as to protect the Privileges with respect to the other party’s interest. To that end, neither party will knowingly waive or compromise any Privilege associated with such information and advice without the prior written consent of the other party. In the event that privileged information is required to be disclosed to any arbitrator or mediator in connection with a dispute between the parties, such disclosure shall not be deemed a waiver of Privilege with respect to such information, and any party receiving it in connection with a proceeding shall be informed of its nature and shall be required to safeguard and protect it.

(b) The rights and obligations created by this Section 8.7 shall apply to all information relating to the KBR Business as to which, but for the Separation, either party would have been entitled to assert or did assert the protection of a Privilege, including (i) any and all information generated prior to the Separation Date but which, after the Separation, is in the possession of either party and (ii) all information generated, received or arising after the Separation Date that refers to or relates to information described in the preceding clause (i).

52

(c) Upon receipt by either party of any subpoena, discovery or other request that may call for the production or disclosure of information that is the subject of a Privilege, or if a party obtains knowledge that any current or former employee of a party has received any subpoena, discovery or other request that may call for the production or disclosure of such information, such party shall provide the other party a reasonable opportunity to review the information and to assert any rights it may have under this Section 8.7 or otherwise to prevent the production or disclosure of such information. Absent receipt of written consent from the other party to the production or disclosure of information that may be covered by a Privilege, each party agrees that it will not produce or disclose any information that may be covered by a Privilege unless a court of competent jurisdiction has entered a final, nonappealable order finding that the information is not entitled to protection under any applicable Privilege.

(d) Nothing in this Section 8.7 shall limit or qualify the rights and obligations of the parties in Section 3.4(d), Section 3.5(d) and Section 8.15.

8.8 Payment of Expenses. KBR shall pay all underwriting fees, discounts and commissions and other direct costs incurred in connection with the IPO. Except as otherwise provided in this Agreement, the Ancillary Agreements or any other agreement between the parties relating to the Separation, the IPO or the Distribution, all other out-of-pocket costs and expenses of the parties hereto in connection with the preparation of this Agreement and the Ancillary Agreements, the Separation, the IPO and the Distribution shall be paid by Halliburton. Notwithstanding the foregoing, KBR shall pay any internal fees, costs and expenses incurred by KBR in connection with the Separation, the IPO and the Distribution.

8.9 Governmental Approvals. The parties acknowledge that certain of the transactions contemplated by this Agreement and the Ancillary Agreements may be subject to certain conditions established by applicable government regulations, orders, and approvals (“Existing Authority”). The parties intend to implement this Agreement, the Ancillary Agreements and the transactions contemplated hereby and thereby consistent with and to the extent permitted by Existing Authority and to cooperate toward obtaining and maintaining in effect such Governmental Approvals as may be required in order to implement this Agreement and each of the Ancillary Agreements as fully as possible in accordance with their respective terms. To the extent that any of the transactions contemplated by this Agreement or any Ancillary Agreement require any Governmental Approvals, the parties will use their reasonable best efforts to obtain any such Governmental Approvals.

8.10 Continuance of Halliburton Credit Support. (a) Duration of Existing Credit Support Agreements. Notwithstanding any other provision of this Agreement or any Ancillary Agreement to the contrary, and except as set forth in Section 8.10(b) below, the parties hereby agree that Halliburton and each applicable member of the Halliburton Group shall maintain in full force and effect each Credit Support Agreement which is issued and outstanding as of the Separation Date until the earlier of: (i) such time as the project contract, or all obligations of any member of the KBR Group thereunder, to which such Credit Support Agreement relates terminates or (ii) such time as such Credit Support Agreement or the underlying instrument to which it relates expires in accordance with its terms or is otherwise released; provided, that KBR shall use reasonable best efforts to attempt to release or replace the liability of Halliburton and

53

the members of its Group under any Credit Support Agreement for which such replacement or release is reasonably available.

(b) Additional Credit Support Agreements Post Separation Date.

(i) Until December 31, 2009, KBR may from time to time request, and Halliburton agrees to provide or cause to be provided such additional guarantees, indemnification or reimbursement obligations or extensions of existing guarantees, indemnification or reimbursement obligations as are required with respect to: (i) the issuance of additional letters of credit necessary to comply with KBR’s obligations under the Egypt Basic Industries Corporation ammonia plant project contract, the U.K. Ministry of Defense Allenby & Connaught project contract and all other KBR project contracts existing as of December 15, 2005; (ii) the issuance of additional surety bonds necessary to support new task orders pursuant to the Little Rock Job Order Contract, the Ministry of Defense Allenby & Connaught project contract, the State of Missouri Job Order Contract and all other KBR project contracts existing as of December 15, 2005; and (iii) the issuance of performance guarantees necessary to support the Egypt Basic Industries Corporation ammonia plant project contract, the U.K. Ministry of Defense Allenby & Connaught project contract, the Little Rock Job Order Contract, the State of Missouri Job Order Contract and all other KBR project contracts existing as of December 15, 2005. Halliburton and each applicable member of the Halliburton Group shall maintain in full force and effect each additional Credit Support Agreement which is obtained pursuant to this Section 8.10(b) until the earlier of: (i) such time as the project contract, or all obligations of any member of the KBR Group thereunder, to which such Credit Support Agreement relates terminates or (ii) such time as such Credit Support Agreement or the underlying instrument to which it relates expires in accordance with its terms or is otherwise released; provided, that KBR shall use reasonable best efforts to attempt to release or replace the liability of Halliburton and the members of its Group under any such Credit Support Agreement for which such replacement or release is reasonably available.

(ii) Except as expressly provided in this Section 8.10(b), the parties agree that after the Separation Date, KBR shall not: (i) request the issuance of any new letter of credit, surety bond or other instrument pursuant to the Credit Support Agreements, (ii) request the issuance by Halliburton of any additional guarantee, indemnification or reimbursement obligation for the benefit of any member of the KBR Group or any customer or lender thereof, or (iii) extend the term of, increase the obligations under, or otherwise materially amend or modify any Credit Support Agreement, in each case without the prior written consent of Halliburton (which consent may be withheld in Halliburton’s sole discretion).

(c) Carry Charge for Letters of Credit. For so long as any Credit Support Agreement that is a letter of credit remains outstanding prior to December 31, 2009, KBR shall pay to Halliburton a quarterly carry charge for continuance of such letters of credit pursuant to this Section 8.10 equal to the sum of: (i) 0.40% per annum of the then outstanding aggregate principal amount of all letters of credit for such quarter meeting the definition of “Performance Letters of Credit” or “Commercial Letters of Credit” (as such terms are defined by the KBR Credit Agreement as of the date hereof), and (ii) 0.80% per annum of the then outstanding aggregate principal amount of all letters of credit constituting financial letters of credit for such quarter, pro rated on a daily basis, payable on the last day of each calendar quarter by

54

intercompany settlement or otherwise as the parties may from time to time agree. Following December 31, 2009, KBR shall pay to Halliburton a quarterly carry charge for continuance of any Credit Support Agreement that is a letter of credit pursuant to this Section 8.10 equal to the sum of: (i) 0.90% per annum of the then outstanding aggregate principal amount of all letters of credit for such quarter meeting the definition of “Performance Letters of Credit” or “Commercial Letters of Credit” (as such terms are defined by the KBR Credit Agreement as of the date hereof), and (ii) 1.65% per annum of the then outstanding aggregate principal amount of all letters of credit constituting financial letters of credit for such quarter, pro rated on a daily basis, payable on the last day of each calendar quarter by intercompany settlement or otherwise as the parties may from time to time agree.

(d) Carry Charge for Surety Bonds. For so long as any Credit Support Agreement that is a surety bond remains outstanding prior to December 31, 2009, KBR shall pay to Halliburton a quarterly carry charge for continuance of such surety bonds pursuant to this Section 8.10 equal to 0.25% per annum of the then outstanding aggregate principal amount of such surety bonds for such quarter, pro rated on a daily basis, payable on the last day of each calendar quarter by intercompany settlement or otherwise as the parties may from time to time agree. Following December 31, 2009, KBR shall pay to Halliburton a quarterly carry charge for continuance of such surety bonds pursuant to this Section 8.10 equal 0.50% per annum of the then outstanding aggregate principal amount of such surety bonds for such quarter, pro rated on a daily basis, payable on the last day of each calendar quarter by intercompany settlement or otherwise as the parties may from time to time agree.

(e) No Other Financing Obligations. Except as expressly set forth in this Section 8.10 or as contemplated by the agreements listed on Schedule 9.2 hereto, following the Separation Date, Halliburton shall have no obligation to provide or continue any credit support to, or advance any funds to or on behalf of, any member of the KBR Group.

(f) KBR Liabilities; Performance Covenants.

(i) All obligations under the Credit Support Agreements shall be deemed KBR Liabilities, as between the Halliburton Group and the KBR Group, for purposes of this Agreement.

(ii) For so long as Halliburton or any member of the Halliburton Group remains liable to any third party with respect to any Credit Support Agreement: (i) KBR shall pay or perform, or cause the Person in the KBR Group for whose benefit the Credit Support Agreement is provided to pay or perform, the underlying obligation as and when the same shall become due and/or payable, to the end that no member of the Halliburton Group shall be required to make any payment under or by reason of its obligation under such Credit Support Agreement and (ii) each member of the Halliburton Group shall retain all rights of reimbursement and subrogation it may have, whether arising by law, by contract or otherwise, with respect to such Credit Support Agreement and such rights shall be enforceable against KBR as well as the member of the KBR Group for whose benefit the Credit Support Agreement was made.

55

(iii) For so long as any Credit Support Agreement remains in effect, to the extent that covenants and agreements contained in the KBR Credit Agreement, any loan or other credit agreement or other material agreement in effect on the date of this Agreement to which any member of the Halliburton Group is a party requires, or requires such party to cause, any member of the KBR Group to take or refrain from taking any action, or provides for a default or event of default if any member of the KBR Group takes or refrains from taking any action, such member of the KBR Group shall at all times take or refrain from taking any such action as would result in a breach or violation of, or a default under, such agreement.

8.11 Confidentiality.

(a) Until the date that is five (5) years from the date hereof, Halliburton and KBR shall hold and shall cause the members of the Halliburton Group and the KBR Group, respectively, to hold, and shall each cause their respective officers, employees, agents, consultants and advisors to hold, in strict confidence and not to disclose or release without the prior written consent of the other party, any and all Confidential Information (as defined herein); provided, that the parties may disclose, or may permit disclosure of, Confidential Information: (i) to their respective auditors, attorneys, financial advisors, bankers and other appropriate consultants and advisors who have a need to know such information and are informed of their obligation to hold such information confidential to the same extent as is applicable to the parties hereto and in respect of whose failure to comply with such obligations, Halliburton or KBR, as the case may be, will be responsible or (ii) to the extent any member of the Halliburton Group or the KBR Group is compelled to disclose any such Confidential Information by judicial or administrative process or, in the opinion of legal counsel, by other requirements of Law. Notwithstanding the foregoing, in the event that any demand or request for disclosure of Confidential Information is made pursuant to clause (ii) above, Halliburton or KBR, as the case may be, shall promptly notify the other of the existence of such request or demand and shall provide the other a reasonable opportunity to seek an appropriate protective order or other remedy, which both parties will cooperate in seeking to obtain. In the event that such appropriate protective order or other remedy is not obtained, the party being compelled to disclose the Confidential Information shall furnish or cause to be furnished only that portion of the Confidential Information that is legally required to be disclosed. As used in this Section 8.11, “Confidential Information” shall mean all proprietary, technical or operational information, data or material of one party which, prior to or following the Separation Date, has been disclosed by Halliburton or members of the Halliburton Group, on the one hand, or KBR or members of the KBR Group, on the other hand, in written, oral (including by recording), electronic, or visual form to, or otherwise has come into the possession of, the other, including pursuant to any provision of this Agreement (except to the extent that such Information can be shown to have been (a) in the public domain through no fault of such party or (b) later lawfully acquired from other sources by the party to which it was furnished; provided, however, in the case of (b) that such sources did not provide such Information in breach of any confidentiality obligations).

(b) Notwithstanding anything to the contrary set forth herein, (i) Halliburton and the other members of the Halliburton Group, on the one hand, and KBR and the other members of the KBR Group, on the other hand, shall be deemed to have satisfied their obligations hereunder with respect to Confidential Information if they exercise the same degree

56

of care (but no less than a reasonable degree of care) as they take to preserve confidentiality for their own similar Information and (ii) confidentiality obligations provided for in any agreement between Halliburton or any other member of the Halliburton Group, or KBR or any other members of the KBR Group, on the one hand, and any employee of Halliburton or any other member of the Halliburton Group, or KBR or any other members of the KBR Group, on the other hand, shall remain in full force and effect. Confidential Information of Halliburton or any other member of the Halliburton Group, on the one hand, or KBR or any other member of the KBR Group, on the other hand, in the possession of and used by the other as of the Separation Date may continue to be used by such Person in possession of the Confidential Information in and only in the operation of the Halliburton Business or the KBR Business, as the case may be, and may be used only so long as the Confidential Information is maintained in confidence and not disclosed in violation of Section 8.11(a). Such continued right to use may not be transferred to any third party unless the third party purchases all or substantially all of the business and assets in which the relevant Confidential Information is used or employed in one transaction or in a series or related transactions. In the event that such right to use is transferred in accordance with the preceding sentence, the transferring party shall not disclose the source of the relevant Confidential Information.

(c) Nothing in this Section 8.11 shall limit or qualify the rights and obligations of the parties with respect to Sections 3.4 and 3.5 hereof.

(d) Nothing in Sections 8.3, 8.4 or 8.5 shall require KBR to violate any agreement with any third parties regarding the confidentiality of confidential and proprietary information relating to that third party or its business; provided, however, that in the event that KBR is required under Sections 8.3, 8.4 or 8.5 to disclose any such information, KBR shall use reasonable best efforts to seek to obtain such third party’s consent to the disclosure of such information. Similarly, nothing in Sections 8.3, 8.4 or 8.5 shall require Halliburton to violate any agreement with any third parties regarding the confidentiality of confidential and proprietary information relating to that third party or its business; provided, however, that in the event that Halliburton is required under Sections 8.3, 8.4 or 8.5 to disclose any such information, Halliburton shall use reasonable best efforts to seek to obtain such third party’s consent to the disclosure of such information.

(e) Nothing in this Section 8.11 shall limit or qualify the rights and obligations of the parties under the IP Matters Agreement.

8.12 Receipt of Notices. If a party receives a notice or other communication from any Governmental Authority or third party, or otherwise becomes aware of any fact or circumstance after the Separation Date relating to an asset, contract or ownership interest transferred to the other party or liability assumed by the other party, it will promptly forward the notice or other communication to the other party or give notice to the other party of such fact or circumstance of which it has become aware. Each of Halliburton and KBR will comply, and will cause members of their respective Groups to comply, with this Section 8.12.

57

8.13 Non Solicitation of Employees.

(a) Halliburton No Hire. For a period of one (1) year from the Separation Date, Halliburton agrees not to (i) solicit, recruit or hire any employees, independent contractors or officers of the KBR Group who have worked for or been contracted to the KBR Business immediately prior to the Separation Date and who are employed full-time by KBR or a member of the KBR Group immediately after the Separation Date or (ii) solicit or encourage any current employee or independent contractor of the KBR Group who has worked full-time for the KBR Business to leave the employment of KBR or a member of the KBR Group. Nothing in this Section 8.13 shall prevent or restrict Halliburton or any member of the Halliburton Group from employing any individual who responds to a general solicitation for employment made by or on behalf of Halliburton or any member of the Halliburton Group that is not specifically directed at employees, independent contractors or officers of KBR who have worked in the KBR Business or any individual who, after the Separation Date, initiates contact with Halliburton or any member of the Halliburton Group for purposes of seeking employment.

(b) KBR No Hire. For a period of one (1) year from the Separation Date, KBR agrees not to (i) solicit, recruit or hire any employees, independent contractors or officers of the Halliburton Group who have worked for or been contracted to the Halliburton Business immediately prior to the Separation Date and who are employed full-time by Halliburton or a member of the Halliburton Group immediately after the Separation Date or (ii) solicit or encourage any current employee or independent contractor of the Halliburton Group who has worked full-time for the Halliburton Business to leave the employment of Halliburton or a member of the Halliburton Group. Nothing in this Section 8.13 shall prevent or restrict KBR or any member of the KBR Group from employing any individual who responds to a general solicitation for employment made by or on behalf of KBR or any member of the KBR Group that is not specifically directed at employees, independent contractors or officers of Halliburton who have worked in the Halliburton Business or any individual who, after the Separation Date, initiates contact with KBR or any member of the KBR Group for purposes of seeking employment.

8.14 Halliburton Policies and Procedures. (a) For so long as the Halliburton Group beneficially owns shares of KBR Common Stock representing a majority of the total voting power of all of the outstanding shares of KBR Voting Stock, the KBR Group will consistently implement and maintain Halliburton’s business practices and standards with respect to internal controls and the Halliburton Code of Business Conduct, which Halliburton may amend or supplement from time to time in its sole discretion.

(b) Notwithstanding the foregoing, for a period of five (5) years following the Separation Date, the KBR Group will consistently implement and maintain the business practices and standards adopted by the Halliburton Board of Directors in July 2006 for the KBR Group with respect to internal control procedures relating to use of foreign agents; provided, however, that the KBR Group may amend such procedures during such 5-year period upon the prior written consent of Halliburton, not to be unreasonably withheld.

8.15 Antitrust Matters. KBR and Halliburton each agree, on behalf of itself and the members of its Group, to at all times during the term of this Agreement use reasonable best efforts to assist with the other party’s full cooperation with any Governmental Authority in its investigation of Antitrust Matters and such other party’s investigation, defense and/or settlement

58

of any claim by any Governmental Authority relating to or arising out of the Antitrust Matters. Without limiting the foregoing, a party’s reasonable best efforts to assist with the other party’s full cooperation contemplated by the preceding sentence shall include:

(a) Without limiting or qualifying the parties’ rights and obligations in Section 8.4 or Section 3.4, each of Halliburton and KBR agrees, on behalf of itself and the members of its Group, to provide, or cause to be provided, to each other as soon as reasonably practicable after written request therefor, any Information relating to the Antitrust Matters, in the possession or under the control of such party that the requesting party reasonably needs: (i) to comply with reporting, disclosure, filing or other requirements imposed on the requesting party (including under applicable securities laws) by a Governmental Authority having jurisdiction over the requesting party, (ii) for use in any Regulatory Proceeding, judicial proceeding or other proceeding or in order to satisfy audit, accounting, claims, regulatory, litigation, subpoena or other similar requirements, (iii) to allow the other party to defend or settle any claim relating to Antitrust Matters for which such party may be responsible, or (iv) to comply with its obligations under this Agreement or any Ancillary Agreement; provided, however, that neither party shall be required by this Section 8.15 to violate any Law or waive any attorney-client or other work-product privilege. In the event that any party determines that such provision of Information pursuant to this Section 8.15 could violate any Law or agreement, or waive any attorney-client or work-product privilege, the parties shall take all reasonable measures to permit the compliance with such obligations in a manner that avoids any such harm or consequence.

(b) Notwithstanding Section 8.4, each party hereby undertakes, on behalf of itself and the members of its Group, to preserve, maintain and retain all documents, records and other tangible evidence related to Antitrust Matters.

(c) Each party agrees, on behalf of itself and the members of its Group, to use reasonable best efforts to (i) make available any of its current and former directors, officers, employees, agents, distributors, attorneys and Affiliates who may have been involved in the Antitrust Matters and whose cooperation is requested by the other party, the DOJ or other Governmental Authority; and (ii) recommend orally and in writing that any and all such persons cooperate fully (including by appearing for interviews with Governmental Authorities or testimony, including sworn testimony before a grand jury) with any investigation conducted by a party, the DOJ or other Governmental Authority with respect to the Antitrust Matters.

(d) Each party agrees to promptly inform and disclose to the other party any developments, communications or negotiations between such party or any member of its Group, on the one hand, and any Governmental Authority or third party, on the other hand, with respect to Antitrust Matters, except as prohibited by law or lawful order of a Governmental Authority. In addition, upon either party’s reasonable request, the attorneys, accountants, consultants or other advisors of the Board of Directors or any committee thereof of a requested party shall brief the Board of Directors or any committee thereof of the requesting party concerning the status of or issues arising under or relating to the Antitrust Matters.

8.16 Cooperation for Litigation. In addition to the rights and obligations of the Parties as set forth in Article III and Sections 8.4 and 8.7 herein, KBR and Halliburton each agree, on behalf of itself and the members of its Group, to at all times during the term of this Agreement

59

use reasonable best efforts to assist with such other party’s investigation, litigation, defense and/or settlement of any claim by or against any Third Party or Governmental Authority relating to or arising out of the KBR Business or the Halliburton Business, as applicable, other than with respect to a dispute subject to Article VII brought by one party against another party; provided, however, that nothing in this Section 8.16 shall be interpreted to limit or qualify in any respect the parties’ additional cooperation obligations with respect to the FCPA Subject Matters, the Barracuda-Caratinga Bolts Matter and the Antitrust Matters, as set forth in Sections 3.4, 3.5 and 8.15, respectively.

8.17 Performance Standard. Each of Halliburton and KBR agrees to at all times exercise good faith and fair dealing in the performance of its rights and obligations under this Agreement.

ARTICLE IX

MISCELLANEOUS

9.1 Limitation of Liability. NOTWITHSTANDING ANYTHING TO THE CONTRARY IN ANY ANCILLARY AGREEMENT, IN NO EVENT SHALL ANY MEMBER OF THE HALLIBURTON GROUP OR THE KBR GROUP OR THEIR RESPECTIVE DIRECTORS, OFFICERS AND EMPLOYEES BE LIABLE TO ANY OTHER MEMBER OF THE HALLIBURTON GROUP OR THE KBR GROUP FOR ANY SPECIAL, CONSEQUENTIAL, INDIRECT, INCIDENTAL OR PUNITIVE DAMAGES OR LOST PROFITS, HOWEVER CAUSED AND ON ANY THEORY OF LIABILITY (INCLUDING NEGLIGENCE) ARISING IN ANY WAY OUT OF THIS AGREEMENT OR ANY ANCILLARY AGREEMENT, WHETHER OR NOT SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES; PROVIDED, HOWEVER, THAT THE FOREGOING LIMITATIONS SHALL NOT LIMIT EACH PARTY’S INDEMNIFICATION OBLIGATIONS FOR LIABILITIES TO THIRD PARTIES AS SET FORTH IN THIS AGREEMENT OR ANY ANCILLARY AGREEMENT.

9.2 Conflicting Agreements; Entire Agreement. Except as otherwise expressly provided herein, in the event of a conflict between this Agreement and any other agreement (including, without limitation, the Ancillary Agreements), the provisions of such other agreement shall prevail. For avoidance of doubt, the parties agree that the agreements set forth on Schedule 9.2 hereto shall continue in full force and effect notwithstanding the execution of this Agreement, and nothing in this Agreement shall be construed to obligate either party hereto to take any action or refrain from taking any action that would result in a breach under any agreement listed on Schedule 9.2. This Agreement, the other Ancillary Agreements and the agreements listed on Schedule 9.2, and the exhibits and schedules referenced or attached hereto and thereto, constitute the entire agreement of the parties to date with respect to the separation of KBR and Halliburton, and supersede all prior written and oral and all contemporaneous oral agreements and understandings with respect to such separation.

60

9.3 Governing Law. Except as set forth in Section 7.9, this Agreement shall be governed and construed and enforced in accordance with the laws of the State of Delaware as to all matters regardless of the laws that might otherwise govern under the principles of conflicts of laws applicable thereto.

9.4 Termination. This Agreement and all Ancillary Agreements may be terminated at any time prior to the IPO Closing Date by and in the sole discretion of Halliburton without the approval of KBR. This Agreement and any Ancillary Agreement may be terminated at any time after the IPO Closing Date by mutual consent of Halliburton and KBR. In the event of termination pursuant to this Section 9.4 prior to the IPO Closing Date, neither party shall have any liability of any kind to the other party other than as set forth in Section 8.8 hereof. In the event of termination after the IPO Closing Date, the provisions of Article I, Article VII, Section 8.11 and Article IX shall survive.

9.5 Notices. (a) Unless expressly provided herein, all notices, claims, certificates, requests, demands and other communications hereunder shall be in writing addressed to the attention of the addressee’s General Counsel at the address of its principal executive office or to such other address or facsimile number for a party as it shall have specified by like notice, and shall be deemed to be duly given: (i) when personally delivered or (ii) if mailed registered or certified mail, postage prepaid, return receipt requested, on the date the return receipt is executed or the letter refused by the addressee or its agent or (iii) if sent by overnight courier which delivers only upon the signed receipt of the addressee, on the date the receipt acknowledgment is executed or refused by the addressee or its agent or (iv) if sent by facsimile or other generally accepted means of electronic transmission, on the date confirmation of transmission is received (provided that a copy of any notice delivered pursuant to this clause (iv) shall also be sent pursuant to clause (ii) or (iii)).

(b) Any delivery, notice, or other communication to Halliburton in accordance with this Agreement will be conclusively deemed for all purposes to be delivery, notice or other communication to the appropriate member of the Halliburton Group and any delivery, notice or other communication given by Halliburton will be conclusively deemed for all purposes to be a delivery, notice or communication given by the appropriate member of the Halliburton Group.

(c) Any delivery, notice or other communication to KBR in accordance with this Agreement will be conclusively deemed for all purposes to be delivery, notice or other communication to the appropriate member of the KBR Group and any delivery, notice or other communication given by KBR will be conclusively deemed for all purposes to be a delivery, notice or communication given by the appropriate member of the KBR Group.

9.6 Counterparts. This Agreement, including the Schedules hereto and the other documents referred to herein, may be executed in counterparts, each of which shall be deemed to be an original but all of which shall constitute one and the same agreement.

9.7 No Third Party Beneficiaries; Assignment. This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective legal representatives, successors and assigns, and nothing in this Agreement, express or implied, is intended to confer upon any other Person any rights or remedies of any nature whatsoever under or by reason of this

61

Agreement. Except as expressly provided herein or as otherwise agreed by the parties, this Agreement may not be assigned by any party hereto.

9.8 Severability. If any term or other provision of this Agreement or the Schedules attached hereto is determined by a nonappealable decision by a court, administrative agency or arbitrator to be invalid, illegal or incapable of being enforced by any rule of law or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to either party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner to the end that transactions contemplated hereby are fulfilled to the fullest extent possible.

9.9 Failure or Indulgence Not Waiver; Remedies Cumulative. No failure or delay on the part of either party hereto in the exercise of any right hereunder shall impair such right or be construed to be a waiver of, or acquiescence in, any breach of any representation, warranty or agreement herein, nor shall any single or partial exercise of any such right preclude other or further exercise thereof or of any other right. All rights and remedies existing under this Agreement or the Schedules attached hereto are cumulative to, and not exclusive of, any rights or remedies otherwise available.

9.10 Amendment. No change or amendment will be made to this Agreement except by an instrument in writing signed on behalf of each of the parties to this Agreement.

9.11 Authority. Each of the parties hereto represents to the other that (a) it has, or its Group member shall have, the corporate or other requisite power and authority to execute, deliver and perform this Agreement and the Ancillary Agreements, (b) the execution, delivery and performance of this Agreement and the Ancillary Agreements by it have been, or by its Group member will be, duly authorized by all necessary corporate or other actions, (c) it has, or its Group member shall have, duly and validly executed and delivered this Agreement and the Ancillary Agreements to be executed and delivered on or prior to the Separation Date, and (d) this Agreement and such Ancillary Agreements are legal, valid and binding obligations, enforceable against it or its Group member in accordance with their respective terms subject to applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting creditors’ rights generally and general equity principles.

9.12 Interpretation. The headings contained in this Agreement, in any Schedule hereto and in the table of contents to this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Any capitalized term used in any Schedule but not otherwise defined therein, shall have the meaning assigned to such term in this Agreement. When a reference is made in this Agreement to an Article or a Section, or a Schedule, such reference shall be to an Article or Section of, or a Schedule to, this Agreement unless otherwise indicated.

62

WHEREFORE, the parties have signed this Master Separation Agreement effective as of the date first set forth above.

HALLIBURTON COMPANY

By:

Name:

Title:

KBR, INC.

By:

Name:

Title:

63

EX-10.2

Exhibit 10.2

FORM OF

TAX SHARING AGREEMENT

BY AND AMONG

HALLIBURTON COMPANY

AND ITS AFFILIATED COMPANIES

AND

KBR INC.

AND ITS AFFILIATED COMPANIES

January 1, 2006

TABLE OF CONTENTS

ARTICLE I. DEFINITIONS		2
Section 1.01	Definitions	2
ARTICLE II. PREPARATION AND FILING OF TAX RETURNS PRIOR TO DECONSOLIDATION YEAR		9
Section 2.01	Manner of Filing	9
ARTICLE III. ALLOCATION OF TAXES PRIOR TO DECONSOLIDATION YEAR		9
Section 3.01	Liability of the ESG Group for Consolidated and Combined Taxes	9
Section 3.02	Liability of the KBR Group for Consolidated and Combined Taxes	9
Section 3.03	ESG Group Federal Income Tax Liability	10
Section 3.04	KBR Group Federal Income Tax Liability	10
Section 3.05	ESG Group Combined Tax Liability	11
Section 3.06	KBR Group Combined Tax Liability	11
Section 3.07	Preparation and Delivery of Pro Forma Tax Returns	11
Section 3.08	Intercompany Payables and Receivables	11
Section 3.09	Credit for Use of Attributes	11
Section 3.10	Subsequent Changes in Treatment of Tax Items	12
Section 3.11	Foreign Corporations	13
Section 3.12	KBR Holdings Not Disregarded	13
Section 3.13	State and Local Filings	13
Section 3.14	Group Relief	13
ARTICLE IV. PREPARATION AND FILING OF TAX RETURNS FOR AND AFTER THE DECONSOLIDATION YEAR		14
Section 4.01	Manner of Filing	14
Section 4.02	Pre-Deconsolidation Tax Returns	14
Section 4.03	Post-Deconsolidation Tax Returns	14
Section 4.04	Accumulated Earnings and Profits, Initial Determination and Subsequent Adjustments	15
Section 4.05	Tax Basis of Assets Transferred	15
ARTICLE V. ALLOCATION OF TAXES FOR AND AFTER DECONSOLIDATION YEAR; ALLOCATION OF                        ADDITIONAL TAX LIABILITIES		15
Section 5.01	Liability of the ESG Group for Consolidated and Combined Taxes	15
Section 5.02	Liability of the KBR Group for Consolidated and Combined Taxes	15
Section 5.03	ESG Group Federal Income Tax Liability	16
Section 5.04	KBR Group Federal Income Tax Liability	16
Section 5.05	ESG Group Combined Tax Liability	17
Section 5.06	KBR Group Combined Tax Liability	17
Section 5.07	Preparation and Delivery of Pro Forma Tax Returns	17

Tax Sharing Agreement

Between Halliburton Co. and KBR, Inc.

Section 5.08	HESI Intercompany Payables and Receivables; KBR Payment	17
Section 5.09	Credit for Use of Attributes	17
Section 5.10	Subsequent Changes in Treatment of Tax Items	18
Section 5.11	Foreign Corporations	19
Section 5.12	Allocation of Additional Tax Liabilities	19
Section 5.13	Tax Attributes of KBR Not Carried Back	22
ARTICLE VI. TAX DISPUTE INDEMNITY; CONTROL OF PROCEEDINGS; COOPERATION AND EXCHANGE OF                          INFORMATION		23
Section 6.01	Tax Dispute Indemnity and Control of Proceedings	23
Section 6.02	Cooperation and Exchange of Information	24
Section 6.03	Reliance on Exchanged Information	25
Section 6.04	Payment of Tax and Indemnity	26
Section 6.05	Prior Tax Years	26
ARTICLE VII. WARRANTIES AND REPRESENTATIONS; INDEMNITY		27
Section 7.01	Warranties and Representations Relating to Actions of Halliburton and KBR	27
Section 7.02	Warranties and Representations Relating to the Distribution	27
Section 7.03	Covenants Relating to the Tax Treatment of the Distribution	28
Section 7.04	Spinoff Indemnification	31
Section 7.05	Indemnified Liability –Spinoff	32
Section 7.06	Amount of Indemnified Liability for Income Taxes – Spinoff	32
Section 7.07	Indemnity Amount – Spinoff	32
Section 7.08	Additional Indemnity Remedy – Spinoff	32
Section 7.09	Calculation of Indemnity Payments	33
Section 7.10	Prompt Performance	33
Section 7.11	Interest	33
Section 7.12	Tax Records	33
Section 7.13	KBR Representations and Covenants	34
Section 7.14	Halliburton Representations and Covenants	34
Section 7.15	Continuing Covenants	34
ARTICLE VIII. MISCELLANEOUS PROVISIONS		35
Section 8.01	Notice	35
Section 8.02	Required Payments	35
Section 8.03	Injunctions	35
Section 8.04	Further Assurances	36
Section 8.05	Parties in Interest	36
Section 8.06	Setoff	36
Section 8.07	Change of Law	36
Section 8.08	Termination and Survival	36
Section 8.09	Amendments; No Waivers	36
Section 8.10	Governing Law and Interpretation	37
Section 8.11	Resolution of Certain Disputes	37
Section 8.12	Confidentiality	37
Section 8.13	Costs, Expenses and Attorneys’ Fees	37

- ii -

Tax Sharing Agreement

Between Halliburton Co. and KBR, Inc.

Section 8.14	Counterparts	38
Section 8.15	Severability	38
Section 8.16	Entire Agreement; Termination of Prior Agreements	38
Section 8.17	Assignment	38
Section 8.18	Fair Meaning	39
Section 8.19	Commencement	39
Section 8.20	Titles and Headings	39
Section 8.21	Construction	39
Section 8.22	Termination	39

- iii -

TAX SHARING AGREEMENT

BY AND BETWEEN

HALLIBURTON COMPANY AND KBR, INC.

This Tax Sharing Agreement (the “Agreement”), dated as of this 1st day of January, 2006, by and between HALLIBURTON COMPANY, a Delaware corporation (“Halliburton”), KBR Holdings LLC, a Delaware limited liability company (“KBR Holdings”), and KBR, Inc., a Delaware corporation (“KBR, Inc.”), is entered into as of the      day of                     , 2006.

RECITALS

WHEREAS, Halliburton is the common parent of an affiliated group of corporations within the meaning of Section 1504(a) of the Code (as defined herein), which currently files a consolidated federal income tax return;

WHEREAS, Halliburton Energy Services, Inc., a Delaware corporation (“HESI”), and certain other entities and divisions comprise the Energy Services Group of Halliburton (collectively, the “ESG Group”), and KBR (as defined herein) and certain other entities and divisions comprise the Energy & Chemicals Group and Government & Infrastructure Group of Halliburton (collectively, the “KBR Group”);

WHEREAS, the ESG Group and the KBR Group each include various corporations that join with Halliburton in the filing of a consolidated U.S. federal income tax return, as well as limited liability companies and other entities organized under the laws of domestic and foreign jurisdictions;

WHEREAS, Halliburton and KBR determined it would be appropriate and desirable, effective as of December 31, 2005, for KBR to reorganize its operations to separate the operations traditionally associated with KBR from the operations traditionally associated with Halliburton (the “Restructuring”);

WHEREAS, Halliburton and KBR contemplate that as part of the Restructuring, KBR may make an initial public offering (the “IPO”) of KBR common stock that would reduce Halliburton’s ownership of KBR to not less than the amount required for Halliburton to control KBR within the meaning of Section 368(c) of the Code with respect to the stock of KBR and to not less than the amount required for Halliburton to control KBR within the meaning of Section 1504(a)(2) of the Code with respect to the stock of KBR;

WHEREAS, Halliburton may determine that it is in the best interests of the Parties to cause (1) Kellogg Energy Services, Inc. to distribute the shares of KBR common stock to DII Industries, LLC, a Delaware limited liability company (“DII”), (2) DII in turn to distribute the shares of KBR common stock to HESI and (3) HESI in turn to distribute the shares of KBR common stock to Halliburton, subject to the terms and conditions of the Master Separation Agreement or the Master Separation and Distribution Agreement (as applicable) (collectively, the “Preliminary Distributions”);

Tax Sharing Agreement

Between Halliburton Co. and KBR, Inc.

WHEREAS, in connection with the Preliminary Distributions, Halliburton may determine that it is in the best interests of the Parties for Halliburton to distribute all of its shares of KBR common stock, on a pro rata basis, to the holders of the common stock of Halliburton, subject to the terms and conditions of the Master Separation Agreement or the Master Separation and Distribution Agreement (as applicable) (the “Distribution”);

WHEREAS, the Preliminary Distributions and the Distribution are intended to qualify as tax free distributions under Section 355 of the Code;

WHEREAS, upon the Deconsolidation (as defined herein), Halliburton and KBR will cease to be members of the same affiliated group for federal income tax purposes;

WHEREAS, the Parties wish to set forth the general principles under which they will allocate and share various Taxes (as defined herein) and related liabilities;

WHEREAS, in contemplation of the IPO and the Deconsolidation, Halliburton, on behalf of itself and its present and future subsidiaries other than KBR (“Halliburton Group”), and KBR, on behalf of itself and its present and future subsidiaries (“KBR Group”) are entering into this Agreement to provide for the allocation between the Halliburton Group and the KBR Group of all responsibilities, liabilities and benefits relating to all Taxes paid or payable by either group for all taxable periods beginning on or after the Effective Date (as defined herein) and to provide for certain other matters;

WHEREAS, the Parties intend and agree that the Effective Date with respect to the provisions of Articles II, III, VI and VIII is January 1, 2001.

NOW, THEREFORE, in consideration of the mutual agreements, provisions, and covenants contained in this Agreement, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereby agree as follows:

ARTICLE I.

DEFINITIONS

Section 1.01 Definitions. The following terms shall have the following meanings (such meanings to be equally applicable to both the singular and the plural forms of the terms defined):

“Accounting Referee” is defined in Section 8.11 herein.

“Adequate Assurances” means posting a bond or providing a letter of credit reasonably acceptable to the Indemnified Party; provided, however, if the Indemnifying Party fails to post such bond or provide such letter of credit, the Indemnifying Party shall provide cash equal to the Indemnity Amount to the Indemnified Party not less than thirty (30) days prior to the date on which such Tax would become due and payable by the Indemnified Party.

“Affiliate” of any person means any person, corporation, partnership or other entity directly or indirectly controlling, controlled by or under common control with such person.

- 2 -

Tax Sharing Agreement

Between Halliburton Co. and KBR, Inc.

“Affiliated Group” means an affiliated group of corporations within the meaning of Section 1504(a) (excluding Section 1504(b)) of the Code for the taxable period in question.

“Code” means the Internal Revenue Code of 1986, as amended, or any successor thereto, as in effect for the taxable period in question.

“Combined Group” means a group of corporations or other entities that files a Combined Return.

“Combined Return” means any Tax Return (other than for Federal Income Taxes) filed on a consolidated, combined (including nexus combination, worldwide combination, domestic combination, line of business combination or any other form of combination), unitary or Group Relief basis that includes activities of members of the ESG Group or the KBR Group, or both, as the case may be.

“Compensatory Transaction” has the meaning set forth in Section 7.03(b)(iii).

“Consolidated Group” means the affiliated group of corporations (as defined in Section 1504(a) of the Code) of which Halliburton is the common parent corporation.

“Consolidated Return” means a Tax Return filed with respect to Federal Income Taxes for the Consolidated Group.

“Control” means stock constituting a 50% or greater interest under Section 355(e) of the Code.

“Deconsolidation” means the event that reduces the amount of KBR stock owned directly or indirectly by Halliburton to be less than the amount required for Halliburton to control KBR within the meaning of Section 1504(a)(2) of the Code.

“Deconsolidation Date” means the date the Deconsolidation occurs.

“Deconsolidation Year” means the taxable year in which the Deconsolidation Date occurs.

“Displaced ESG Tax Attribute” has the meaning set forth in Section 5.12(g) of this Agreement.

“Disputed Tax Issue” is defined in Section 6.01(a) herein.

“Disputed Tax Issue Indemnitee” is defined in Section 6.01(a) herein.

“Disputed Tax Issue Indemnitor” is defined in Section 6.01(a) herein.

“Disqualifying Action” is defined in Section 7.03(a)(i) hereof.

“Distribution” has the meaning set forth in the Recitals to this Agreement.

“Distribution Date” is the date the Distribution occurs.

- 3 -

Tax Sharing Agreement

Between Halliburton Co. and KBR, Inc.

“Effective Date” is January 1, 2006, provided, however that the Effective Date with respect to Articles II, III, VI and VIII is January 1, 2001.

“ESG Allocated Attributes” has the meaning set forth in Section 3.09 or Section 5.09 of this Agreement as the case requires.

“ESG Group” has the meaning set forth in the Recitals to this Agreement.

“ESG Group Combined Tax Liability” means, with respect to any taxable period, the ESG Group’s liability for Taxes owed with respect to Combined Returns, as determined under Section 3.05 or Section 5.05 of this Agreement as the case requires.

“ESG Group Federal Income Tax Liability” means, with respect to any taxable period, the ESG Group’s liability for Federal Income Taxes, as determined under Section 3.03 or Section 5.03 of this Agreement as the case requires.

“ESG Group Members” means those entities or divisions of entities included in the ESG Group as set forth on Exhibit A, hereto.

“ESG Group Pro Forma Combined Return” means a pro forma Combined Return or other schedule prepared pursuant to Section 3.05 or Section 5.05 of this Agreement as the case requires.

“ESG Group Pro Forma Consolidated Return” means a pro forma consolidated U.S. Federal Income Tax Return or other schedule prepared pursuant to Section 3.03 or Section 5.03 of this Agreement as the case requires.

“ESG Stand-Alone Attributes” has the meaning set forth in Section 3.09(a) or Section 5.09(a) of this Agreement as the case requires.

“Federal Income Tax” means any Tax imposed under Subtitle A of the Code or any other provision of United States Federal Income Tax law (including, without limitation, the Taxes imposed by Sections 11, 55, 59A, and 1201(a) of the Code), and any interest, additions to Tax or penalties applicable or related thereto.

“Final Determination” means the final resolution of any Tax (or other matter) for a taxable period, including related interest or penalties, that, under applicable law, is not subject to further appeal, review or modification through proceedings or otherwise, including (i) by the expiration of a statute of limitations or a period for the filing of claims for refunds, amending Tax Returns, appealing from adverse determinations, or recovering any refund (including by offset), (ii) by a decision, judgment, decree, or other order by a court of competent jurisdiction, which has become final and unappealable, (iii) by a closing agreement or an accepted offer in compromise under Section 7121 or 7122 of the Code, or comparable agreements under laws of other jurisdictions, (iv) by execution of an Internal Revenue Service Form 870 or 870-AD, or by a comparable form under the laws of other jurisdictions (excluding, however, with respect to a particular Tax Item for a particular taxable period any such form that reserves (whether by its terms or by operation of law) the right of the taxpayer to file a claim for refund and/or the right of the Tax Authority to assert a further deficiency with respect to such Tax Item for such period), or (v) by any allowance of a refund or credit, but only after the expiration of all periods during which such refund may be adjusted.

- 4 -

Tax Sharing Agreement

Between Halliburton Co. and KBR, Inc.

“Foreign Tax Credit Adjustment” has the meaning set forth in Section 5.12(f) hereof.

“Group Relief” has the meaning set forth in Section 3.14(a) hereof.

“Halliburton Affiliated Group” means, for each taxable period, the Affiliated Group of which Halliburton or any successor of Halliburton is the common parent.

“Halliburton Affiliated Group Federal Income Tax Return” means the consolidated Federal income Tax Return of the Halliburton Affiliated Group.

“Halliburton Group” is defined in the Recitals to this Agreement.

“Indemnified Liability” has the meaning set forth in Section 7.05.

“Indemnified Party” has the meaning set forth in Section 7.04(b) of this Agreement.

“Indemnity Amount” has the meaning set forth in Section 7.07.

“Indemnifying Party” has the meaning set forth in Section 7.04(b) of this Agreement.

“IPO” is defined in the Recitals to this Agreement.

“IRS” means the United States Internal Revenue Service or any successor thereto, including, but not limited to, its agents, representatives, and attorneys.

“KBR” means KBR Holdings from the Effective Date to the day immediately prior to the earlier of (i) the Deconsolidation Date or (ii) the date of the IPO and means KBR, Inc. from and after such date.

“KBR Affiliated Group” means, for each taxable period, the Affiliated Group of which KBR or any successor of KBR is the common parent.

“KBR Allocated Attributes” has the meaning set forth in Section 3.09 or Section 5.09 of this Agreement as the case requires.

“KBR Businesses” means the present, former and future subsidiaries, divisions and businesses of any member of the KBR Group which are not, or are not contemplated by the Master Separation Agreement or the Master Separation and Distribution Agreement (as applicable) to be, part of the Halliburton Group immediately after the Deconsolidation Date.

“KBR Foreign Taxes” has the meaning set forth in Section 5.12(f) of this Agreement.

“KBR Group” is defined in the Recitals to this Agreement.

- 5 -

Tax Sharing Agreement

Between Halliburton Co. and KBR, Inc.

“KBR Group Combined Tax Liability” means, with respect to any taxable period, the KBR Group’s liability for Taxes owed with respect to Combined Returns, as determined under Section 3.06 or Section 5.06 of this Agreement as the case requires.

“KBR Group Federal Income Tax Liability” means, with respect to any taxable period, the KBR Group’s liability for U.S. Federal Income Taxes, as determined under Section 3.04 or Section 5.04 of this Agreement as the case requires.

“KBR Group Members” means those entities or divisions of entities included in the KBR Group as set forth on Exhibit B, hereto.

“KBR Group Pro Forma Combined Return” means a pro forma Combined Return or other schedule prepared pursuant to Section 3.06 or Section 5.06 of this Agreement as the case requires.

“KBR Group Pro Forma Consolidated Return” means a pro forma consolidated U.S. Federal Income Tax Return or other schedule prepared pursuant to Section 3.04 or Section 5.04 of this Agreement as the case requires.

“KBR Group Relief Tax Attribute” has the meaning set forth in Section 3.14(a) of this Agreement.

“KBR Losses” has the meaning set forth in Section 5.12(g) of this Agreement.

“KBR Restructuring Issue” is defined in Section 6.01(c) herein.

“KBR Stand-Alone Attributes” has the meaning set forth in Section 3.09(b) or Section 5.09(b) of this Agreement as the case requires.

“Loss Adjustment” has the meaning set forth in Section 5.12(g) of this Agreement.

“Master Separation Agreement” means that certain Master Separation Agreement entered into by Halliburton and KBR, dated                          , 2006.

“Master Separation and Distribution Agreement” means that certain Master Separation and Distribution Agreement entered into by Halliburton and KBR, dated                          , 2006.

“Non-Transacting Party” is defined in Section 7.03(b)(i) herein.

“Notice” is defined in Section 8.01 herein.

“Party” means each of Halliburton and KBR, and, solely for purposes of this definition, “Halliburton” includes the Halliburton Group and “KBR” includes the KBR Group, all as of the Deconsolidation Date. Each of Halliburton and KBR shall cause the Halliburton Group and the KBR Group, respectively, to comply with this Agreement.

- 6 -

Tax Sharing Agreement

Between Halliburton Co. and KBR, Inc.

“Post-Deconsolidation Period” means any period beginning after the Deconsolidation Date.

“Potential Disqualifying Action” is defined in Section 7.03(a)(iii) hereof.

“Pre-Deconsolidation Period” means any period ending on or before the Deconsolidation Date.

“Preliminary Distributions” is defined in the Recitals to this Agreement.

“Private Letter Ruling” means the private letter ruling issued by the IRS to Halliburton in connection with the Spinoff.

“Project Constructor” means the transaction, effective December 15, 2003, pursuant to which Halliburton separated the ESG Group, on the one hand, from the Energy & Chemicals Group and the Government & Infrastructure Group (formerly the Engineering & Construction Group), on the other hand, with HESI acting as the holding company for the ESG Group and DII acting as the holding company for the Energy & Chemicals Group and the Government & Infrastructure Group.

“Required Tax Attribute Carryback” is defined in Section 5.13 hereof.

“Restricted Period” means the period beginning two years before the Distribution Date and ending two years after the Distribution Date.

“Restructuring” is defined in the Recitals to this Agreement.

“Restructuring Taxes” means any and all Taxes resulting from the Restructuring or from Project Constructor, and shall include any related interest, penalties, Tax credit recapture or other additions to Tax, including, without limitation, any Tax imposed pursuant to, or as a result of, the application of Section 311 of the Code.

“Ruling Documents” means (1) the request for a ruling under Section 355 and various other sections of the Code, that have been or will be filed with the IRS in connection with the Spinoff, together with any supplemental filings or ruling requests or other materials subsequently submitted on behalf of Halliburton, its subsidiaries and shareholders to the IRS, the appendices and exhibits thereto, and any rulings issued by the IRS to Halliburton in connection with the Spinoff or (2) any similar filings submitted to, or rulings issued by, any other Tax Authority in connection with the Spinoff.

“Spinoff” means the separation of KBR from Halliburton through the Distribution.

“Subsequent Ruling” has the meaning set forth in Section 7.03(a)(iii).

“Subsequent Opinion” has the meaning set forth in Section 7.03(a)(iii).

“Tainting Act” means (i) any act of omission or commission, including but not limited to, any transaction, representation, or election which would constitute a breach by KBR (or its

- 7 -

Tax Sharing Agreement

Between Halliburton Co. and KBR, Inc.

successors) of the warranties, representations and covenants of Sections 7.02 or 7.03 hereof (without regard to whether a Subsequent Opinion had been obtained); (ii) any breach of any representation or covenant given by KBR in connection with the Private Letter Ruling, Subsequent Ruling, Tax Opinion or Subsequent Opinion which relates to the qualification of the Distribution as a Tax Free Spinoff; or (iii) any transaction involving the stock or assets of KBR (or its successors) occurring after the Deconsolidation Date.

“Tax” means any of the Taxes.

“Tax Attribute” means one or more of the following attributes of a member of either the ESG Group or the KBR Group: (i) with respect to the Consolidated Return, a net operating loss, a net capital loss, an unused investment credit, an unused foreign tax credit, an excess charitable contribution, a U.S. federal minimum tax credit or U.S. federal general business credit (but not tax basis or earnings and profits) and (ii) any comparable Tax Item reflected on a Combined Return.

“Tax Authority” means a governmental authority (foreign or domestic) or any subdivision, agency, commission or authority thereof or any quasi-governmental or private body having jurisdiction over the assessment, determination, collection or imposition of any Tax (including, without limitation, the U.S. Internal Revenue Service).

“Tax Controversy” means any audit, examination, dispute, suit, action, litigation or other judicial or administrative proceeding initiated by KBR, Halliburton, the IRS or any other Tax Authority.

“Tax Free Spinoff” is defined in Section 7.02(a) hereof.

“Tax Item” means any item of income, gain, loss, deduction or credit, or other item reflected on a Tax Return or any Tax Attribute.

“Tax Counsel” means a nationally recognized law firm selected by Halliburton and engaged to deliver the Tax Opinion.

“Tax Opinion” means an opinion of Tax Counsel to the effect that the Preliminary Distributions and the Distribution should qualify as a Tax Free Spinoff.

“Tax Opinion Documents” means the officer’s certificates and other documents submitted to Tax Counsel and relied on by Tax Counsel in rendering the Tax Opinion.

“Tax Return” means any return, report, certificate, form or similar statement or document (including, any related or supporting information or schedule attached thereto and any information return, amended Tax Return, claim for refund or declaration of estimated tax) required to be supplied to, or filed with, a Tax Authority in connection with the determination, assessment or collection of any Tax or the administration of any laws, regulations or administrative requirements relating to any Tax.

“Taxes” means all forms of taxation, whenever created or imposed, and whenever imposed by a national, local, municipal, governmental, state, federation or other body, and

- 8 -

Tax Sharing Agreement

Between Halliburton Co. and KBR, Inc.

without limiting the generality of the foregoing, shall include net income, alternative or add-on minimum tax, gross income, sales, use, ad valorem, gross receipts, value added, franchise, profits, license, transfer, recording, withholding, payroll, employment, excise, severance, stamp occupation, premium, property, windfall profit, custom duty, or other tax, governmental fee or other like assessment or charge of any kind whatsoever, together with any related interest, penalties, or other additions to tax, or additional amounts imposed by any such Tax Authority.

“Transacting Party” is defined in Section 7.03(b)(i) herein.

Any term used but not capitalized herein that is defined in the Code or in the Treasury Regulations thereunder, shall to the extent required by the context of the provision at issue, have the meaning assigned to it in the Code or such regulation.

ARTICLE II.

PREPARATION AND FILING OF TAX RETURNS PRIOR TO DECONSOLIDATION YEAR

Section 2.01 Manner of Filing.

(a) For periods after the Effective Date and prior to the Deconsolidation Year and except as provided in Section 2.0l(b) hereof, Halliburton shall have the sole and exclusive responsibility for the preparation and filing of, and shall prepare and file or cause to be prepared and filed: (1) all Consolidated Returns and (2) all Combined Returns.

(b) For periods after the Effective Date and prior to the Deconsolidation Year and except as otherwise provided in Section 2.0l(a) hereof, the ESG Group and the KBR Group shall have the sole and exclusive responsibility for the preparation and filing of, and shall prepare and file or cause to be prepared and filed, all Tax Returns of the ESG Group Members and the KBR Group Members that are not required to be filed on a consolidated or combined basis. With respect to any Combined Return required to be filed in a foreign taxing jurisdiction, Halliburton shall determine, in its sole discretion, whether ESG Group Members or KBR Group Members, rather than Halliburton, shall have the responsibility for preparing and filing such Combined Return and the manner in which Taxes related to such Combined Return shall be allocated and paid.

ARTICLE III.

ALLOCATION OF TAXES PRIOR TO DECONSOLIDATION YEAR

Section 3.01 Liability of the ESG Group for Consolidated and Combined Taxes. For each taxable year ending prior to the Deconsolidation Year and beginning on or after the Effective Date, the ESG Group shall be liable to Halliburton for an amount equal to the ESG Group Federal Income Tax Liability and the ESG Group Combined Tax Liability.

Section 3.02 Liability of the KBR Group for Consolidated and Combined Taxes. For each taxable year ending prior to the Deconsolidation Year and beginning on or after the

- 9 -

Tax Sharing Agreement

Between Halliburton Co. and KBR, Inc.

Effective Date, the KBR Group shall be liable to Halliburton for an amount equal to the KBR Group Federal Income Tax Liability and the KBR Group Combined Tax Liability to the extent such liabilities are paid by Halliburton or by a member of the ESG Group.

Section 3.03 ESG Group Federal Income Tax Liability. With respect to each taxable year ending prior to the Deconsolidation Year and beginning on or after the Effective Date, the ESG Group Federal Income Tax Liability for such taxable period shall be the Federal Income Taxes for such taxable period, as determined on an ESG Group Pro Forma Consolidated Return prepared:

(a) assuming that the members of the ESG Group were not included in the Consolidated Group and by including only Tax Items of members of the ESG Group that are included in the Consolidated Return;

(b) except as provided in Section 3.03(e) hereof, using all elections, accounting methods and conventions used on the Consolidated Return for such period;

(c) applying the highest statutory marginal corporate income Tax rate in effect for such taxable period;

(d) excluding any Tax Attributes for which HESI has been compensated pursuant to Section 3.09 hereof;

(e) assuming that the ESG Group elects not to carry back any net operating losses; and

(f) assuming that the ESG Group’s utilization of any Tax Attribute carryforward or carryback is limited to the Tax Attributes of the ESG Group that would be available if the ESG Group Federal Income Tax Liability for each taxable year ending after January 1, 2001 were determined in accordance with this Section 3.03.

Section 3.04 KBR Group Federal Income Tax Liability. With respect to each taxable year ending prior to the Deconsolidation Year and beginning on or after the Effective Date, the KBR Group Federal Income Tax Liability for such taxable period shall be the Federal Income Taxes for such taxable period, as determined on an KBR Group Pro Forma Consolidated Tax Return prepared:

(a) assuming that the members of the KBR Group were not included in the Consolidated Group and by including only Tax Items of members of the KBR Group that are included in the Consolidated Return;

(b) except as provided in Section 3.04(e) hereof, using all elections, accounting methods and conventions used on the Consolidated Return for such period;

(c) applying the highest statutory marginal corporate income Tax rate in effect for such taxable period;

- 10 -

Tax Sharing Agreement

Between Halliburton Co. and KBR, Inc.

(d) excluding any Tax Attributes for which KBR has been compensated pursuant to Section 3.09 hereof;

(e) assuming that the KBR Group elects not to carry back any net operating losses and may elect either to deduct or take a credit for foreign Taxes paid or deemed paid (and to carryback or carryforward any excess foreign Taxes); and

(f) assuming that the KBR Group’s utilization of any Tax Attribute carryforward or carryback is limited to the Tax Attributes of the KBR Group that would be available if the KBR Group Federal Income Tax Liability for each taxable year ending after January 1, 2001 were determined in accordance with this Section 3.04.

Section 3.05 ESG Group Combined Tax Liability. With respect to any taxable year ending prior to the Deconsolidation Year and beginning on or after the Effective Date, the ESG Group Combined Tax Liability shall be the sum for such taxable period of the ESG Group’s liability for Taxes owed with respect to Combined Returns, as determined on the ESG Group Pro Forma Combined Returns prepared in a manner consistent with the principles and procedures set forth in Section 3.03 hereof.

Section 3.06 KBR Group Combined Tax Liability. With respect to any taxable year ending prior to the Deconsolidation Year and beginning on or after the Effective Date, the KBR Group Combined Tax Liability shall be the sum for such taxable period of the KBR Group’s liability for Taxes owed with respect to Combined Returns, as determined on the KBR Group Pro Forma Combined Returns prepared in a manner consistent with the principles and procedures set forth in Section 3.04 hereof.

Section 3.07 Preparation and Delivery of Pro Forma Tax Returns. Not later than ninety (90) days following the date on which the related Consolidated Return or Combined Return, as the case may be, is filed with the appropriate Tax Authority, Halliburton shall prepare and deliver to HESI and KBR, respectively, pro forma Tax Returns calculating (i) the ESG Group Federal Income Tax Liability or the ESG Group Combined Tax Liability, and (ii) the KBR Group Federal Income Tax Liability or the KBR Group Combined Tax Liability, which is attributable to the period covered by such filed Tax Return.

Section 3.08 Intercompany Payables and Receivables. The liability of the ESG Group and the KBR Group for (i) the ESG Group Federal Income Tax Liability and (ii) the KBR Group Federal Income Tax Liability, respectively, shall be reflected in the intercompany accounts of Halliburton and HESI or KBR, as the case may be.

Section 3.09 Credit for Use of Attributes. Not later than ninety (90) days following the filing of the Consolidated Return for each taxable year, Halliburton shall determine the aggregate amount of the Tax Attributes of the Consolidated Group and all Combined Groups that are allocable to the ESG Group (the “ESG Allocated Attributes”) and the KBR Group (the “KBR Allocated Attributes”) as of the end of such year and shall inform HESI and KBR, respectively, of such determination.

(a) If the amount of the ESG Allocated Attributes is less than the amount of Tax Attributes (as reasonably determined by Halliburton) that would have been available to the ESG

- 11 -

Tax Sharing Agreement

Between Halliburton Co. and KBR, Inc.

Group at the end of such year had the ESG Group Members not been included in the Consolidated Return and the Combined Returns (the “ESG Stand-Alone Attributes”), the value of such shortfall, to the extent such shortfall is attributable to the use of the ESG Group’s Tax Attributes by KBR Group Members, shall be reflected in the intercompany accounts as an amount payable by Halliburton to HESI. If the amount of the ESG Allocated Attributes is greater than the ESG Stand-Alone Attributes, the value of such excess, to the extent such excess is attributable to the use of Tax Attributes of KBR Group Members by ESG Group Members during such year, shall be reflected in the intercompany accounts as an amount payable by HESI to Halliburton. For this purpose, a Tax Attribute shall be treated as used by KBR Group Members or ESG Group Members only to the extent that such Tax Attribute is necessary to reduce the KBR Group Federal Income Tax Liability or ESG Group Federal Income Tax Liability (computed in accordance with Section 3.04 or 3.03) for such year. In calculating the ESG Stand-Alone Attributes, the utilization of any Tax Attribute carryforward by ESG Group Members shall be subject to the limitation described in Section 3.03(f) hereof. For purposes of this section, the value of any Tax Attribute shall be equal to the amount of Taxes (computed in accordance with Section 3.03 hereof) that would be avoided by the payor if it had sufficient income to fully utilize such Tax Attribute in such year.

(b) If the amount of the KBR Allocated Attributes is less than the amount of Tax Attributes (as reasonably determined by Halliburton) that would have been available to the KBR Group at the end of such year had the KBR Group Members not been included in the Consolidated Return and the Combined Returns (the “KBR Stand-Alone Attributes”), the value of such shortfall, to the extent such shortfall is attributable to the use of the KBR Group’s Tax Attributes by ESG Group Members, shall be reflected in the intercompany accounts as an amount payable by Halliburton to KBR. If the amount of the KBR Allocated Attributes is greater than the KBR Stand-Alone Attributes, the value of such excess, to the extent such excess is attributable to the use of Tax Attributes of ESG Group Members by KBR Group Members during such year, shall be reflected in the intercompany accounts as an amount payable by KBR to Halliburton. For this purpose, a Tax Attribute shall be treated as used by ESG Group Members or KBR Group Members only to the extent that such Tax Attribute is necessary to reduce the ESG Group Federal Income Tax Liability or KBR Group Federal Income Tax Liability (computed in accordance with Section 3.03 or 3.04) for such year. In calculating the KBR Stand-Alone Attributes, the utilization of any Tax Attribute carryforward by KBR Group Members shall be subject to the limitation described in Section 3.04(f) hereof. For purposes of this section, the value of any Tax Attribute shall be equal to the amount of Taxes (computed in accordance with Section 3.04 hereof) that would be avoided by the payor if it had sufficient income to fully utilize such Tax Attribute in such year.

Section 3.10 Subsequent Changes in Treatment of Tax Items. For any taxable year ending prior to the Deconsolidation Year and beginning on or after the Effective Date, in the event of a change in the treatment of any Tax Item of any member of the Consolidated Group or a Combined Group as a result of a Final Determination, Halliburton shall calculate (i) the change to the ESG Group Federal Income Tax Liability or ESG Group Combined Tax Liability and/or the KBR Group Federal Income Tax Liability or the KBR Group Combined Tax Liability and (ii) any change to the Allocated Attributes and/or the Stand-Alone Attributes of the ESG Group and the KBR Group, and such changes shall be properly reflected in the intercompany accounts described in Section 3.09 hereof.

- 12 -

Tax Sharing Agreement

Between Halliburton Co. and KBR, Inc.

Section 3.11 Foreign Corporations. Any Taxes associated with the filing of a separate Tax Return in a foreign jurisdiction with respect to an ESG Group Member or a KBR Group Member shall be allocated to and paid directly by such member. Any Taxes and Tax Attributes associated with the filing of a separate Tax Return in a foreign jurisdiction that includes the Tax Items of one or more ESG Group Members and one or more KBR Group Members shall be allocated to such members by Halliburton in a manner consistent with the principles set forth in this Article III.

Section 3.12 KBR Holdings Not Disregarded. Notwithstanding KBR Holding’s classification as an entity disregarded as an entity separate from its owner under Treasury Regulations § 301.7701-3:

(a) Tax Attributes of the KBR Group shall include the income and deductions of KBR Holdings and such income and deductions of KBR Holdings shall not be included in the ESG Group’s Tax Attributes.

(b) Intercompany accounts payable between Halliburton and KBR Holdings under Section 3.09(b) hereof shall remain intercompany accounts payable between Halliburton and KBR Holdings and shall not be treated instead as intercompany accounts payable between Halliburton and Kellogg Energy Services, Inc.

(c) Amounts payable between Halliburton and KBR Holdings under Section 5.09(b) hereof shall remain amounts payable between Halliburton and KBR Holdings and shall not be treated instead as amounts payable between Halliburton and Kellogg Energy Services, Inc.

Section 3.13 State and Local Filings. Any Taxes associated with the filing of a separate Tax Return in a state or local jurisdiction with respect to an ESG Group Member or a KBR Group Member shall be allocated to and paid directly by such member. Any Taxes and Tax Attributes associated with the filing of a Combined Return in a state or local jurisdiction that includes the Tax Items of one or more ESG Group Members and one or more KBR Group Members shall be allocated to such members by Halliburton in a manner consistent with the principles set forth in this Article III and consistent with past practices.

Section 3.14 Group Relief.

(a) For any taxable year ending prior to the Deconsolidation Year and beginning on or after the Effective Date, in the event a Final Determination causes Halliburton or any member of the ESG Group to recognize additional income directly as a result of the reduction of the amount of “Group Relief” (as defined in Section 402 et seq. of the UK Income and Corporation Taxes Act 1988, as amended) that was surrendered by the KBR Group (a “KBR Group Relief Tax Attribute”), then KBR shall pay to Halliburton, on a timely basis, the amount of additional Tax incurred by Halliburton or any member of the ESG Group that is directly attributable to the loss of the KBR Group Relief Tax Attribute.

(b) No later than 90 days following the filing of any U.K. Tax Return, Halliburton shall pay to KBR an amount equal to the product of: (x) the aggregate amount of Group Relief that was surrendered to Halliburton or any member of the ESG Group multiplied by (y) the highest U.K. Corporation Tax rate applicable to corporations at the time the Group Relief was surrendered by the KBR Group.

- 13 -

Tax Sharing Agreement

Between Halliburton Co. and KBR, Inc.

(c) The provisions of this Section 3.14, Section 5.12(c) and Section 6.05 are intended to be the exclusive governing provisions with respect to indemnification and compensation rights and obligations among the parties relating to U.K. Group Relief.

ARTICLE IV.

PREPARATION AND FILING OF TAX RETURNS FOR AND AFTER THE

DECONSOLIDATION YEAR

Section 4.01 Manner of Filing.

(a) Except to the extent otherwise provided herein, all Tax Returns filed with federal and state Tax Authorities of the United States for the Deconsolidation Year and for two taxable years following the Deconsolidation Year by Halliburton or by KBR shall be prepared (in the absence of a controlling change in law or circumstances or consent of Halliburton with such consent not to be unreasonably withheld) consistent with past practices, elections, accounting methods, conventions, and principles of taxation used for the most recent taxable periods for which Tax Returns involving similar items have been filed prior to the Deconsolidation Date.

(b) For a period of two (2) fiscal years following the Distribution Date, all Tax Returns filed by Halliburton and KBR after the Distribution Date shall be prepared on a basis that is consistent with the Private Letter Ruling or Tax Opinion obtained by Halliburton in connection with the Distribution (in the absence of a controlling change in law or circumstances), and shall be filed on a timely basis by the Party responsible for such filing under this Agreement.

Section 4.02 Pre-Deconsolidation Tax Returns. Except as provided in Section 4.03(b) hereof, all Tax Returns required to be filed for the portion of the Deconsolidation Year ending on the Deconsolidation Date shall be filed by the party who would bear responsibility under Section 2.01 hereof if such Tax Returns were for periods prior to the Deconsolidation Year.

Section 4.03 Post-Deconsolidation Tax Returns.

(a) All Tax Returns of the KBR Group for the portion of the Deconsolidation Year beginning after the Deconsolidation Date and all periods after the Deconsolidation Year shall be filed by KBR and all Tax Returns of the Halliburton Group for the portion of the Deconsolidation Year beginning after the Deconsolidation Date and all periods after the Deconsolidation Year shall be filed by Halliburton.

(b) All KBR Group foreign, state or local income Tax Returns for the Deconsolidation Year that are filed based on a complete fiscal year (i.e. there is not a Tax year end as of the Deconsolidation Date) shall be filed by KBR.

(c) If Deconsolidation occurs for federal Tax purposes but not for Combined Return purposes, i.e., there is more than 50% but less than 80% ownership of KBR stock by Halliburton, the HESI and KBR Tax departments will develop procedures consistent with this Agreement for handling such Combined Returns.

- 14 -

Tax Sharing Agreement

Between Halliburton Co. and KBR, Inc.

Section 4.04 Accumulated Earnings and Profits, Initial Determination and Subsequent Adjustments. Within ninety (90) days following the Distribution Date, Halliburton shall notify KBR of the balance of accumulated earnings and profits on Halliburton’s Tax records as of the Distribution Date which are allocable to the KBR Businesses, as calculated in accordance with the appropriate provisions of the Code and the Treasury Regulations thereunder (including Section 312(h) of the Code and Treasury Regulations § 1.312-10 or any successor regulation thereto) by Halliburton. The notice provided by Halliburton to KBR hereunder shall include supporting documentation which details the calculation of earnings and profits allocated to the KBR Businesses as of the Distribution Date. Within sixty (60) days after filing the Halliburton Affiliated Group Federal Income Tax Return for the taxable year that includes the Distribution Date, Halliburton shall notify KBR of any adjustments in the Halliburton earnings and profits as of the Distribution Date and shall provide to KBR supporting documentation which details the recalculation of Halliburton earnings and profits allocable to the KBR Businesses as of the Distribution Date. If in subsequent Tax years, a Final Determination results in an adjustment to the accumulated earnings and profits on the Tax records of Halliburton as of the Distribution Date, Halliburton shall promptly notify KBR of the adjustment within sixty (60) days after receiving written notice of such Final Determination, and shall provide KBR with supporting documentation which details the recalculation of Halliburton earnings and profits allocable to the KBR Businesses as of the Distribution Date.

Section 4.05 Tax Basis of Assets Transferred. Within ninety (90) days following the Distribution Date, Halliburton shall notify KBR of the Tax basis of the stock of any controlled foreign corporations (as defined in Section 957 of the Code) transferred to KBR in the Restructuring. In the event that a Final Determination results in an adjustment to the basis of such stock, Halliburton shall notify KBR within sixty (60) days of receiving written notice of such Final Determination, of the nature and amount of the adjustments and shall provide KBR with supporting documentation which details the calculation of such adjustments.

ARTICLE V.

ALLOCATION OF TAXES FOR AND AFTER DECONSOLIDATION YEAR;

ALLOCATION OF ADDITIONAL TAX LIABILITIES

Section 5.01 Liability of the ESG Group for Consolidated and Combined Taxes. For the Deconsolidation Year and all taxable years following the Deconsolidation Year, the ESG Group shall be liable to Halliburton for an amount equal to the ESG Group Federal Income Tax Liability and the ESG Group Combined Tax Liability.

Section 5.02 Liability of the KBR Group for Consolidated and Combined Taxes. For the Deconsolidation Year, the KBR Group shall be liable to Halliburton for an amount equal to the KBR Group Federal Income Tax Liability and the KBR Group Combined Tax Liability to the extent such liability was paid by Halliburton or by a member of the ESG Group.

- 15 -

Tax Sharing Agreement

Between Halliburton Co. and KBR, Inc.

Section 5.03 ESG Group Federal Income Tax Liability. With respect to the Deconsolidation Year and all taxable years following the Deconsolidation Year, the ESG Group Federal Income Tax Liability for such taxable period shall be the Federal Income Taxes for such taxable period, as determined on an ESG Group Pro Forma Consolidated Return prepared:

(a) assuming that the members of the ESG Group were not included in the Consolidated Group and by including only Tax Items of members of the ESG Group that are included in the Consolidated Return;

(b) except as provided in Section 5.03(e) hereof, using all elections, accounting methods and conventions used on the Consolidated Return for such period;

(c) applying the highest statutory marginal corporate income Tax rate in effect for such taxable period;

(d) excluding any Tax Attributes for which HESI has been compensated pursuant to Section 5.09 hereof;

(e) assuming that the ESG Group elects not to carry back any net operating losses; and

(f) assuming that the ESG Group’s utilization of any Tax Attribute carryforward or carryback is limited to the Tax Attributes of the ESG Group that would be available if the ESG Group Federal Income Tax Liability for each taxable year ending after January 1, 2001 were determined in accordance with this Section 5.03.

Section 5.04 KBR Group Federal Income Tax Liability. With respect to the Deconsolidation Year, the KBR Group Federal Income Tax Liability for such taxable period shall be the Federal Income Taxes for such taxable period, as determined on an KBR Group Pro Forma Consolidated Tax Return prepared:

(a) assuming that the members of the KBR Group were not included in the Consolidated Group and by including only Tax Items of members of the KBR Group that are included in the Consolidated Return;

(b) except as provided in Section 5.04(e) hereof, using all elections, accounting methods and conventions used on the Consolidated Return for such period;

(c) applying the highest statutory marginal corporate income Tax rate in effect for such taxable period;

(d) excluding any Tax Attributes for which KBR has been compensated pursuant to Section 5.09 hereof;

(e) assuming that the KBR Group elects not to carry back any net operating losses and may elect either to deduct or take a credit for foreign Taxes paid or deemed paid (and to carryback or carryforward any excess foreign Taxes); and

- 16 -

Tax Sharing Agreement

Between Halliburton Co. and KBR, Inc.

(f) assuming that the KBR Group’s utilization of any Tax Attribute carryforward or carryback is limited to the Tax Attributes of the KBR Group that would be available if the KBR Group Federal Income Tax Liability for each taxable year ending after January 1, 2001 were determined in accordance with this Section 5.04.

Section 5.05 ESG Group Combined Tax Liability. With respect to the Deconsolidation Year and all taxable years following the Deconsolidation Year, the ESG Group Combined Tax Liability shall be the sum for such taxable period of the ESG Group’s liability for Taxes owed with respect to Combined Returns, as determined on the ESG Group Pro Forma Combined Returns prepared in a manner consistent with the principles and procedures set forth in Section 5.03 hereof, without recalculating the state apportionment factors.

Section 5.06 KBR Group Combined Tax Liability. With respect to the Deconsolidation Year, the KBR Group Combined Tax Liability shall be the sum for such taxable period of the KBR Group’s liability for Taxes owed with respect to Combined Returns, as determined on the KBR Group Pro Forma Combined Returns prepared in a manner consistent with the principles and procedures set forth in Section 5.04 hereof, without recalculating the state apportionment factors and assuming that Tax Items of the KBR Group are not included in the Combined Returns of the Halliburton Group following the Deconsolidation Date.

Section 5.07 Preparation and Delivery of Pro Forma Tax Returns. Not later than ninety (90) days following the date on which the related Consolidated Return or Combined Return, as the case may be, is filed with the appropriate Tax Authority, Halliburton shall prepare and deliver to HESI and KBR, respectively, pro forma Tax Returns calculating (i) the ESG Group Federal Income Tax Liability or the ESG Group Combined Tax Liability, and (ii) the KBR Group Federal Income Tax Liability or the KBR Group Combined Tax Liability, which is attributable to the period covered by such filed Tax Return.

Section 5.08 HESI Intercompany Payables and Receivables; KBR Payment. The liability of the ESG Group for the ESG Group Federal Income Tax Liability and ESG Group Combined Tax Liability shall be reflected in the intercompany accounts of Halliburton and HESI. For the Deconsolidation Year, KBR will pay Halliburton for the KBR Group Federal Income Tax Liability and the KBR Group Combined Tax Liability within sixty (60) days following the delivery to KBR by Halliburton of a KBR Group Pro Forma Consolidated Tax Return or a KBR Group Pro Forma Combined Return, as the case may be, to the extent such Tax liabilities are paid by Halliburton or other person who is not a member of the KBR Group. For the Deconsolidation Year, any payment due from KBR described in the previous sentence shall be decreased by the cumulative amount of payments made by KBR to Halliburton to fund Halliburton’s estimated Tax payments with respect to Taxes for the Deconsolidation Year.

Section 5.09 Credit for Use of Attributes. Not later than ninety (90) days following the filing of the Consolidated Return for the Deconsolidation Year and all taxable years following the Deconsolidation Year, Halliburton shall determine the aggregate amount of the Tax Attributes of the Consolidated Group and all Combined Groups that are allocable to the ESG Group (the “ESG Allocated Attributes”) as of the end of such year and shall inform HESI of such determination. Not later than sixty (60) days following the filing of the Consolidated Return for the Deconsolidation Year, Halliburton shall determine the aggregate amount of the

- 17 -

Tax Sharing Agreement

Between Halliburton Co. and KBR, Inc.

Tax Attributes of the Consolidated Group and all Combined Groups that are allocable to the KBR Group (the “KBR Allocated Attributes”) as of the end of such year and shall inform KBR of such determination.

(a) If the amount of the ESG Allocated Attributes is less than the amount of Tax Attributes (as reasonably determined by Halliburton) that would have been available to the ESG Group at the end of such year had the ESG Group Members not been included in the Consolidated Return and the Combined Returns (the “ESG Stand-Alone Attributes”), the value of such shortfall, to the extent such shortfall is attributable to the use of the ESG Group’s Tax Attributes by KBR Group Members, shall be reflected in the intercompany accounts as an amount payable by Halliburton to HESI. If the amount of the ESG Allocated Attributes is greater than the ESG Stand-Alone Attributes, the value of such excess, to the extent such excess is attributable to the use of Tax Attributes of KBR Group Members by ESG Group Members during such year, shall be reflected in the intercompany accounts as an amount payable by HESI to Halliburton. For this purpose, a Tax Attribute shall be treated as used by KBR Group Members or ESG Group Members only to the extent that such Tax Attribute is necessary to reduce the KBR Group Federal Income Tax Liability or ESG Group Federal Income Tax Liability (computed in accordance with Section 5.04 or 5.03) for such year. In calculating the Stand-Alone Attributes, the utilization of any Tax Attribute carryforward by ESG Group Members shall be subject to the limitation described in Section 5.03(f) hereof. For purposes of this section, the value of any Tax Attribute shall be equal to the amount of Taxes (computed in accordance with Section 5.03 hereof) that would be avoided by the payor if it had sufficient income to fully utilize such Tax Attribute in such year.

(b) If the amount of the KBR Allocated Attributes for the Pre-Deconsolidation Period is less than the amount of Tax Attributes (as reasonably determined by Halliburton) that would have been available to the KBR Group for the Pre-Deconsolidation Period had the KBR Group Members not been included in the Consolidated Return and the Combined Returns (the “KBR Stand-Alone Attributes”), the value of such shortfall, to the extent such shortfall is attributable to the use of the KBR Group’s Tax Attributes by ESG Group Members, shall be paid by Halliburton to KBR within thirty (30) days of the date the KBR Allocated Attributes are determined. If the amount of the KBR Allocated Attributes for the Pre-Deconsolidation Period is greater than the amount of the KBR Stand-Alone Attributes, the value of such excess, to the extent such excess is attributable to the use of Tax Attributes of ESG Group Members by KBR Group Members during such period, shall be paid by KBR to Halliburton within thirty (30) days of the date the KBR Allocated Attributes are determined. For this purpose, a Tax Attribute shall be treated as used by ESG Group Members or KBR Group Members only to the extent that such Tax Attribute is necessary to reduce the ESG Group Federal Income Tax Liability or KBR Group Federal Income Tax Liability (computed in accordance with Section 5.03 or 5.04) for such year. In calculating the KBR Stand-Alone Attributes, the utilization of any Tax Attribute carryforward by KBR Group Members shall be subject to the limitation described in Section 5.04(f) hereof. For purposes of this section, the value of any Tax Attribute shall be equal to the amount of Taxes (computed in accordance with Section 5.04 hereof) that would be avoided by the payor if it had sufficient income to fully utilize such Tax Attribute in such year.

Section 5.10 Subsequent Changes in Treatment of Tax Items. For the Deconsolidation Year and all taxable years following the Deconsolidation Year, in the event of a change in the

- 18 -

Tax Sharing Agreement

Between Halliburton Co. and KBR, Inc.

treatment of any Tax Item of any member of the Consolidated Group or a Combined Group as a result of a Final Determination, Halliburton shall calculate (i) the change to the ESG Group Federal Income Tax Liability or ESG Group Combined Tax Liability and (ii) any change to the Allocated Attributes and/or the Stand-Alone Attributes of the ESG Group, and such changes shall be properly reflected in the intercompany accounts described in Section 5.09(a) hereof. For the Deconsolidation Year, in the event of a change in the treatment of any Tax Item of any member of the Consolidated Group or a Combined Group as a result of a Final Determination, Halliburton shall calculate (i) the change to the KBR Group Federal Income Tax Liability or KBR Group Combined Tax Liability and (ii) any change to the Allocated Attributes and/or the Stand-Alone Attributes of the KBR Group and such changes shall be properly reflected in payments from Halliburton to KBR, or from KBR to Halliburton, as the case may be.

Section 5.11 Foreign Corporations. Any Taxes associated with the filing of a separate Tax Return in a foreign jurisdiction with respect to an ESG Group Member or a KBR Group Member shall be allocated to and paid directly by such member. For the Deconsolidation Year any Taxes and Tax Attributes associated with the filing of a separate Tax Return in a foreign jurisdiction that includes the Tax Items of one or more ESG Group Members and one or more KBR Group Members shall be allocated to such members by Halliburton in a manner consistent with the principles set forth in this Article V.

Section 5.12 Allocation of Additional Tax Liabilities.

(a) Restructuring Taxes. Notwithstanding that the Restructuring and Project Constructor occurred prior to the Effective Date, notwithstanding any other provision of this Agreement to the contrary, and except as otherwise provided in the Master Separation Agreement or the Master Separation and Distribution Agreement (as applicable) and Section 5.12(a)(i) hereof, Halliburton shall pay and shall indemnify and hold harmless KBR and any member of the KBR Group from and against any and all Restructuring Taxes, without regard to any benefit that any member of the KBR Group might derive as a result of the payment of the Restructuring Taxes by Halliburton. Halliburton shall also be liable for all fees, costs and expenses, including reasonable attorneys’ fees, arising out of, or incident to, any proceedings before any Tax Authority, or any judicial authority, with respect to any amount for which it is liable for under Section 5.12(a) hereof.

(i) In the event any Restructuring Taxes are attributable to a Tainting Act of KBR or any member of the KBR Group, then KBR shall pay and shall indemnify and hold harmless Halliburton from and against any and all Restructuring Taxes and from and against any costs whatsoever connected with such Taxes, including, but not limited to, fees, interest, penalties, and expenses, including reasonable attorneys’ fees. For purposes of this Section 5.12(a)(i), a Restructuring Tax is attributable to a Tainting Act if (1) such Tax would not have been imposed but for the Tainting Act, or (2) the Tainting Act would have independently caused the imposition of such Tax; provided, however, that in no event shall a Restructuring Tax be considered attributable to a Tainting Act to the extent such Tax would not have been incurred but for a breach by Halliburton of any warranty, representation or covenant contained in Article VII hereof.

- 19 -

Tax Sharing Agreement

Between Halliburton Co. and KBR, Inc.

(ii) An indemnification payment required to be made by one Party pursuant to Section 5.12(a) hereof shall be paid in immediately available funds within thirty (30) days after receiving a written demand from the other Party for such payment; however, no Party shall make a written demand for an indemnification payment attributable to Restructuring Taxes under Section 5.12(a) hereof until such Tax liability is established by a Final Determination. Any indemnification payment required to be made by either Party under Section 5.12(a) hereof which is not paid timely shall bear interest (compounded daily) at the Federal short-term rate or rates established pursuant to Section 6621 of the Code for the period during which such payment is due but unpaid.

(b) Dual Consolidated Losses. Notwithstanding any other provisions of this Agreement, whether before or during the Deconsolidation Year, to the extent a member of the KBR Group is responsible for a triggering event (as defined in Treasury Regulations § 1.1503-2(g)(2)(iii)(A)) that causes Halliburton to recapture and report as income for any Tax period the amount of a dual consolidated loss (as defined in Treasury Regulations § 1.1503-2), KBR shall pay to Halliburton on a timely basis any Tax attributable to the recapture of such dual consolidated loss. KBR hereby assumes all liability for any such Tax and shall indemnify and hold harmless Halliburton and any member of the Halliburton Group for such liability; provided, however, to the extent any such recapture is attributable to a triggering event resulting from the Spinoff, KBR shall not be liable for any Tax resulting from such recapture.

(c) Group Relief.

(i) In the event a Final Determination causes Halliburton or any member of the ESG Group to recognize additional income directly as a result of the reduction of a KBR Group Relief Tax Attribute, then KBR shall pay to Halliburton, on a timely basis, the amount of additional Tax incurred by Halliburton or any member of the ESG Group that is directly attributable to the loss of the KBR Group Relief Tax Attribute. KBR shall not be required to indemnify Halliburton or any member of the ESG Group for a reduction in the KBR Group Relief Tax Attribute that results from the Spinoff.

(ii) No later than 90 days following the filing of any U.K. Tax Return, Halliburton shall pay to KBR an amount equal to the product of: (x) the aggregate amount of Group Relief that was surrendered to Halliburton or any member of the ESG Group multiplied by (y) the highest U.K. Corporation Tax rate applicable to corporations at the time the Group Relief was surrendered by the KBR Group.

(iii) The provisions of Section 3.14, this Section 5.12(c) and Section 6.05 are intended to be the exclusive governing provisions with respect to indemnification and compensation rights and obligations among the parties relating to U.K. Group Relief.

(d) Refunds. Each Party shall be entitled to retain or be paid all refunds of Tax received, whether in the form of payment, credit or otherwise, from any Tax Authority with respect to any Tax for which such Party is responsible under this Article V.

(e) Allocation of Taxable Items. Halliburton shall determine the amounts of income, gain, loss, deduction, and credit of the KBR Group for the Pre-Deconsolidation Period that are

- 20 -

Tax Sharing Agreement

Between Halliburton Co. and KBR, Inc.

properly includible in the Consolidated Return for the taxable year which includes the Deconsolidation Date. For all relevant purposes of this Agreement, the members of the KBR Group and each KBR Combined Group shall cease to be members of the Consolidated Group as of the end of the Deconsolidation Date, and the KBR Group shall cause the book of account of the KBR Group to be closed for accounting and Tax purposes as of the end of the Deconsolidation Date in accordance with Halliburton’s direction. In determining consolidated taxable income for the taxable period that ends on the Deconsolidation Date, the income and other items of the KBR Group shall be determined in good faith by Halliburton in accordance with Treasury Regulations §§ 1.1502-76(b)(1), 1.1502-76(b)(2)(i) and 1.1502-76(b)(2)(iv) and no election shall be made under § 1.1502-76(b)(2)(ii)(D) to ratably allocate items. However, an allocation shall be made in good faith by Halliburton under Treasury Regulations § 1.1502-76(b)(2)(iii) if such allocation is determined by Halliburton in good faith to be necessary to appropriately allocate items in the event the Deconsolidation Date occurs on any date other than the last day of any month.

(f) Foreign Tax Credit True-Up. With respect to the Deconsolidation Year, no later than ninety (90) days following the filing of a Consolidated Return, an amended Consolidated Return or a final settlement with the U.S. Internal Revenue Service, Halliburton shall determine the aggregate amount of the “Foreign Tax Credit Adjustment.” The Foreign Tax Credit Adjustment shall be equal to (x) the aggregate amount of foreign Taxes paid or accrued by members of the KBR Group and allowable as foreign tax credits for United States federal income tax purposes for the period commencing January 1, 2001, and ending on the Deconsolidation Date (the “KBR Foreign Taxes”), minus (y) the sum of (i) the aggregate amount during such period of KBR Foreign Taxes used to reduce (either as a deduction or credit) the KBR Group’s Federal Income Tax Liability pursuant to Section 3.04 and Section 5.04 hereof, (ii) the aggregate amount during such period of credit that the KBR Group received with respect to KBR Foreign Taxes pursuant to Section 3.09 and Section 5.09 hereof, and (iii) the aggregate amount during such period of KBR Foreign Taxes allocated to the KBR Group upon Deconsolidation pursuant to Treasury Regulations § 1.1502-79(d). If such Foreign Tax Credit Adjustment is a positive amount, Halliburton shall pay such amount to the KBR Group. The payment in the preceding sentence shall be due within ninety (90) days following the earlier of (a) the filing of the federal income Tax Return on which Halliburton realizes a benefit for the KBR Foreign Taxes or (b) the filing of the federal income Tax Return on which KBR could have utilized the foreign tax credits, were KBR in possession of such foreign tax credits. For purposes of this agreement, a benefit for KBR Foreign Taxes is considered to be realized by Halliburton only when all available Halliburton/ESG Group foreign tax credits (except ESG Group foreign tax credits carried back) have been utilized. If the amount determined pursuant to this Section 5.12(f) is a negative amount, the KBR Group shall pay such amount to Halliburton. If such negative amount is the result of a foreign tax credit carried forward pursuant to Treasury Regulations § 1.1502-79(d), such payment shall be due no sooner than ninety (90) days following the filing of the federal income Tax Return on which the KBR Group realizes the benefit associated with the foreign tax credit carryforward.

(g) KBR Group Tax Losses. Notwithstanding anything to the contrary in this Agreement, with respect to tax years beginning on or after the Effective Date and ending prior to or on the Deconsolidation Date, no later than ninety (90) days following the filing of a Consolidated Return, an amended Consolidated Return or a final settlement with the IRS,

- 21 -

Tax Sharing Agreement

Between Halliburton Co. and KBR, Inc.

Halliburton shall determine the aggregate amount of the “Loss Adjustment.” The Loss Adjustment shall be an amount equal to: (x) the aggregate amount of Tax Attributes of the KBR Group reflected on the Consolidated Return that are net operating losses or net capital losses for the period commencing on the Effective Date through the Deconsolidation Date (the “KBR Losses”) multiplied by thirty-five percent (35%); minus (y) the sum of: (i) the aggregate amount during such period of reduction of the KBR Group’s U.S. federal income tax liability pursuant to Section 3.04 and Section 5.04 hereof resulting from the KBR Losses, (ii) the aggregate amount during such period of credit that the KBR Group received with respect to the KBR Losses pursuant to Section 3.09 and Section 5.09 hereof, and (iii) the aggregate amount during such period of KBR Losses allocated to the KBR Group upon Deconsolidation pursuant to Treasury Regulations §§ 1.1502-21 and 1.1502-22(b) multiplied by thirty-five percent (35%). If the Loss Adjustment pursuant to the preceding sentence is a positive amount, Halliburton shall pay to KBR an amount equal to the Loss Adjustment when Halliburton realizes a tax benefit from using the KBR Losses. Such payment shall be reduced by an amount equal to the tax benefit that Halliburton otherwise would have realized by the use of a Tax Attribute of a member of the ESG Group (a “Displaced ESG Tax Attribute”) that would have been used if the KBR Losses had not been included in the Consolidated Return or final settlement with the IRS. When a Displaced ESG Tax Attribute is used, Halliburton shall then pay KBR an amount equal to the tax benefit realized from the use of the Displaced ESG Tax Attribute by Halliburton. For purposes of this Section 5.12(g), Displaced ESG Tax Attributes shall be considered used and Halliburton shall be treated as recognizing a tax benefit from such use (i) when they are applied to a Consolidated Return of the Halliburton Affiliated Group or ESG Group to reduce the consolidated tax liability of the Halliburton Affiliated Group or ESG Group; or (ii) when they are allocated to a member of the Halliburton Affiliated Group or ESG Group that is no longer consolidated with the Halliburton Affiliated Group or ESG Group. Payments required under this Section 5.12(g) shall be made within 90 days of filing a Consolidated Return where Halliburton has realized the tax benefit from using KBR Losses or a Displaced ESG Tax Attribute.

Section 5.13 Tax Attributes of KBR Not Carried Back. With respect to any Tax Attributes incurred by the KBR Group in a Post-Deconsolidation Period, KBR shall not, and shall cause each member of the KBR Group to not, elect to carry back Tax Attributes to a Pre-Deconsolidation Period. In the event the applicable Tax law requires a Tax Attribute of the KBR Group arising in a Post-Deconsolidation Period to be carried back to a Pre-Deconsolidation Period Tax Return of Halliburton or other member of the Halliburton Group (such Tax Attribute being a “Required Tax Attribute Carryback”), KBR shall notify Halliburton of such Required Tax Attribute Carryback sixty (60) days prior to the date such Tax Return must be filed and KBR shall timely provide Halliburton with all information reasonably necessary to properly account for such Required Tax Attribute Carryback on such Tax Return. If a Required Tax Attribute Carryback that is reported on a Tax Return filed by Halliburton or other member of the Halliburton Group produces an actual Tax savings to Halliburton or other member of the Halliburton Group, Halliburton shall pay KBR an amount equal to such savings within sixty (60) days following the filing of such Tax Return.

- 22 -

Tax Sharing Agreement

Between Halliburton Co. and KBR, Inc.

ARTICLE VI.

TAX DISPUTE INDEMNITY; CONTROL OF PROCEEDINGS; COOPERATION AND

EXCHANGE OF INFORMATION

Section 6.01 Tax Dispute Indemnity and Control of Proceedings.

(a) Whenever a Party becomes aware of the existence of an issue which relates to any Tax liability of the other Party (a “Disputed Tax Issue” of such other Party), and the rights or responsibilities under this Agreement of such Party may be affected by the resolution of such Disputed Tax Issue, such Party (a “Disputed Tax Issue Indemnitee”) shall promptly notify the other Party (the “Disputed Tax Issue Indemnitor”) of the Disputed Tax Issue. The Disputed Tax Issue Indemnitor has the right to defend, handle, settle or contest at its cost any Disputed Tax Issue; provided, however, that Halliburton shall have the right (but not the obligation) to defend, handle, settle or contest at KBR’s cost any Disputed Tax Issue related to a Disqualifying Action or Potential Disqualifying Action.

(b) Except as provided in this Article VI, Halliburton shall have full responsibility and discretion in handling, settling or contesting any Tax Controversy involving a Tax Return for which it has filing responsibility under this Agreement. KBR shall have full responsibility and discretion in handling, settling or contesting any Tax Controversy involving a Tax Return for which it has filing responsibility under this Agreement. Except as otherwise provided in Section 5.12(a)(i) hereof and in this Article VI, any costs incurred in handling, settling or contesting any Tax Controversy shall be borne by the Party having full responsibility and discretion thereof.

(c) In the event that (x) a statutory notice of deficiency (or foreign, state or local law equivalent) is received by Halliburton from the IRS or any other Tax Authority, (y) such notice is with respect to a Tax Return for which Halliburton has filing responsibility under this Agreement and (z) such notice relates in whole or in part to Restructuring Taxes for which KBR could be liable to Halliburton pursuant to Section 5.12(a) hereof (a “KBR Restructuring Issue”) then

(i) Halliburton, upon receiving a written request from KBR to file a petition with the United States Tax Court (or equivalent foreign, state or local court) seeking a redetermination of such deficiency, which shall be given no later than a date reasonably necessary to permit preparation and timely filing of such petition, shall timely file such petition; provided, however, that, notwithstanding such request, Halliburton, with the prior written consent of KBR, shall have the option to pay the amount of the deficiency, in which case KBR shall either itself pay or loan to Halliburton no later than three (3) business days before Halliburton pays such deficiency, without interest, and, until a Final Determination of the KBR Restructuring Issue results, one hundred (100) percent of the amount of the portion of the deficiency relating to the KBR Restructuring Issue, and to file a claim for the refund thereof, and, if the claim is denied, to bring an action in a court of competent jurisdiction seeking the refund of Tax paid with respect to such deficiency; or

- 23 -

Tax Sharing Agreement

Between Halliburton Co. and KBR, Inc.

(ii) If (1) KBR does not request Halliburton to file a petition in the United States Tax Court (or equivalent foreign, state or local court) for redetermination of the deficiency pursuant to Section 6.01(c)(i) hereof, (2) Halliburton does not, on its own initiative, timely file such a petition, and (3) KBR requests that Halliburton file a claim for refund, then KBR shall either pay the deficiency or request in writing that Halliburton pay such deficiency, in which case KBR shall loan to Halliburton no later than three (3) business days before Halliburton pays such deficiency, without interest, and, until a Final Determination of the KBR Restructuring Issue results, one hundred (100) percent of the amount of the portion of the deficiency relating to the KBR Restructuring Issue, which loan Halliburton shall use to pay such deficiency, and Halliburton shall file a claim for refund thereof and, if the claim is denied, bring an action in a court of competent jurisdiction seeking such refund.

(iii) In the event that a judgment of the United States Tax Court or other court of competent jurisdiction results in an adverse determination with respect to the KBR Restructuring Issue, and Halliburton notifies KBR that it does not intend to appeal such KBR Restructuring Issue, then KBR shall have the right to cause Halliburton to appeal from such adverse determination at KBR’s expense.

(iv) KBR and its representatives, at KBR’s expense, shall be entitled to participate in (1) all conferences, meetings, or proceedings with any Tax Authority, the subject matter of which is or includes the KBR Restructuring Issue and (2) all appearances before any court, the subject matter of which includes the KBR Restructuring Issue.

(d) The right to participate referred to in Section 6.01(c)(iv) hereof shall include, with respect to the KBR Restructuring Issue, the right to participate in the preparation and submission of documentation, protests, memoranda of fact and law and briefs; the conduct of oral arguments or presentations; the selection of witnesses; and the negotiation of stipulations of fact.

(e) Notwithstanding Sections 6.01(c)(iv) and (d) hereof, unless and until the notice provided in Section 6.01(c)(iii) above is given, Halliburton shall control the litigation of the KBR Restructuring Issue and have the authority to settle in a reasonable manner and in good faith any such issue.

Section 6.02 Cooperation and Exchange of Information.

(a) Each Party shall cooperate fully at such time and to the extent reasonably requested by the other Party in connection with the preparation and filing of any Tax Return or claim for refund, or the conduct of any audit, dispute, proceeding, suit or action concerning any issues or other matters considered in this Agreement. Such cooperation shall include, without limitation, the following: (i) forwarding promptly copies of appropriate notices and forms or other communications received from any Tax Authority (including any IRS revenue agent’s report or similar report, notice of proposed adjustment, or notice of deficiency) or sent to any Tax Authority or any other administrative, judicial or other governmental authority that relate to a Disputed Tax Issue; (ii) the retention and provision on demand of Tax Returns, books, records (including those concerning ownership and Tax basis of property which either Party may

- 24 -

Tax Sharing Agreement

Between Halliburton Co. and KBR, Inc.

possess), documentation or other information relating to the Tax Returns, including accompanying schedules, related workpapers, and documents relating to rulings or other determinations by Taxing Authorities, until the expiration of the applicable statute of limitations (giving effect to any extension, waiver or mitigation thereof) subject to the provisions of Section 6.02(e) hereof; (iii) the provision of additional information, including an explanation of material provided under clause (i) of Section 6.02(a) hereof, to the extent such information is necessary or reasonably helpful in connection with the foregoing; (iv) the execution of any document that may be necessary or reasonably helpful in connection with the filing of a Tax Return by Halliburton or KBR or of their respective subsidiaries, or in connection with any audit, dispute, proceeding, suit or action; and (v) such Party’s commercially reasonable efforts to obtain any documentation from a governmental authority or a third party that may be necessary or reasonably helpful in connection with any of the foregoing.

(b) Both Parties shall use reasonable efforts to keep each other advised as to the status of Tax audits or Tax Controversies involving a Disputed Tax Issue and cooperate in a defense with respect to a Disputed Tax Issue in any Tax Controversy.

(c) Each Party shall make its employees and facilities available on a reasonable and mutually convenient basis in connection with any of the foregoing matters.

(d) If either Party fails to provide any information requested pursuant to Section 6.02 hereof within a reasonable period, as determined in good faith by the Party requesting the information, then the requesting Party shall have the right to engage a public accounting firm to gather such information, provided that thirty (30) days prior written notice is given to the unresponsive Party. If the unresponsive Party fails to provide the requested information within thirty (30) days of receipt of such notice, then such unresponsive Party shall permit the requesting Party’s public accounting firm full access to all appropriate records or other information as reasonably necessary to comply with the requirements of Section 6.02 hereof and shall reimburse the requesting Party or pay directly all costs connected with the requesting Party’s engagement of the public accounting firm.

(e) Upon the expiration of any statute of limitations, the documentation of Halliburton or KBR or any of their respective subsidiaries, including, without limitation, books, records, Tax Returns and all supporting schedules and information relating thereto, shall not be destroyed or disposed of unless (i) the Party proposing such destruction or disposal provides sixty (60) days prior written notice to the other Party describing in reasonable detail the documentation to be destroyed or disposed of and (ii) the recipient of such notice agrees in writing to such destruction or disposal. If the recipient of such notice objects, then the Party proposing the destruction or disposal shall promptly deliver such materials to the objecting Party at the expense of the objecting Party.

Section 6.03 Reliance on Exchanged Information. If either Party supplies information to the other Party upon such Party’s request, and an officer of the requesting Party intends to sign a statement or other document under penalties of perjury in reliance upon the accuracy of such information, then a duly authorized officer of the Party supplying such information shall certify, to the best of such Party’s knowledge, the accuracy and completeness of the information so supplied.

- 25 -

Tax Sharing Agreement

Between Halliburton Co. and KBR, Inc.

Section 6.04 Payment of Tax and Indemnity. Except as provided in Section 7.03 of this Agreement, Halliburton shall timely pay (or shall cause to be timely paid) all Taxes of the Consolidated Group, of any Combined Group which includes a member of the ESG Group and of any entity or person that is not a member of the KBR Group and shall indemnify and hold harmless KBR for all liability for Taxes of any member of the Consolidated Group, of any Combined Group which includes a member of the ESG Group or of any other person or entity that is not a member of the KBR Group assessed against any member of the KBR Group pursuant to Treasury Regulations § 1.1502-6 or any analogous or similar law.

Section 6.05 Prior Tax Years. For all taxable periods beginning before the Effective Date of this Article VI (January 1, 2001), the Parties hereby agree that:

(a) KBR shall have full responsibility and discretion in handling, settling or contesting any Tax Controversy involving a Tax Return that includes Tax Items of a member of the KBR Group and does not include Tax Items of a member of the ESG Group;

(b) Halliburton shall have full responsibility and discretion in handling, settling or contesting any Tax Controversy involving a Tax Return that includes Tax Items of a member of the ESG Group and does not include Tax Items of a member of the KBR Group;

(c) Halliburton shall have full responsibility and discretion in handling, settling or contesting any Tax Controversy involving any Tax Return not described in Section 6.05(a) or (b);

(d) with respect to any Consolidated Return or Combined Return described in this Section 6.05 that includes activities of members of the ESG Group and the KBR Group, KBR shall pay to Halliburton, within ninety (90) days of a Final Determination of any Tax, any liability for such Tax attributable to a member of the KBR Group, as reasonably determined by Halliburton;

(e) with respect to any Consolidated Return or Combined Return described in this Section 6.05 that includes activities of members of the ESG Group and the KBR Group, Halliburton shall pay to KBR, within ninety (90) days of a Final Determination of any Tax, any refund due with respect to such Final Determination attributable to a member of the KBR Group, as reasonably determined by Halliburton;

(f) any costs incurred in handling, settling or contesting any Tax Controversy described in Section 6.05(a) shall be borne by KBR, any costs incurred in handling, settling or contesting any Tax Controversy described in Section 6.05(b) shall be borne by Halliburton and any costs incurred in handling, settling or contesting any Tax Controversy described in Section 6.05(c) shall be borne by the Party who would bear such costs if Section 6.01(a) applied;

(g) for the purposes of this Section 6.05, Halliburton Produtos Ltda. shall be considered a member of the KBR Group until the date it is transferred to Kellogg Energy Services, Inc.; and

(h) except to the extent otherwise provided in this Section 6.05, the provisions of Article VI shall apply to the taxable periods described in this Section 6.05. For the avoidance of

- 26 -

Tax Sharing Agreement

Between Halliburton Co. and KBR, Inc.

doubt, notwithstanding anything to the contrary in this Section 6.05, the provisions of Section 6.01(a) shall apply to any Disputed Tax Issue relating to any taxable period beginning before the Effective Date of this Article VI.

ARTICLE VII.

WARRANTIES AND REPRESENTATIONS; INDEMNITY

Section 7.01 Warranties and Representations Relating to Actions of Halliburton and KBR. Each of Halliburton and KBR warrants and represents to the other that:

(a) it is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has all requisite corporate power to own, lease and operate its properties, to carry on its business as presently conducted and to carry out the transactions contemplated by this Agreement;

(b) it has duly and validly taken all corporate action necessary to authorize the execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby;

(c) this Agreement has been duly executed and delivered by it and constitutes its legal, valid and binding obligation enforceable in accordance with its terms subject, as to the enforcement of remedies, to (i) applicable bankruptcy, reorganization, insolvency, moratorium or other similar laws affecting the enforcement or creditors’ rights generally from time to time in effect and (ii) to general principles of equity, whether enforcement is sought in a proceeding at law or in equity; and

(d) the execution and delivery of this Agreement, the consummation of the transactions contemplated hereby, or the compliance with any of the provisions of this Agreement will not (i) conflict with or result in a breach of any provision of its certificate of incorporation or by-laws, (ii) breach, violate or result in a default under any of the terms of any agreement or other instrument or obligation to which it is a party or by which it or any of its properties or assets may be bound, or (iii) violate any order, writ, injunction, decree, statute, rule or regulation applicable to it or affecting any of its properties or assets.

Section 7.02 Warranties and Representations Relating to the Distribution.

(a) In General. Each of the Parties represents that, as of the date of this Agreement, it knows of no fact (after due inquiry) that may cause the Tax treatment of the Distribution to be other than a distribution of KBR stock with respect to which no gain or loss is recognized by Halliburton, KBR or their respective stockholders pursuant to Section 355 and related provisions of the Code and relevant Treasury regulations promulgated thereunder (such distribution a “Tax Free Spinoff”).

(b) No Contrary Plan. Each of the Parties represents that it has no plan or intent to take any action which is inconsistent with the treatment of the Distribution as a Tax Free Spinoff.

- 27 -

Tax Sharing Agreement

Between Halliburton Co. and KBR, Inc.

Section 7.03 Covenants Relating to the Tax Treatment of the Distribution.

(a) In General. The Parties intend the Distribution to qualify as a Tax Free Spinoff.

(i) During the Restricted Period, KBR shall not permit or take any action within its control (including entering into any agreement, understanding or arrangement or any negotiations with respect to any transactions or series of transactions) that, or fail to take any action within its control the failure of which, would cause the Distribution to fail to qualify as a Tax Free Spinoff (any such action or failure to act, a “Disqualifying Action”).

(ii) For the avoidance of doubt, and without limitation, Disqualifying Actions include (1) KBR causing or permitting to be caused a change in its Control or (2) KBR ceasing the active conduct of a trade or business within the meaning of Section 355(b) of the Code to the extent the existence of such trade or business was necessary to a conclusion reached by the IRS in the Private Letter Ruling or a conclusion reached by Tax Counsel in the Tax Opinion, unless Halliburton consents in writing to such action, unless expressly required or permitted pursuant to the Master Separation Agreement or Master Separation and Distribution Agreement (as applicable), or unless, for actions after the Distribution Date, KBR first obtains, and permits Halliburton to review, either a supplemental ruling from the IRS or an opinion from a nationally recognized law firm reasonably acceptable to Halliburton, in either case, to the effect that such action or non-action referred to in this Section 7.03(a)(ii) will not affect the qualification of the Distribution as a Tax Free Spinoff.

(iii) During the Restricted Period, except for transactions contemplated by the Master Separation Agreement or Master Separation and Distribution Agreement (as applicable), KBR shall not take any action within its control, taken alone or together with any other action (including entering into any agreement, understanding or arrangement or any negotiations with respect to any transactions or series of transactions), that, or fail to take any action within its control the failure of which, would result in a more than immaterial possibility that the Distribution would be treated as part of a plan pursuant to which one or more persons acquire directly or indirectly KBR stock representing a “50-percent or greater interest” within the meaning of Section 355(e)(4) of the Code (any such action or failure to act, a “Potential Disqualifying Action”), unless, prior to the taking of the Potential Disqualifying Action, KBR delivers to Halliburton either a private letter ruling from the IRS reasonably acceptable to Halliburton (a “Subsequent Ruling”) or an opinion from a nationally recognized law firm reasonably acceptable to Halliburton (a “Subsequent Opinion”), in either case, to the effect that the Potential Disqualifying Action would not cause the Distribution to cease to qualify as a Tax Free Spinoff.

(iv) For the avoidance of doubt, and without limitation, each of the following constitutes a Potential Disqualifying Action pursuant to Section 7.03(a)(iii) hereof:

(1) The merger or consolidation of KBR with or into any other corporation;

- 28 -

Tax Sharing Agreement

Between Halliburton Co. and KBR, Inc.

(2) The liquidation or partial liquidation of KBR (within the meaning of such terms as defined in Section 346 and Section 302, respectively, of the Code);

(3) The sale or transfer of all or substantially all of KBR’s assets (within the meaning of Rev. Proc. 77-37, 1977-2 C.B. 568) in a single transaction or series of related transactions;

(4) The redemption or other repurchase of any of KBR’s capital stock (other than in connection with future employee benefit plans or pursuant to a future market purchase program involving five (5) percent or less of its publicly traded stock); or

(5) The change in KBR’s equity structure (including stock issuances, pursuant to the exercise of options, the vesting of restricted stock units or otherwise, option grants, the adoption of, or authorization of shares under a stock option plan, grants of restricted stock or stock units, capital contributions or acquisition); provided, however, that stock issuances pursuant to and awards under the KBR, Inc. 2006 Stock and Incentive Plan or the Transitional Stock Adjustment Plan related to conversions of awards made with respect to Halliburton stock shall not be considered a change in KBR’s equity structure for purposes of this Section 7.03(a)(iv)(5);

unless such action is expressly required or permitted pursuant to the Master Separation Agreement or Master Separation and Distribution Agreement (as applicable) or unless KBR first delivers to Halliburton a Subsequent Ruling or a Subsequent Opinion, both reasonably acceptable to Halliburton, in either case, to the effect that the action would not cause the Distribution to cease to qualify as a Tax Free Spinoff.

(b) Notice of Events That Could Affect the Tax Treatment of the Distribution and Right to Enjoin.

(i) Subject to Section 7.03(b)(iii) hereof, until the first day after the second anniversary of the Distribution, KBR shall give Halliburton at least thirty (30) days prior written notice of KBR’s intention to effect any transaction with respect to KBR’s capital structure, whether through issuance, redemption or otherwise if and to the extent there is more than an immaterial possibility that such transaction would constitute a Disqualifying Action. Each such notice shall set forth the necessary terms and conditions of the proposed transaction, including, as applicable, the nature of any related action proposed to be taken, the approximate number of shares proposed to be issued, redeemed or transferred (directly or indirectly, in accordance with the provisions of Section 355(e) of the Code), all with sufficient particularity to enable Halliburton to review and comment on the effect of such transaction with respect to Section 355(e) of the Code. Because the damages that may result to Halliburton will be difficult to quantify, in the event Halliburton obtains an opinion from a nationally recognized law firm that the proposed transaction described in this Section 7.03(b)(i) would more likely than not constitute a Disqualifying Action, Halliburton shall have the right to enjoin KBR from

- 29 -

Tax Sharing Agreement

Between Halliburton Co. and KBR, Inc.

entering into such transaction, and upon ten (10) business days prior written notice from Halliburton of its desire to enjoin such transaction, KBR shall not enter into such transaction; provided, however, that Halliburton will not waive its right to recover damages for breach of this Agreement if KBR is not enjoined from engaging in the proposed transaction.

(ii) If KBR receives a Subsequent Opinion or Subsequent Ruling, KBR shall notify Halliburton and (if Halliburton is not otherwise provided a copy) provide Halliburton promptly with a copy of such Subsequent Opinion or Subsequent Ruling, but in any event with ten (10) business days after the receipt of the Subsequent Opinion or Subsequent Ruling.

(iii) Notice shall not be required under Section 7.03(b)(i) hereof with respect to the grant and/or exercise of any stock option, stock, stock-based compensation or other employment related arrangements arising in the ordinary course of business that have customary terms and conditions consistent with past practice (a “Compensatory Transaction”) if the Compensatory Transaction satisfies the requirements of Treasury Regulations § 1.355-7(d)(8), or, if in the case of options, if (A) the exercise price is equal to or greater than the fair market value of the stock subject to the option on the date of grant or issuance and (B) such option does not have a readily ascertainable fair market value within the meaning of Treasury Regulations § 1.83-7.

(iv) Each Party shall furnish the other with a copy of any document of information that reasonably could be expected to affect treatment of the Distribution as a Tax Free Spinoff.

(v) All information provided by any Party to the other Party pursuant to this Section 7.03(b) shall be kept confidential pursuant to the terms and conditions of Section 8.12 hereof.

(c) Cooperation Relating to the Tax Treatment of the Distribution.

(i) Each Party shall cooperate with the other and shall take such actions reasonably requested by such other Party in connection with obtaining either a Subsequent Ruling or Subsequent Opinion. Such cooperation shall include providing any information, representations and/or covenants reasonably requested by the requesting Party to enable such Party to obtain, or maintain the validity of, either a Subsequent Ruling or Subsequent Opinion. From and after any date on which a Party makes any representation or covenant to counsel for the purpose of obtaining a Subsequent Opinion or to the IRS for the purpose of obtaining a Subsequent Ruling and until the first day after the second anniversary (or such later date as may be agreed upon at the time such representations and/or covenants are made) of the date of such Subsequent Ruling or Subsequent Opinion, the party making such representation or covenant shall take no action that would have caused such representation to be untrue or covenant to be breached unless Halliburton determines, in its reasonable discretion, which discretion shall be exercised in good faith solely to ensure that the Distribution constitutes a Tax Free Spinoff, that such action would not cause the Distribution to fail to qualify as a Tax Free Spinoff.

- 30 -

Tax Sharing Agreement

Between Halliburton Co. and KBR, Inc.

(ii) KBR shall not file any request for a Subsequent Ruling with respect to the treatment of the Distribution as a Tax Free Spinoff without the prior written consent of Halliburton, which consent shall not be unreasonably withheld or delayed, if a favorable Subsequent Ruling would be reasonably likely to have an adverse effect on Halliburton.

(d) Each Party agrees that it will not take any position on a Tax Return that is inconsistent with the treatment of the Distribution as a Tax Free Spinoff.

(e) Each Party agrees (i) not to take any action reasonably expected to result in an increased Tax liability to the other Party under this Agreement and (ii) to take any action reasonably requested by the other Party that would reasonably be expected to result in a Tax benefit or avoid a Tax detriment to such other Party; provided, in either such case, that the taking or refraining to take such action does not result in any additional cost not fully compensated for by the other Party or any other adverse effect to such Party. The Parties hereby acknowledge that the preceding sentence is not intended to limit, and therefore shall not apply to, the rights of the parties with respect to matters otherwise covered by this Agreement.

(f) For the avoidance of doubt, notwithstanding anything in this Agreement to the contrary (including, but not limited to, Section 7.14), KBR will be responsible for any Taxes of a member of the Halliburton Group arising from the change of Control of KBR even if (i) Halliburton or KBR, (ii) one or more officers or directors acting on behalf of Halliburton or KBR, or (iii) another person or persons with the implicit or explicit permission of one or more officers or directors of Halliburton or KBR held discussions with third parties for the sale of the stock of KBR prior to the Distribution.

(g) For the avoidance of doubt, KBR will not be responsible for any Taxes of a member of the Halliburton Group arising from the change of Control of Halliburton.

Section 7.04 Spinoff Indemnification.

(a) In General. Notwithstanding anything herein to the contrary, the provisions of this Article VII shall govern all matters among the Parties hereto related to an Indemnified Liability (as defined in Section 7.05 below) and an Indemnity Amount (as defined in Section 7.07 below).

(b) Indemnification Obligation. If either Party breaches any warranty, representation or covenant set forth in Sections 7.02, 7.03, 7.13 or 7.14 of this Agreement and the Distribution shall fail to qualify as a Tax Free Spinoff as a result of such breach, then such Party (the “Indemnifying Party”) shall indemnify and hold harmless the other Party against any and all federal, state, local and foreign Taxes, interest, penalties and additions to Tax imposed upon or incurred by Halliburton, the Halliburton Group, KBR or the KBR Group, as the case may be (each such party an “Indemnified Party”), as a result of the failure of the Distribution to qualify as a Tax Free Spinoff, to the extent provided herein.

- 31 -

Tax Sharing Agreement

Between Halliburton Co. and KBR, Inc.

Section 7.05 Indemnified Liability –Spinoff. For purposes of this Agreement, the term “Indemnified Liability” means any liability imposed upon or incurred by (1) Halliburton or any member of the Halliburton Group, for which Halliburton or any other member of the Halliburton Group is indemnified and held harmless under Section 7.04(b), or (2) KBR or any member of the KBR Group, for which KBR or any other member of the KBR Group is indemnified and held harmless under Section 7.04(b).

Section 7.06 Amount of Indemnified Liability for Income Taxes – Spinoff. The amount of an Indemnified Liability for a federal, state, local or foreign Tax incurred by an Indemnified Party based on or determined with reference to income shall be deemed to be the amount of Tax computed by multiplying (i) the Tax Authority’s highest effective Tax rate applicable to the Indemnified Party for the character of the Tax Item subject to Tax as a result of the failure of the Distribution to qualify as a Tax Free Spinoff for the taxable period in which the Distribution occurs, times (ii) the gain or income of the Indemnified Party which is subject to Tax in the Tax Authority’s jurisdiction as a result of such failure, and (iii) in the case of a state, times the percentage representing the extent to which such gain or income is apportioned or allocated to such state; provided, however, that in the case of a state Tax determined as a percentage of Federal income Tax liability, the amount of Indemnified Liability shall be deemed to be the amount of Tax computed by multiplying (x) that state’s highest effective rate applicable to the Indemnified Party for the character of the Tax Item subject to Tax as a result of the failure of the Distribution to qualify as a Tax Free Spinoff for the taxable period in which the Distribution occurs, times (y) the gain or income of the Indemnified Party which is subject to federal income Tax as a result of such failure, times (z) the percentage representing the extent to which the gain or income required to be recognized on the Distribution is apportioned to such state.

Section 7.07 Indemnity Amount – Spinoff. With respect to any Indemnified Liability, the amount which the Indemnifying Party shall pay to the Indemnified Party as indemnification (the “Indemnity Amount”) shall be the sum of (i) the amount of the Indemnified Liability, as determined under Section 7.06, (ii) any penalties and interest imposed with respect to the Indemnified Liability and (iii) an amount such that when the sum of the amounts set forth in clauses (i), (ii) and this clause (iii) of this Section 7.07 are reduced by all Taxes imposed as a result of the receipt of such sum, (taking into account any related current credits or deductions available to the Indemnified Party or any of its Affiliates under any law or Tax Authority) the reduced amount is equal to the sum of the amounts set forth in clauses (i) and (ii) of this Section 7.07.

Section 7.08 Additional Indemnity Remedy – Spinoff. Each of the Parties recognizes that any failure by it to comply with its obligations under this Article VII may result in additional Taxes which could cause irreparable harm to Halliburton, its shareholders, the Halliburton Group, and/or KBR and the KBR Group, and that such entities may be inadequately compensated by monetary damages for such failure. Accordingly, if (A) (i) a Party shall fail to comply with any obligation under this Article VII which would be reasonably foreseeable to result in any additional Taxes and (ii) such Party shall fail to provide the other Party with an opinion from a nationally recognized law firm, such opinion, upon timely review being approved by the other Party (which approval shall not be unreasonably withheld), that the failure to comply with such obligation will not result in any increase in Taxes of Halliburton, its

- 32 -

Tax Sharing Agreement

Between Halliburton Co. and KBR, Inc.

shareholders, any member of the Halliburton Group, on the one hand, or KBR or any member of the KBR Group, on the other hand, as the case may be, or if (B) it is probable in the written legal opinion of a nationally recognized law firm that the failure by such Party to comply with any such obligation under this Article VII will result in an Indemnified Liability under this Agreement and the Indemnifying Party fails to provide Adequate Assurances to the Indemnified Party of its ability to pay the Indemnity Amount under this Agreement, then Halliburton or KBR, as the case may be, shall be entitled to injunctive relief in the manner described in Section 8.03 hereof, in addition to all other remedies.

Section 7.09 Calculation of Indemnity Payments. Except as otherwise provided under this Agreement, to the extent that the Indemnifying Party has an indemnification or payment obligation to the Indemnified Party pursuant to this Agreement, the Indemnified Party shall provide the Indemnifying Party with its calculation of the amount of such obligation. The documentation of such calculation shall provide sufficient detail to permit the Indemnifying Party to reasonably understand the calculation. All indemnification payments shall be made to the Indemnified Party or to the appropriate Tax Authority as specified by the Indemnified Party within the time prescribed for payment in this Agreement, or if no period is prescribed, within thirty (30) days after delivery by the Indemnified Party to the Indemnifying Party of written notice of an indemnification obligation, or if the Tax liability giving rise to an Indemnified Liability is contested pursuant to Section 6.01(c) of this Agreement, within thirty (30) days of a Final Determination with respect to such Indemnified Liability. Any disputes with respect to indemnification payments shall be resolved in accordance with Section 8.11 below.

Section 7.10 Prompt Performance. All actions required to be taken by any Party under this Agreement shall be performed within the time prescribed for performance in this Agreement, or if no period is prescribed, such actions shall be performed promptly.

Section 7.11 Interest. Payments pursuant to this Agreement that are not made within the period prescribed in Section 7.09 shall bear interest (compounded daily) from and including the date immediately following the last date of such period through and including the date of payment at a rate equal to the Federal short-term rate or rates established pursuant to Section 6621 of the Code for the period during which such payment is due but unpaid.

Section 7.12 Tax Records. The Parties to this Agreement hereby agree to retain and provide on proper demand by any Tax Authority (subject to any applicable privileges) the books, records, documentation and other information relating to any Tax Return until the later of (a) the expiration of the applicable statute of limitations (giving effect to any extension, waiver or mitigation thereof), (b) the date specified in an applicable records retention agreement entered into with the IRS, (c) a Final Determination made with respect to such Tax Return and (d) the final resolution of any claim made under this Agreement for which such information is relevant. Notwithstanding the prior sentence, no Party may destroy any such records without the approval of all other Parties to this Agreement as described in section 6.02 hereof.

- 33 -

Tax Sharing Agreement

Between Halliburton Co. and KBR, Inc.

Section 7.13 KBR Representations and Covenants. KBR hereby represents, warrants and covenants that:

(a) KBR will review the information and representations made in the Ruling Documents and in the Tax Opinion Documents that will be submitted to the IRS, and, KBR covenants that all of such information or representations that relate to KBR or any member of the KBR Group, or the business or operations of each, will be true, correct and complete to KBR’s knowledge and will identify to Halliburton any information or representations that are incorrect or incomplete.

(b) KBR will not, and will cause each member of the KBR Group not to, take any action, or fail or omit to take any action, that would cause any of the information or representations made in the Ruling Documents and in the Tax Opinion Documents that relate to KBR or any member of the KBR Group or the business or operations of each, to be untrue, regardless of whether such information or representations are included in the Private Letter Ruling (or any supplemental ruling) or in the Tax Opinion (or any Subsequent Opinion).

Section 7.14 Halliburton Representations and Covenants. Halliburton hereby represents, warrants, and covenants that:

(a) Halliburton will review the information and representations made in the Ruling Documents and in the Tax Opinion Documents that will be submitted to the IRS, and Halliburton covenants that all of such information or representations that relate to Halliburton or any member of the Halliburton Group, or the business or operations of each, will be true, correct and complete to Halliburton’s knowledge and will identify to KBR any information or representations that are incorrect or incomplete.

(b) Halliburton will not, and will cause each member of the Halliburton Group not to, take any action, or fail or omit to take any action, that would cause any of the information or representations made in the Ruling Documents and in the Tax Opinion Documents that relate to Halliburton or any member of the Halliburton Group, or the business or operations of each, to be untrue, regardless of whether such information or representations are included in the Private Letter Ruling (or any supplemental ruling) or in the Tax Opinion (or any Subsequent Opinion).

Section 7.15 Continuing Covenants. Each Party agrees (1) not to take any action reasonably expected to result in a new or changed Tax Item that is detrimental to the other Party and (2) to take any action reasonably requested by the other Party that would reasonably be expected to result in a new or changed Tax Item that produces a benefit or avoids a detriment to such other Party; provided that such action does not result in any additional cost not fully compensated for by the requesting Party. The Parties hereby acknowledge that the preceding sentence is not intended to limit, and therefore shall not apply to, the rights of the Parties with respect to matters otherwise covered by this Agreement.

- 34 -

Tax Sharing Agreement

Between Halliburton Co. and KBR, Inc.

ARTICLE VIII.

MISCELLANEOUS PROVISIONS

Section 8.01 Notice. Any notice, demand, claim, or other communication required or permitted to be given under this Agreement (a “Notice”) shall be in writing and may be personally serviced, provided a receipt is obtained therefor, or may be sent by certified mail, return receipt requested, postage prepaid, or may be sent by telecopier, with acknowledgment of receipt requested, to the either of the Parties at the following addresses (or at such other address as one Party may specify by notice to the other Party):

Halliburton at:	Halliburton Company
	1401 McKinney, Suite 2400
	Houston, Texas 77010-4035
	Telecopier Number: (713) 839-4816
	Attn: Director of Taxes
KBR at:	KBR, Inc.
	4100 Clinton Drive, P.O. Box 3
	Houston, Texas 77001-0003
	Telecopier Number: (713) 753-3868
	Attn: Director of Taxes
KBR Holdings at:	KBR Holdings LLC
	4100 Clinton Drive, P.O. Box 3
	Houston, Texas 77001-0003
	Telecopier Number: (713) 753-3868
	Attn: Director of Taxes

A Notice which is delivered personally shall be deemed given as of the date specified on the written receipt therefor. A Notice mailed as provided herein shall be deemed given on the third business day following the date so mailed. A Notice delivered by telecopier shall be deemed given upon the date it is transmitted. Notification of a change of address may be given by either Party to the other in the manner provided in Section 8.01 hereof for providing a Notice.

Section 8.02 Required Payments. Unless otherwise provided in this Agreement, any payment of Tax required shall be due within thirty (30) days of a Final Determination of the amount of such Tax.

Section 8.03 Injunctions. The Parties acknowledge that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with its specific terms or were otherwise breached. The Parties hereto shall be entitled to an

- 35 -

Tax Sharing Agreement

Between Halliburton Co. and KBR, Inc.

injunction or injunctions to prevent breaches of the provisions of this Agreement and to enforce specifically the terms and provisions of this Agreement and to enforce specifically the terms and provisions hereof in any court having jurisdiction, such remedy being in addition to any other remedy to which they may be entitled at law or in equity.

Section 8.04 Further Assurances. Subject to the provisions hereof, the Parties hereto shall make, execute, acknowledge and deliver such other instruments and documents, and take all such other actions, as may be reasonably required in order to effectuate the purposes of this Agreement and to consummate the transactions contemplated hereby. Subject to the provisions hereof, each of the Parties shall, in connection with entering into this Agreement, perform its obligations hereunder and take any and all actions relating hereto, comply with all applicable laws, regulations, orders, and decrees, obtain all required consents and approvals and make all required filings with any governmental agency, other regulatory or administrative agency, commission or similar authority and promptly provide the other Party with all such information as such Party may reasonably request in order to be able to comply with the provisions of this sentence.

Section 8.05 Parties in Interest. Except as herein otherwise specifically provided, nothing in this Agreement expressed or implied is intended to confer any right or benefit upon any person, firm or corporation other than the Parties and their respective successors and permitted assigns.

Section 8.06 Setoff. All payments to be made under this Agreement shall be made without setoff, counterclaim or withholding, all of which are expressly waived.

Section 8.07 Change of Law. If, due to any change in applicable law or regulations or the interpretation thereof by any court of law or other governing body having jurisdiction subsequent to the date of this Agreement, performance of any provision of this Agreement or any transaction contemplated thereby shall become impracticable or impossible, the Parties hereto shall use their best efforts to find and employ an alternative means to achieve the same or substantially the same result as that contemplated by such provision.

Section 8.08 Termination and Survival. Notwithstanding anything in this Agreement to the contrary, this Agreement shall remain in effect and its provisions shall survive for the full period of all applicable statutes of limitation (giving effect to any extension, waiver or mitigation thereof) or until otherwise agreed to in writing by Halliburton and KBR, or their successors.

Section 8.09 Amendments; No Waivers.

(a) Any provision of this Agreement may be amended or waived if, and only if, such amendment or waiver is in writing and signed, in the case of an amendment, by Halliburton and KBR, or in the case of a waiver, by the Party against whom the waiver is to be effective.

(b) No failure or delay by any Party in exercising any right, power or privilege hereunder shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege.

- 36 -

Tax Sharing Agreement

Between Halliburton Co. and KBR, Inc.

Section 8.10 Governing Law and Interpretation. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware applicable to agreements made and to be performed in the State of Delaware.

Section 8.11 Resolution of Certain Disputes. Any disagreement between the Parties with respect to any matter that is the subject of this Agreement, including, without limitation, any disagreement with respect to any calculation or other determinations by Halliburton hereunder, which is not resolved by mutual agreement of the Parties, shall be resolved by a nationally recognized independent accounting firm chosen by and mutually acceptable to the Parties hereto (an “Accounting Referee”). Such Accounting Referee shall be chosen by the Parties within fifteen (15) business days from the date on which one Party serves written notice on the other Party requesting the appointment of an Accounting Referee, provided that such notice specifically describes the calculations to be considered and resolved by the Accounting Referee. In the event the Parties cannot agree on the selection of an Accounting Referee, then the Accounting Referee shall be any office or branch of the public accounting firm of Deloitte & Touche. The Accounting Referee shall resolve any such disagreements as specified in the notice within thirty (30) days of appointment; provided, however, that no Party shall be required to deliver any document or take any other action pursuant to this Section 8.11 if it determines that such action would result in the waiver of any legal privilege or any detriment to its business. Any resolution of an issue submitted to the Accounting Referee shall be final and binding on the Parties hereto without further recourse. The Parties shall share the costs and fees of the Accounting Referee equally.

Section 8.12 Confidentiality. Except to the extent required to protect a Party’s interests in a Tax Controversy, each Party shall hold and shall cause its consultants and advisors to hold in strict confidence, unless compelled to disclose by judicial or administrative process or, in the opinion of its counsel, by other requirements of law, all information (other than any such information relating solely to the business or affairs of such Party) concerning the other Party or its representatives pursuant to this Agreement (except to the extent that such information can be shown to have been (i) previously known by the Party to which it was furnished, (ii) in the public domain through no fault of such Party, or (iii) later lawfully acquired from other sources by the Party to which it was furnished), and each Party shall not release or disclose such information to any other person, except its auditors, attorneys, financial advisors, bankers and other consultants and advisors who shall be advised of the provisions of this Agreement. Each Party shall be deemed to have satisfied its obligation to hold confidential information concerning or supplied by the other Party if it exercises the same care as it takes to preserve confidentiality for its own similar information.

Section 8.13 Costs, Expenses and Attorneys’ Fees. Except as expressly set forth in this Agreement, each Party shall bear its own costs and expenses incurred pursuant to this Agreement. In the event either Party to this Agreement brings an action or proceeding for the breach or enforcement of this Agreement, the prevailing party in such action, proceeding, or appeal, whether or not such action, proceeding or appeal proceeds to final judgment, shall be entitled to recover as an element of its costs, and not as damages, such reasonable attorneys’ fees as may be awarded in the action, proceeding or appeal in addition to whatever other relief the prevailing party may be entitled. For purposes of Section 8.13 hereof, the “prevailing party” shall be the Party who is entitled to recover its costs; a Party not entitled to recover its costs shall not

- 37 -

Tax Sharing Agreement

Between Halliburton Co. and KBR, Inc.

recover attorneys’ fees. No sum for attorneys’ fees shall be counted in calculating the amount of the judgment for purposes of determining whether a Party is entitled to recover its costs or attorneys’ fees.

Section 8.14 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument.

Section 8.15 Severability. The Parties hereby agree that, if any provision of this Agreement should be adjudicated to be invalid or unenforceable, such provision shall be deemed deleted herefrom with respect, and only with respect, to the operation of such provision in the particular jurisdiction in which such adjudication was made, and only to the extent of the invalidity, and any such invalidity or unenforceability in a particular jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. All other remaining provisions of this Agreement shall remain in full force and effect for the particular jurisdiction and all other jurisdictions.

Section 8.16 Entire Agreement; Termination of Prior Agreements.

(a) This Agreement contains the entire agreement between the Parties with respect to the subject matter hereof and supersedes all other agreements, whether or not written, in respect of any Tax between or among any member or members of the Halliburton Group, on the one hand, and any member or members of the KBR Group, on the other hand. All such other agreements, including, but not limited to, that certain Tax Sharing Agreement by and among Halliburton Company and its Affiliated Companies and KBR, Inc. and its Affiliated Companies, dated October 2, 2006, are hereby canceled and any rights or obligations existing thereunder are hereby fully and finally settled without any payment by any party thereto; provided, however, that (i) that certain letter agreement regarding Tax indemnification for periods ending prior to January 1, 2001, attached as Exhibit C to this Agreement, shall be cancelled as of the date of this Agreement and any rights or obligations existing thereunder are hereby fully and finally settled without any payment by any party thereto and (ii) that certain Amendment to the Amended and Restated Tax Sharing and Allocation Agreement, attached as Exhibit D to this Agreement, shall remain in effect.

(b) Without limiting the foregoing, the Parties acknowledge and agree that in the event of any conflict or inconsistency between the provisions of this Agreement and the provisions of the Master Separation Agreement or the Master Separation and Distribution Agreement (as applicable), the provisions of this Agreement shall take precedence and to such extent shall be deemed to supersede such conflicting provisions under the Master Separation Agreement or the Master Separation and Distribution Agreement (as applicable).

Section 8.17 Assignment. This Agreement is being entered into by Halliburton and KBR on behalf of themselves and each member of the Halliburton Group and KBR Group, respectively. This Agreement shall constitute a direct obligation of each such member and shall be deemed to have been readopted and affirmed on behalf of any corporation which becomes a member of the Halliburton Group or KBR Group in the future. Halliburton and KBR hereby guarantee the performance of all actions, agreements and obligations provided for under this

- 38 -

Tax Sharing Agreement

Between Halliburton Co. and KBR, Inc.

Agreement of each member of the Halliburton Group and KBR Group, respectively. Halliburton and KBR shall, upon the written request of the other, cause any of their respective group members to formally execute this Agreement. This Agreement shall be binding upon, and shall inure to the benefit of, the successors, assigns and persons controlling any of the corporations bound hereby for so long as such successors, assigns or controlling persons are members of the Halliburton Group or the KBR Group or their successors and assigns.

Section 8.18 Fair Meaning. This Agreement shall be construed in accordance with its fair meaning and shall not be construed strictly against the drafter.

Section 8.19 Commencement. This Agreement shall commence on the date of execution indicated below.

Section 8.20 Titles and Headings. Titles and headings to sections herein are inserted for the convenience of reference only and are not intended to be a part or to affect the meaning or interpretation of this Agreement.

Section 8.21 Construction. In this Agreement, unless the context otherwise requires the terms “herein,” “hereof,” and “hereunder” refer to this Agreement.

Section 8.22 Termination. This Agreement may be terminated at any time prior to the date of the IPO, without the approval of KBR, by and in the sole discretion of the Halliburton Board of Directors. In the event of such termination, no Party shall have any liability to the other Party from or for the terminated Agreement, except that expenses incurred in connection with the preparation of this Agreement shall be paid as provided in Section 8.13 hereof; provided that any agreement that remained in force prior to the Deconsolidation Date, as described in Section 8.16 hereof, shall remain in force upon a termination of this Agreement pursuant to this Section 8.22.

SPACE INTENTIONALLY LEFT BLANK

- 39 -

Tax Sharing Agreement

Between Halliburton Co. and KBR, Inc.

IN WITNESS WHEREOF, the Parties hereto have executed and delivered this Agreement as of the day and year first above written.

Halliburton Company

By:

Name:

Title:

KBR, Inc.

By:

Name:

Title:

KBR Holdings LLC

By:

Name:

Title:

- 40 -

EX-10.6

Exhibit 10.6

FORM OF

EMPLOYEE MATTERS AGREEMENT

BETWEEN

HALLIBURTON COMPANY

and

KBR, INC.

Dated                     , 2006

TABLE OF CONTENTS

	Page
ARTICLE I DEFINITIONS	1
ARTICLE II GENERAL PRINCIPLES	5
SECTION 2.1     KBR Plans	5
SECTION 2.2     Halliburton Plans	5
ARTICLE III DEFINED BENEFIT AND DEFINED CONTRIBUTION PLANS	7
SECTION 3.1     Halliburton’s Obligations for Domestic Plans	7
SECTION 3.2     Pension Indemnification	8
ARTICLE IV HEALTH AND WELFARE PLANS; OTHER BENEFITS	8
SECTION 4.1     Participation in and General Administration of Welfare Plans	8
SECTION 4.2     Retiree Medical	8
SECTION 4.3     Vacation	8
SECTION 4.4     COBRA and HIPAA	9
SECTION 4.5     Leave of Absence and FMLA	9
SECTION 4.6     Workers’ Compensation	9
SECTION 4.7     Perquisites	9
ARTICLE V EQUITY AND OTHER COMPENSATION	9
SECTION 5.1     Executive and Non-Qualified Plans	9
SECTION 5.2     1993 Stock and Incentive Plan	10
SECTION 5.3     Employee Stock Purchase Plans	11
SECTION 5.4     Management Performance Pay Plan and Annual Performance Pay Plan	11
SECTION 5.5     Deduction under Section 83(h) of the Code	11
ARTICLE VI SEVERANCE AND STATUTORY SEPARATION LIABILITIES	12
SECTION 6.1     Severance and Statutory Separation Liabilities	12
ARTICLE VII INDEMNIFICATION	12
SECTION 7.1     Indemnification by Halliburton	12
SECTION 7.2     Indemnification by KBR	12
ARTICLE VIII CERTAIN TRANSITION MATTERS	13
SECTION 8.1     Transition Services Agreement	13
SECTION 8.2     Requests for IRS and DOL Opinions	13
SECTION 8.3     Consent of Third Parties	13
SECTION 8.4     Tax Cooperation	14
SECTION 8.5     Plan Returns	14
SECTION 8.6     Plan and Trust Separation	14
ARTICLE IX EMPLOYMENT-RELATED MATTERS	14
SECTION 9.1     Terms of KBR Employment	14
SECTION 9.2     Non-Termination of Employment; No Third-Party Beneficiaries	14

i

ARTICLE X GENERAL PROVISIONS	15
SECTION 10.1       Effect if IPO does not Occur	15
SECTION 10.2       Limitation of Liability	15
SECTION 10.3       Relationship of Parties	15
SECTION 10.4       Incorporation of Separation Agreement Provisions	16
SECTION 10.5       Governing Law	16
SECTION 10.6       Severability	16
SECTION 10.7       Amendment	16
SECTION 10.8       Assignment	16
SECTION 10.9       No Strict Construction; Cooperation of the Parties	16
SECTION 10.10     Termination	17
SECTION 10.11     Conflict	17
SECTION 10.12     Counterparts	17

ii

EMPLOYEE MATTERS AGREEMENT

This EMPLOYEE MATTERS AGREEMENT (this “Agreement”) is entered into as of the              day of                         , 2006 by and between Halliburton Company, a Delaware corporation (“Halliburton”), and KBR, Inc., a Delaware corporation (“KBR”).

WHEREAS, the Board of Directors of Halliburton has determined that it is in the best interests of Halliburton and its shareholders to make an initial public offering (“IPO”) of shares of KBR common stock, par value $0.001 per share;

WHEREAS, in order to effectuate the foregoing, Halliburton and KBR have entered into a Master Separation Agreement, dated as of the date hereof (the “Separation Agreement”), which provides, among other things, subject to the terms and conditions thereof, for the Separation, the IPO, and the execution and delivery of certain other agreements, including this Agreement, in order to facilitate and provide for the foregoing; and

WHEREAS, in order to ensure an orderly transition under the Separation Agreement it will be necessary for Halliburton and KBR to allocate between them assets, liabilities and responsibilities with respect to certain employee compensation, benefit plans and programs, and certain employment matters.

NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements herein contained, the parties, intending to be legally bound, agree as follows:

ARTICLE I

DEFINITIONS

Wherever used in this Agreement, the following terms shall have the meanings indicated below, unless a different meaning is plainly required by the context. The singular shall include the plural, unless the context indicates otherwise. Capitalized terms used herein and not otherwise defined shall have the meanings assigned to them in the Separation Agreement. Headings of sections are used for convenience of reference only, and in case of conflict, the text of this Agreement, rather than such headings, shall control:

“Agreement” means this Employee Matters Agreement and all amendments made hereto from time to time.

“Benefit Liabilities” means all claims, causes of action, demands, liabilities, debts or damages (known or unknown) related to (i) any Plans, (ii) any arrangements or services that are the subject of this Agreement, and (iii) all employment matters, including but not limited to claims arising under foreign law and federal, state or local statute, claims in connection with workers’ compensation or “whistle blower” statutes and/or contract, tort, defamation, slander, wrongful termination or any other state or federal regulatory, statutory or common law or local ordinance.

“Board(s)” means the Board of Directors of Halliburton and/or the Board of Directors of KBR, as the context indicates.

1

“Canadian Plans” means the Halliburton Group Canada Inc. Profit Sharing Pension Plan, the Halliburton Group Canada Inc. Retirement Income Plan, the Halliburton Group Canada Inc. Registered Retirement Savings Plan, the Halliburton Group Canada Inc. Non-registered Retirement Savings Plan and any other plans intended to provide retirement benefits maintained in Canada by Halliburton or any of its Subsidiaries for the benefit of Halliburton Employees and in which any KBR Employee participates as of the IPO Closing Date.

“COBRA” means the continuation coverage requirements for “group health plans” under Title X of the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended from time to time, and as codified in Section 4980B of the Code and ERISA Sections 601 through 608.

“Code” means the Internal Revenue Code of 1986, as amended from time to time.

“Deconsolidation Date” shall have the meaning set forth in the Tax Sharing Agreement.

“DOL” means the United States Department of Labor.

“Energy Services Group” means Halliburton Energy Services, Inc., a Delaware corporation, and its Subsidiaries.

“ERISA” means the Employee Retirement Income Security Act of 1974, as amended from time to time.

“FMLA” means the Family and Medical Leave Act of 1993, as amended from time to time.

“Group” shall have the meaning set forth in the Separation Agreement.

“Halliburton” means Halliburton Company, a Delaware corporation. In all such instances in which “Halliburton” is referred to in this Agreement, it shall also be deemed to include a reference to each member of the Halliburton Group, unless it specifically provides otherwise.

“Halliburton Business” shall have the meaning set forth in the Separation Agreement.

“Halliburton Employee” means any individual who is employed in the Halliburton Business during the relevant time period.

“Halliburton Group” shall have the meaning set forth in the Separation Agreement.

“Halliburton Non-Qualified Plans” means the Halliburton Elective Deferral Plan, the Halliburton Company Supplemental Executive Retirement Plan, the Halliburton Company Benefit Restoration Plan, the Dresser Industries Inc. Deferred Compensation Plan, the ERISA Excess Benefit Plan for Dresser Industries Inc., the ERISA Compensation Limit Benefit Plan for

2

Dresser Industries Inc., and any other plan, other than the Halliburton Qualified Plans, maintained by Halliburton or any of its Subsidiaries for the purpose of providing retirement benefits to any Halliburton Employee and in which any KBR Employee participates as of the IPO Closing Date.

“Halliburton Qualified Plans” means the Halliburton Retirement & Savings Plan, the Halliburton Savings Plan, the Halliburton Retirement Plan, the Pension Plan for United Steelworkers Local 6312 Guiberson, the Pension Plan for Participants of Certain Consolidated Discontinued Operations, the Pension Plan for Inactive Participants, the Petroleum and Minerals Operations Retirement Plan, the Retirement Plan for the USWA AFL-CIO on Behalf of the Local 6580, the Pension Plan for Hourly Employees of Axelson Operations, the Bariod Union Retirement Program, and any other plan intended to qualify under Section 401(a) of the Code maintained by Halliburton or any of its Subsidiaries for the benefit of Halliburton Employees and in which any KBR Employee participates as of the IPO Closing Date.

“IPO” has the meaning set forth in the Recitals hereof, as the same is further described in the Separation Agreement.

“IPO Closing Date” means the first date on which the proceeds of any sale of KBR Common Stock to the underwriters in the IPO are received.

“IRS” means the United States Internal Revenue Service.

“KBR” means KBR, Inc., a Delaware corporation. In all such instances in which KBR is referred to in this Agreement, it shall also be deemed to include a reference to each member of the KBR Group, unless it specifically provides otherwise; KBR shall be solely responsible to Halliburton for ensuring that each member of the KBR Group complies with the applicable terms of this Agreement.

“KBR Business” shall have the meaning set forth in the Separation Agreement.

“KBR Common Stock” shall have the meaning set forth in the Separation Agreement.

“KBR Employee” means any individual who is employed in the KBR Business during the relevant time period.

“KBR Group” shall have the meaning set forth in the Separation Agreement.

“KBR Pension Plans” means the Brown & Root, Inc. Employees’ Retirement and Savings Plan, the Brown & Root, Inc. Hourly Employees’ Pension Plan, the Brown & Root, Inc. Hourly Employees’ 401(k) Plan, the Halliburton NUS Corporation Employees’ Profit Sharing Plan, the Kellogg Brown & Root, Inc. Retirement and Savings Plan, the Halliburton NUS Corporation Employees’ Pension Plan, the Kellogg Brown & Root UK Limited Pension Plan, the MW Kellogg Limited Pension Scheme, the Devonport Dockyard Pension Scheme, and any other plan maintained by KBR or any of its Subsidiaries for the purpose of providing retirement benefits to any KBR Employee.

3

“Participating Company” means: (a) Halliburton; (b) any Person (other than an individual) that Halliburton has approved for participation in, has accepted participation in, or which is participating in, a Plan sponsored by Halliburton; or (c) any Person (other than an individual) that, by the terms of such a Plan, participates in such a Plan sponsored by Halliburton or any employees of which, by the terms of such a Plan, participate in a Plan.

“Pension Schemes” means the Kellogg Brown & Root (UK) Ltd Pension Plan, the M.W. Kellogg Limited Pension Plan and the Devonport Royal Dockyard Pension Scheme.

“Person” means an individual, a partnership, a corporation, a limited liability company, an association, a joint stock company, a trust, a joint venture, an unincorporated organization or a governmental entity or any department, agency or political subdivision thereof.

“Plan” depending on the context, may mean any plan, policy, program, payroll practice, arrangement, contract, annuity contract, trust, insurance policy, or any agreement or funding vehicle providing compensation or benefits to employees, dependents of employees or former employees or non-employee and employee directors of Halliburton, KBR or any member of the Halliburton Group or the KBR Group. “Plan,” when immediately preceded by “Halliburton,” means a Plan sponsored by Halliburton or a member of the Halliburton Group. When immediately preceded by “KBR,” “Plan” means a Plan sponsored by KBR or a member of the KBR Group.

“QDRO” means a domestic relations order which qualifies under Section 414(p) of the Code and ERISA Section 206(d) and which creates or recognizes an alternate payee’s right to, or assigns to an alternate payee, all or a portion of the benefits payable to a participant under a plan qualified under Section 401(a) of the Code.

“SEC” means the United States Securities and Exchange Commission.

“Separation” shall have the meaning set forth in the Separation Agreement.

“Separation Agreement” means the Master Separation Agreement between Halliburton Company and KBR, Inc. entered into as of                         , 2006.

“Subsidiary” shall have the meaning set forth in the Separation Agreement.

“Tax Sharing Agreement” shall have the meaning set forth in the Separation Agreement.

“Transferred Halliburton Employee” means any individual who was previously employed in the KBR Business and then was transferred to work in the Halliburton Business on or prior to the IPO Closing Date and remained employed in the Halliburton Business as of the IPO Closing Date or did not return to work in the KBR Business prior to the IPO Closing Date.

“Transferred KBR Employee” means any individual who was previously employed in the Halliburton Business and then was transferred to work in the KBR Business on or prior to the IPO Closing Date and remained employed in the KBR Business as of the IPO Closing Date or did not return to work in the Halliburton Business prior to the IPO Closing Date.

4

“Transition Services Agreement” means the Transition Services Agreement, which is attached as an exhibit to the Separation Agreement.

ARTICLE II

GENERAL PRINCIPLES

SECTION 2.1 KBR Plans.

(a) Non-Duplication of Benefits. Halliburton and KBR shall mutually agree, if necessary, on methods and procedures, including amending the respective Plan documents, to prevent employees of the KBR Group from receiving duplicate benefits from the Halliburton Plans and the KBR Plans.

(b) Service Credit. Except as specified otherwise in this Agreement or as required by applicable law, with respect to KBR Employees, each KBR Plan in existence on the IPO Closing Date shall provide that all service with the Halliburton Group as of the IPO Closing Date shall receive full recognition and credit and be taken into account under such KBR Plan to the same extent as if such service occurred with the KBR Group, except to the extent that duplication of benefits would result. The service crediting provisions shall be subject to any respectively applicable “service bridging,” “break in service,” “employment date” or “eligibility date” rules under the KBR Plans.

(c) Beneficiary Designations. Subject to Section 8.3 of this Agreement, all beneficiary designations made by the KBR Employees for the Halliburton Plans shall be transferred to and be in full force and effect under the corresponding KBR Plans until such time, if ever, that any such beneficiary designation is replaced or revoked by the KBR Employee who made the beneficiary designation. If no such beneficiary designations are on file, the terms of the applicable KBR Plan shall control.

(d) KBR Under No Obligation to Maintain Plans. Except as specified otherwise in this Agreement, nothing in this Agreement shall preclude KBR, at any time, from amending, merging, modifying, terminating, eliminating, reducing, or otherwise altering in any respect any KBR Plan, any benefit under any KBR Plan or any trust, insurance policy or funding vehicle related to any KBR Plan (to the extent permitted by law) in accordance with the applicable governing plan documents.

(e) Halliburton Participation in KBR Plans. Unless the prior written consent of KBR is obtained, Halliburton Employees shall not participate in any KBR Plans.

SECTION 2.2 Halliburton Plans.

(a) KBR’s Participation in Halliburton Plans. After the IPO Closing Date, KBR shall continue to be a Participating Company in the Halliburton Company 2002 Employee Stock Purchase Plan, the Halliburton Company 2002 Non-Qualified Stock Purchase Plan, the Halliburton Company UK Employee Share Purchase Plan, the Halliburton Elective Deferral Plan, the Halliburton Company Supplemental Executive

5

Retirement Plan, the Halliburton Company Benefit Restoration Plan, the Halliburton Group Canada Inc. Retirement Income Plan, the Halliburton Group Canada Inc. Registered Retirement Savings Plan and the Halliburton Group Canada Inc. Non-registered Retirement Savings Plan for the period of time specified in this Agreement, subject to the terms and conditions provided in said Plans and in Articles V and VIII of this Agreement. Except as otherwise provided in this Section 2.2(a) or unless the prior written consent of Halliburton is obtained, KBR shall not participate in any Halliburton Plans. To the extent contemplated by this Agreement, Halliburton may also provide benefits to KBR Employees under the terms of the Halliburton Company 1993 Stock and Incentive Plan, the Dresser Industries Inc. Deferred Compensation Plan, the ERISA Excess Benefit Plan for Dresser Industries Inc., the ERISA Compensation Limit Benefit Plan for Dresser Industries Inc., the Halliburton Group Canada Inc. Profit Sharing Pension Plan, the Halliburton Management Performance Pay Plan and the Halliburton Annual Performance Pay Plan. As of the Deconsolidation Date, unless the prior written consent of Halliburton is obtained, KBR shall not participate in any Halliburton Plans.

(b) Halliburton’s General Obligations as Plan Sponsor. Halliburton shall continue to administer, or cause to be administered, in accordance with their terms and applicable law, the Halliburton Plans specifically identified in Section 2.2(a), and shall have the sole and absolute discretion and authority to interpret said Halliburton Plans, as set forth therein, subject to the specific arrangements provided in this Agreement.

(c) KBR’s General Obligations as Participating Company. With respect to any Halliburton Plan or program that provides benefits to a KBR Employee, KBR will cooperate with Halliburton on a timely basis with respect to such Plans or programs, and KBR shall comply with the terms as set forth in such Plans or any procedures adopted pursuant thereto, including (without limitation): (i) assisting in the administration of claims, to the extent requested by the claims administrator of said Halliburton Plan; (ii) cooperating fully with Halliburton Plan auditors; (iii) the provision of payroll processing support; (iv) the qualification and administration of QDROs; (v) preserving the confidentiality of all financial arrangements Halliburton has or may have with any entity or individual with whom Halliburton has entered into an agreement relating to said Halliburton Plan; and (vi) preserving the confidentiality of participant information to the extent not specified otherwise in this Agreement. In addition, KBR shall provide, or cause to be provided, all participant information that is necessary or appropriate for the efficient and accurate administration of each Halliburton Plan or program that provides benefits to a KBR Employee during the respective period applicable to such Plan. Halliburton and its respective authorized agents shall, subject to applicable laws of confidentiality and data protection, be given reasonable and timely access to, and may make copies of, all information relating to the subjects of this Agreement in the custody of the other party or its agents, to the extent necessary or appropriate for the administration of said Plans or programs.

(d) Reporting and Disclosing Communications to Participants. While KBR is a Participating Company in the Halliburton Plans, Halliburton shall take, or cause to be taken, all actions necessary or appropriate to facilitate the distribution of all Halliburton Plan-related communications and materials to participating KBR Employees and their

6

beneficiaries, including (without limitation) notices and enrollment material for the Halliburton Plan. KBR shall provide all information needed by Halliburton to facilitate such Halliburton Plan-related communications. KBR shall take, or cause to be taken, all actions necessary or appropriate to facilitate the distribution of all KBR Plan-related communications and materials to participating KBR Employees and their beneficiaries.

(e) Halliburton Under No Obligation to Maintain Plans. Except as specified otherwise in this Agreement, nothing in this Agreement shall preclude Halliburton, at any time, from amending, merging, modifying, terminating, eliminating, reducing, or otherwise altering in any respect any Halliburton Plan, any benefit under any Halliburton Plan or any trust, insurance policy or funding vehicle related to any Halliburton Plan (to the extent permitted by law) in accordance with the applicable governing plan documents.

ARTICLE III

DEFINED BENEFIT AND DEFINED CONTRIBUTION PLANS

SECTION 3.1 Halliburton’s Obligations for Domestic Plans.

(a) Generally. Halliburton hereby affirmatively covenants that, to the extent permitted by law, the Halliburton Qualified Plans shall provide that, effective as of the date on which KBR is no longer a member of the “controlled group” of corporations of Halliburton (as defined in Section 414(b) of the Code), a participant in said Plans who is employed in the KBR Business shall be deemed to have terminated his or her employment under said Plans and, if otherwise eligible under said Plans, shall be eligible to receive a distribution of benefits in accordance with the terms and conditions of said Plans. In addition, Halliburton hereby affirmatively covenants that the Halliburton Qualified Plans shall provide that, effective as of the date on which KBR is no longer a member of the “controlled group” of corporations of Halliburton (as defined in Section 414(b) of the Code), affected employees who participate in the Halliburton Qualified Plans shall be entitled to defer the receipt of their accrued benefits under said Plans, to roll over their accrued benefit amount under said Plans to another eligible retirement plan, or to receive a distribution under said Plans, all subject to the terms and conditions of said Plans and to any taxation and early withdrawal penalties.

(b) Transfer of Sponsorship. The parties acknowledge that Halliburton is designated as the sponsor with respect to the Halliburton NUS Corporation Employees’ Profit Sharing Plan (the “NUS Profit Sharing Plan”) and the Halliburton NUS Corporation Employees’ Pension Plan (the “NUS Pension Plan”), which plans provide benefits solely to KBR employees. On or before the Deconsolidation Date, Halliburton and KBR hereby agree to transfer the sponsorship of the NUS Profit Sharing Plan, the NUS Pension Plan and any other KBR Pension Plan (as applicable) from Halliburton to KBR. Furthermore, from and after the Deconsolidation Date, KBR shall have the sole obligation to provide to KBR Employees any benefits to which such employees are entitled under the NUS Profit Sharing Plan and the NUS Pension Plan, and Halliburton shall be relieved from all obligation or liability for the provision of such benefits to KBR Employees; provided, however, that to the extent any such benefits are funded in a trust maintained by Halliburton, such trust shall be divided between Halliburton and KBR as contemplated in Section 8.6 hereof.

7

(c) Effect on KBR Employees. This Section 3.1 and a KBR Employee’s termination for purposes of the Halliburton Qualified Plans shall have no effect on any KBR Employee’s participation in the KBR Qualified Plans.

SECTION 3.2 Pension. Indemnification. KBR agrees to indemnify Halliburton on a continuing basis against any costs, expenses, penalties, fines or liabilities incurred or suffered by Halliburton (A) in relation to any and all pension liabilities of any member of the KBR Group, including, without limitation, KBR Holdings Limited, Kellogg Brown and Root (UK) Limited, Devonport Management Limited and M.W. Kellogg Ltd., and (B) in relation to the Pension Schemes, including, but not limited to (i) any costs, expenses, penalties, fines, or liabilities to contribute or to provide support which are levied, imposed or incurred pursuant to Sections 38 to 58 of the Pensions Act 2004 as a consequence of KBR or any person connected or associated with KBR participating in the Pension Schemes and (ii) any debt which shall be owing or shall become due from Halliburton in respect of KBR’s participation in the Pension Schemes as a result of the operation of Section 75 or Section 75A of the Pensions Act 1995 or otherwise. Notwithstanding the foregoing, the indemnity in this Section 3.2 shall not apply to any costs, expenses, penalties, fines or liabilities incurred or suffered by Halliburton with respect to any Halliburton Employee.

ARTICLE IV

HEALTH AND WELFARE PLANS; OTHER BENEFITS

SECTION 4.1 Participation in and General Administration of Welfare Plans. Effective as of the IPO Closing Date, Halliburton will provide, to the extent applicable, welfare benefit plans to employees employed in the Halliburton Business and KBR will provide, to the extent applicable, welfare plans to employees employed in the KBR Business, and each shall be solely responsible for the cost of providing such benefits. Each of Halliburton and KBR shall be individually responsible for claims for benefits filed under their respective welfare benefit plans.

SECTION 4.2 Retiree Medical. To the extent a KBR Employee is entitled to retiree medical benefits under a plan or arrangement maintained by the Energy Services Group, Halliburton shall cause the Energy Services Group to provide or continue to provide such retiree medical benefits to such retirees; provided, however, that the Energy Services Group shall have the sole and absolute discretion and authority to interpret said plan or arrangement or amend or terminate said plan or arrangement. Nothing in this Agreement shall obligate KBR to establish, maintain or continue to sponsor a medical benefits plan for retired employees. Halliburton or the appropriate member of the Halliburton Group shall be responsible for the cost of providing the benefits under this Section 4.2.

SECTION 4.3 Vacation. Effective from and after the IPO Closing Date through the Deconsolidation Date, Halliburton shall pay to any Halliburton Employee who transfers employment to a member of the KBR Group a cash payment in satisfaction of such employee’s accrued vacation pay in the Halliburton Company Vacation Pay Plan, and KBR shall pay to any KBR Employee who transfers employment to a member of the Halliburton Group a cash payment in satisfaction of such employee’s interest in the Kellogg Brown & Root Hour Accumulation and Use Plan, each such payment to be paid as soon as practicable but no later than 45 calendar days after such transfer of employment. A Halliburton Employee’s service with

8

the KBR Group prior to such employee’s transfer of employment to Halliburton on or before the Deconsolidation Date shall be considered for purposes of determining the amount of vacation accruals to which such employee is entitled under the applicable Halliburton policies or plans. A KBR Employee’s service with the Halliburton Group prior to such employee’s transfer of employment on or before the Deconsolidation Date to KBR shall be considered for purposes of determining the amount of vacation accruals to which such employee is entitled under the applicable KBR policies or plans.

SECTION 4.4 COBRA and HIPAA. Halliburton and KBR shall each be responsible, respectively, for compliance with the health care continuation coverage requirements of COBRA and the portability requirements under the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) with respect to their respective health and welfare benefit plans.

SECTION 4.5 Leave of Absence and FMLA. KBR hereby acknowledges that KBR shall be responsible for administering leaves of absence and complying with FMLA with respect to KBR Employees. Halliburton shall have the right to conduct an audit of KBR’s compliance with FMLA at any time prior to date on which KBR is no longer a member of the “controlled group” of corporations of Halliburton (as defined in Section 414(b) of the Code). KBR shall continue to make available in connection with the audit all documents and other information that Halliburton reasonably requires. Halliburton shall determine, in its sole discretion, the performance standards, audit methodology, auditing policy and quality measures and reporting requirements.

SECTION 4.6 Workers’ Compensation. KBR hereby acknowledges that KBR has been and shall continue to be responsible for the administration, costs and funding of workers’ compensation claims for KBR Employees prior to the IPO Closing Date, and KBR hereby agrees to assume the administration, costs and funding of workers’ compensation claims with respect to Transferred KBR Employees.

SECTION 4.7 Perquisites. From and after the IPO Closing Date, Halliburton shall have no obligations to provide perquisites to KBR Employees, including, but not limited to, employee physicals, financial counseling or country club or social club memberships.

ARTICLE V

EQUITY AND OTHER COMPENSATION

SECTION 5.1 Executive and Non-Qualified Plans.

(a) Generally. As of the IPO Closing Date, a participant in any of the Halliburton Non-Qualified Plans who is a KBR Employee will continue to participate in said Halliburton Non-Qualified Plans; provided, however, that either KBR or Halliburton may designate a date upon which such KBR Employees cease participation in the Halliburton Non-Qualified Plans by written notice to the other provided at least 30 days prior to the designated date of termination of participation. If not earlier terminated, such KBR Employees’ participation in the Halliburton Non-Qualified Plans shall terminate as of the Deconsolidation Date, except as otherwise provided in this Agreement. Upon the Deconsolidation Date, the KBR Employees’ benefits under the Halliburton Non-Qualified Plans shall be governed by the terms of said Plans.

9

(b) Division of Obligations. During the period beginning on the IPO Closing Date and ending as of the Deconsolidation Date, KBR hereby covenants and agrees to reimburse Halliburton for any expenses or accruals of benefits or interest under the Halliburton Non-Qualified Plans with respect to KBR Employees participating in the Halliburton Non-Qualified Plans, such reimbursement to be paid no later than 30 calendar days after the receipt by KBR of a memorandum that shall set forth in reasonable detail for the period covered: (i) the expenses incurred and the benefits or interest accrued, (ii) the basis for the calculation of such amounts, and (iii) such additional information as KBR may reasonably request at least 30 days in advance of the memorandum. If any portion of the amount attributable to benefit or interest accruals reimbursed by KBR is no longer payable under the terms of the underlying Halliburton Non-Qualified Plan, Halliburton shall refund to KBR the amount of such reimbursement. Effective as of the Deconsolidation Date, KBR shall have the sole obligation to provide to KBR Employees any benefits to which such employees are entitled under the Halliburton Elective Deferral Plan, the Halliburton Company Supplemental Executive Retirement Plan, the Halliburton Company Benefit Restoration Plan and the ERISA Excess Benefit Plan for Dresser Industries Inc., and Halliburton shall be relieved from all obligation or liability for the provision of such benefits to KBR Employees; provided, however, that to the extent any assets associated with the liabilities for these plans are held in a trust maintained by Halliburton, such trust shall be divided between Halliburton and KBR as contemplated in Section 8.6 hereof.

(c) The Dresser Industries Inc. Deferred Compensation Plan. The parties acknowledge that certain active KBR Employees participate in the Dresser Industries Inc. Deferred Compensation Plan. Effective as of the Deconsolidation Date, KBR hereby agrees to assume all obligations and liabilities under the Dresser Industries Inc. Deferred Compensation Plan related to the benefits of the KBR Employees who are active as of the Deconsolidation Date. KBR hereby agrees to create a nonqualified deferred compensation plan (the “Assumed Plan”) to reflect such assumed obligations and liabilities. KBR hereby agrees to indemnify Halliburton against any costs, expenses, penalties, fines or liabilities incurred or suffered by Halliburton as a result of any actions KBR may take or fail to take under the Assumed Plan.

SECTION 5.2 1993 Stock and Incentive Plan. Certain KBR Employees have been granted options and/or restricted stock under the Halliburton Company 1993 Stock and Incentive Plan and participate in the Performance Unit Program under said Plan. No awards will be made under said Plan to KBR Employees after the effective date of this Agreement. The parties agree that all Halliburton Employees and KBR Employees participating in the 2004-2006 performance cycle under the Performance Unit Program as of the IPO Closing Date shall be deemed to have remained employed through the entire 2004-2006 performance cycle for the purpose of determining earned reward amounts under the Performance Unit Program. As of the date that KBR ceases to be a “Subsidiary” as defined in said Plan (the “Plan Divestiture Date”),

10

KBR Employees holding options and/or restricted stock granted under said Plan, or participating in the Performance Unit Program under said Plan, will be considered terminated from employment, and, except as otherwise provided herein, such options, restricted stock or performance units will be governed by the terms of the applicable award agreement and terms of said Plan. With respect to options and restricted stock awards (with restrictions that have not yet lapsed as of the Plan Divestiture Date) held by KBR Employees under the 1993 Stock and Incentive Plan, such options and restricted stock awards shall be converted upon the Plan Divestiture Date to options and restricted stock awards covering KBR common stock with terms, and in a manner, approved by the Compensation Committee of the Board of Halliburton and consented to by the KBR Board (or its compensation committee, if one has been established). Halliburton hereby contributes to the capital of KBR all of Halliburton’s right, title and interest to all shares of restricted KBR stock granted under said Plan that are hereafter forfeited to Halliburton under said Plan following the Plan Divestiture Date.

SECTION 5.3 Employee Stock Purchase Plans. Effective as of January 1, 2007, KBR Employees shall cease to be eligible to participate in the Halliburton Company 2002 Employee Stock Purchase Plan, the Halliburton Company 2002 Non-qualified Stock Purchase Plan and the Halliburton Company UK Employee Share Purchase Plan.

SECTION 5.4 Management Performance Pay Plan and Annual Performance Pay Plan. Prior to the IPO Closing Date, the Halliburton Management Performance Pay Plan and the Halliburton Annual Performance Pay Plan each provide separate metrics with respect to the Halliburton Business and the KBR Business for determining the qualification for and amount of awards under said Plans. Effective after the IPO Closing Date, if a Transferred KBR Employee is assigned new metrics with respect to the KBR Business for determining the qualification for and amount of awards under said Plans, said employee’s award under said Plans shall be determined pro-rata with respect to Halliburton and KBR metrics based upon said employee’s time of service for the Halliburton Group and the KBR Group. KBR agrees to pay the full amount of any compensation payable to a KBR Employee with respect to said Plans, and Halliburton agrees to reimburse KBR for the pro-rata portion of such compensation that corresponds to such employee’s time of service for the Halliburton Group. KBR Employees shall not be eligible to participate in the Halliburton Management Performance Pay Plan or the Halliburton Annual Performance Pay Plan after December 31, 2006.

SECTION 5.5 Deduction under Section 83(h) of the Code. The deduction attributable to equity-based compensation permitted under Section 83(h) of the Code including, without limitation, the deduction attributable to the grant of stock, the vesting of restricted stock, the purchase of stock at a discount under a plan described in Section 5.3, and the exercise of stock options shall generally be allocated to the employer as of the date the amount is includible in the employee’s income, and the taxable income associated with the compensation shall be reported by such employer. Where the issuer or payor of such compensation is in the

11

Halliburton Group or the KBR Group and the employer is in the other Group, the employer will make a payment, or series of payments (including such payments reflected in intercompany accounts), to the issuer or payor equal to the amount of the corresponding tax deduction(s).

ARTICLE VI

SEVERANCE AND STATUTORY SEPARATION LIABILITIES

SECTION 6.1 Severance and Statutory Separation Liabilities. On and after the IPO Closing Date, Halliburton shall be solely responsible for any payments of severance pay benefits or separation benefits required by applicable law, including without limitation the costs associated with plans under which such benefits are provided (“Severance Benefits”), with respect to Halliburton Employees, and KBR shall be solely responsible for any payments of Severance Benefits with respect to KBR Employees, in each case without regard to whether such Severance Benefits are attributable to such employee’s service for a prior employer.

ARTICLE VII

INDEMNIFICATION

SECTION 7.1 Indemnification by Halliburton. Except as otherwise provided in this Agreement, Halliburton shall, for itself and as agent for each member of the Halliburton Group, indemnify, defend (or, where applicable, pay the defense costs for) and hold harmless KBR and its Subsidiaries from and against any and all Benefit Liabilities that any third party seeks to impose upon KBR or its Subsidiaries, or which are imposed upon KBR or its Subsidiaries, if and to the extent such Benefit Liabilities relate to, arise out of or result from any of the following items (without duplication):

(a) any acts or omissions or alleged acts or omissions by or on behalf of any member or person employed by a member of the Halliburton Group in the conduct of the Halliburton Business;

(b) any claim by an officer of any member of the Halliburton Group (who is an officer as of the IPO Closing Date) against any member or employee of any member of the KBR Group; and

(c) any breach by Halliburton or any member or individual employed by a member of the Halliburton Group of this Agreement.

In the event that any member of the Halliburton Group makes a payment to KBR or its Subsidiaries hereunder, and the Benefit Liability on account of which such payment was made is subsequently diminished, either directly or through a third-party recovery, KBR will promptly repay (or will procure a KBR Subsidiary to promptly repay) such member of the Halliburton Group the amount by which the payment made by such member of the Halliburton Group exceeds the actual cost of the associated indemnified Benefit Liability.

SECTION 7.2 Indemnification by KBR. Except as otherwise provided in this Agreement, KBR shall, for itself and as agent for each member of the KBR Group, indemnify, defend (or, where applicable, pay the defense costs for) and hold harmless Halliburton and its Subsidiaries from and against any and all Benefit Liabilities that any third party seeks to impose

12

upon Halliburton or its Subsidiaries, or which are imposed upon Halliburton or its Subsidiaries, if and to the extent such Benefit Liabilities relate to, arise out of or result from any of the following items (without duplication):

(a) any acts or omissions or alleged acts or omissions by or on behalf of any member or person employed by a member of the KBR Group in the conduct of the KBR Business;

(b) any claim by an officer of any member of the KBR Group (who is an officer as of the IPO Closing Date) against any member or employee of any member of the Halliburton Group; and

(c) any breach by KBR or any member or individual employed by a member of the KBR Group of this Agreement.

In the event that any member of the KBR Group makes a payment to Halliburton or its Subsidiaries hereunder, and the Benefit Liability on account of which such payment was made is subsequently diminished, either directly or through a third-party recovery, Halliburton will promptly repay (or will cause a Halliburton Subsidiary to promptly repay) such member of the KBR Group the amount by which the payment made by such member of the KBR Group exceeds the actual cost of the indemnified Benefit Liability.

ARTICLE VIII

CERTAIN TRANSITION MATTERS

SECTION 8.1 Transition Services Agreement. On or about the date hereof, Halliburton and KBR shall enter into the Transition Services Agreement covering the provisions of various services to be provided by Halliburton and its affiliates to KBR. The provisions of this Agreement shall be subject to the provisions of such Transition Services Agreement and to the extent that any provision in this Agreement is inconsistent with a provision in the Transition Services Agreement the provision in the Transition Services Agreement shall control.

SECTION 8.2 Requests for IRS and DOL Opinions. Halliburton and KBR shall make such applications to regulatory agencies, including, without limitation, the IRS and the DOL, as may be necessary or appropriate. Halliburton and KBR shall cooperate fully with one another on any issue relating to the transactions contemplated by this Agreement for which Halliburton and/or KBR elects to seek a determination letter or private letter ruling from the IRS, an advisory opinion from the DOL or similar opinion or ruling from any other regulatory agency, domestic or foreign.

SECTION 8.3 Consent of Third Parties. If any provision of this Agreement is dependent on the consent of any third party (such as a vendor) and such consent is withheld, Halliburton and KBR shall use their commercially reasonable best efforts to implement the applicable provisions of this Agreement. If any provision of this Agreement cannot be implemented due to the failure of such third party to consent, Halliburton and KBR shall negotiate in good faith to implement the provision in a mutually satisfactory manner.

13

SECTION 8.4 Tax Cooperation. In connection with the interpretation and administration of this Agreement, Halliburton and KBR shall take into account the agreements and policies established pursuant to the Separation Agreement and the Tax Sharing Agreement.

SECTION 8.5 Plan Returns. Plan Returns shall be filed or caused to be filed by Halliburton or KBR, as the case may be, in accordance with the principles established in the Tax Sharing Agreement. For purposes of this Section 8.5, “Plan Returns” means any return, report, certificate, form or similar statement or document required to be filed with a government agency with respect to an employee benefit plan or program, domestic or foreign.

SECTION 8.6 Plan and Trust Separation. Either Halliburton or KBR may give notice of termination of their participation in the master trust and other plans or trusts, including international trusts or schemes or their equivalents, maintained for the purpose of funding benefits or arrangements maintained by Halliburton and KBR (“Trusts”) and such Trusts shall be separated with respect to the Halliburton and KBR Plans. The parties shall work together in good faith to complete such separation on commercially reasonable terms and conditions and within a reasonable time period, not to exceed eighteen (18) months from the date of notice, taking into consideration the best interests of the Plan participants as determined by the appropriate plan sponsor or fiduciary, including without limitation the appointment of trustees and establishment of trust agreements. Halliburton and KBR understand that the Trusts separately account for the assets of each Halliburton Plan and KBR Plan, and upon separation of such Trusts, the assets allocated to each Plan shall be transferred to a trust or funding arrangement established for such Plan in accordance with the directions of the appropriate plan sponsor or fiduciary. In the event a Trust does not separately account for the assets of each Halliburton Plan and KBR Plan, the separation will be implemented in a way that equitably and fairly reflects the assets or benefits payable under the terms of such Plan. In addition, to the extent any of the Canadian Plans provide benefits to both Halliburton Employees and KBR Employees, KBR agrees to cooperate with Halliburton to facilitate the separation of the Canadian Plans. In the event of disagreement among the parties with respect to a Trust separation, such disagreement shall be settled in accordance with the provisions of Article VII of the Separation Agreement, which includes binding arbitration as its final step.

ARTICLE IX

EMPLOYMENT-RELATED MATTERS

SECTION 9.1 Terms of KBR Employment. Employees of the KBR Group may be required to execute a new agreement regarding confidential information and proprietary developments in a form approved by KBR. In addition, nothing in this Agreement, the Separation Agreement, the Transition Services Agreement or the Tax Sharing Agreement should be construed to change the at-will status of any of the employees of any member of the Halliburton Group or the KBR Group.

SECTION 9.2 Non-Termination of Employment; No Third-Party Beneficiaries. No provision of this Agreement shall be construed to create any right, or accelerate entitlement, to any compensation or benefit whatsoever on the part of any KBR Employee or other future, present or former employee of Halliburton, KBR, the Halliburton Group or the KBR Group under any Halliburton Plan or KBR Plan or otherwise. Without

14

limiting the generality of the foregoing: (a) except as otherwise provided in this Agreement or applicable provisions of the Plans, neither the IPO, the Separation nor the termination of the Participating Company status of KBR or any member of the KBR Group shall cause any employee to be deemed to have incurred a termination of employment; and (b) except as otherwise provided in this Agreement, no transfer of employment between the Halliburton Group and the KBR Group before the IPO Closing Date shall be deemed a termination of employment for any purpose hereunder.

ARTICLE X

GENERAL PROVISIONS

SECTION 10.1 Effect if IPO does not Occur. Subject to Section 10.10, if the IPO does not occur, then all actions and events that are, under this Agreement, to be taken or occur effective as of the IPO Closing Date, or otherwise in connection with the IPO, shall not be taken or occur except to the extent specifically agreed by the parties.

SECTION 10.2 Limitation of Liability. TO THE EXTENT THAT HALLIBURTON OR ANY MEMBER OF THE HALLIBURTON GROUP PROVIDES SERVICES UNDER THIS AGREEMENT TO KBR, AND SUCH SERVICES ARE NOT OTHERWISE ADDRESSED IN THE TRANSITION SERVICES AGREEMENT, SUCH SERVICES SHALL BE PERFORMED WITH THE SAME GENERAL DEGREE OF CARE AS WHEN PERFORMED WITHIN THE HALLIBURTON ORGANIZATION. KBR HEREBY EXPRESSLY WAIVES ANY RIGHT KBR MAY OTHERWISE HAVE FOR ANY LOSSES, TO ENFORCE SPECIFIC PERFORMANCE OR TO PURSUE ANY OTHER REMEDY AVAILABLE IN CONTRACT, AT LAW, OR IN EQUITY IN THE EVENT OF ANY NON-PERFORMANCE, INADEQUATE PERFORMANCE, FAULTY PERFORMANCE OR OTHER FAILURE OR BREACH BY HALLIBURTON OR ANY MEMBER OF THE HALLIBURTON GROUP UNDER OR RELATING TO THIS AGREEMENT, NOTWITHSTANDING THE NEGLIGENCE (WHETHER SOLE, JOINT OR CONCURRENT OR ACTIVE OR PASSIVE) OF HALLIBURTON OR ANY MEMBER OF THE HALLIBURTON GROUP OR ANY OTHER PERSON OR ENTITY INVOLVED IN THE PROVISION OF SERVICES AND WHETHER DAMAGES ARE ASSERTED IN CONTRACT OR TORT, UNDER FEDERAL, STATE OR FOREIGN LAWS OR OTHER STATUTE OR OTHERWISE; PROVIDED, HOWEVER, THAT THE FOREGOING WAIVER SHALL NOT EXTEND TO COVER, AND HALLIBURTON SHALL BE RESPONSIBLE FOR, SUCH LOSSES CAUSED BY GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF HALLIBURTON, ANY MEMBER OF THE HALLIBURTON GROUP OR ANY THIRD PARTY SERVICE PROVIDER HEREUNDER.

SECTION 10.3 Relationship of Parties. Nothing in this Agreement shall be deemed or construed by the parties or any third party as creating a fiduciary relationship, a relationship of principal and agent, partnership or joint venture between the parties, the understanding and agreement being that no provision contained herein, and no act of the parties, shall be deemed to create any relationship between the parties other than the relationship set forth herein. This Agreement shall be binding upon and inure solely to the benefit of and be enforceable by each party and its respective successors and permitted assigns. Nothing in this Agreement, express or implied, is intended to or shall confer upon any other person any right, benefit or remedy of any nature whatsoever under or by reason of this Agreement.

15

SECTION 10.4 Incorporation of Separation Agreement Provisions. If a dispute, claim or controversy results from or arises out of or in connection with this Agreement, the parties agree to use the procedures set forth in Article VII of the Separation Agreement in lieu of other available remedies, to resolve same. The provisions of Sections 9.1 (Limitation of Liability) and 9.5 (Notices) of the Separation Agreement are hereby incorporated herein by reference, and unless otherwise expressly specified herein, such provisions shall apply as if fully set forth herein (references in this Section 10.4 to an “Article” or a “Section” shall mean Articles or Sections of the Separation Agreement, and, except as expressly set forth herein, references in the material incorporated herein by reference shall be references to the Separation Agreement).

SECTION 10.5 Governing Law. To the extent not preempted by applicable federal law, this Agreement shall be governed by, construed and interpreted in accordance with the laws of the State of Delaware, irrespective of the choice of law principles of the State of Delaware, as to all matters, including matters of validity, construction, effect, performance and remedies.

SECTION 10.6 Severability. If any term or other provision of this Agreement is determined to be invalid, illegal or incapable of being enforced by any rule of law or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to either party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible and in an acceptable manner to the end that transactions contemplated hereby are fulfilled to the fullest possible extent.

SECTION 10.7 Amendment. Halliburton and KBR may mutually agree to amend the provisions of this Agreement at any time or times, either prospectively or retroactively, to such extent and in such manner as the Boards mutually deem advisable. Each Board may delegate its amendment power, in whole or in part, to one or more Persons or committees as it deems advisable.

SECTION 10.8 Assignment. Neither this Agreement nor any of the rights, interests or obligations hereunder may be assigned by a party without the prior written consent of the other party, except that the any party may at any time assign any or all of its rights or obligations hereunder to one of its wholly owned subsidiaries (but no such assignment shall relieve such party of any of its obligations under this Agreement).

SECTION 10.9 No Strict Construction; Cooperation of the Parties. The language this Agreement uses shall be deemed to be the language the parties hereto have chosen to reflect their mutual intent, and no rule of strict construction or presumption based upon the party that has drafted this Agreement shall be applied against any party hereto. The parties acknowledge that the names used for Plans under this Agreement may not be the sole name designated for such Plans, but the parties acknowledge and agree to recognize the Plans under the names used herein. To the extent that issues arise related to the subject matter hereof that are not specifically addressed by this Agreement, the parties will cooperate to address such issues in the same manner and using the same principles provided in this Agreement.

16

SECTION 10.10 Termination. This Agreement may be terminated at any time prior to the IPO Closing Date by Halliburton in its sole discretion (without the approval of KBR). This Agreement may be terminated at any time after the IPO Closing Date by mutual consent of Halliburton and KBR. In the event of termination pursuant to this Section, no party shall have any liability of any kind under this Agreement to the other party.

SECTION 10.11 Conflict. In the event of any conflict between the provisions of this Agreement and the Separation Agreement or any Plan, the provisions of this Agreement shall control. In the event of any conflict between the provisions of this Agreement and the Transition Services Agreement, the provisions of the Transition Services Agreement shall control.

SECTION 10.12 Counterparts. This Agreement may be executed in two or more counterparts each of which shall be deemed to be an original, but all of which together shall constitute but one and the same Agreement.

IN WITNESS WHEREOF, each of the parties has caused this Employee Matters Agreement to be executed on its behalf by its officers thereunto duly authorized on the day and year first above written.

HALLIBURTON COMPANY

By:

Name:

Title:

KBR, INC.

By:

Name:

Title:

17

EX-10.7

Exhibit 10.7

FORM OF

INTELLECTUAL PROPERTY MATTERS AGREEMENT

BETWEEN

HALLIBURTON COMPANY

and

KBR, INC.

Dated                             , 2006

TABLE OF CONTENTS

		Page
ARTICLE I DEFINITIONS		1
ARTICLE II OWNERSHIP OF INTELLECTUAL PROPERTY		7
SECTION 2.1	KBR’s Ownership	7
SECTION 2.2	Halliburton’s Ownership	7
SECTION 2.3	KBR Marks and Halliburton Marks	7
ARTICLE III LICENSES TO HALLIBURTON		8
SECTION 3.1	KBR Patents	8
SECTION 3.2	KBR Licensed Other IP	8
SECTION 3.3	KBR Third Party Patents	8
SECTION 3.4	Technology Fees	8
SECTION 3.5	Retained Rights	9
SECTION 3.6	Reports; Audit Right	9
ARTICLE IV LICENSES TO KBR		10
SECTION 4.1	Halliburton Patents	10
SECTION 4.2	Halliburton Licensed Other IP	10
SECTION 4.3	Halliburton Third Party Patents	10
SECTION 4.4	Retained Rights	10
ARTICLE V OTHER AGREEMENTS		10
SECTION 5.1	Conflict	10
SECTION 5.2	Software License Agreement	10
ARTICLE VI MAINTENANCE AND ENFORCEMENT		11
SECTION 6.1	Prosecution and Maintenance of IP Rights	11
SECTION 6.2	Enforcement of IP Rights	11
ARTICLE VII CONFIDENTIALITY		11
SECTION 7.1	Confidentiality	11
SECTION 7.2	Equitable Relief	12
ARTICLE VIII WARRANTIES AND INDEMNIFICATION		12
SECTION 8.1	No Representation or Warranty	12
SECTION 8.2	Indemnification by Halliburton	12
SECTION 8.3	Indemnification by KBR	13
SECTION 8.4	Procedures for Indemnification of Third Party Claims	13
SECTION 8.5	Mitigation of Damages	15
ARTICLE IX TERM AND TERMINATION		15
SECTION 9.1	Term	15
SECTION 9.2	Termination	15

i

ARTICLE X GENERAL PROVISIONS		16
SECTION 10.1	Effect if IPO does not Occur	16
SECTION 10.2	Relationship of Parties	16
SECTION 10.3	Incorporation of Separation Agreement Provisions	16
SECTION 10.4	Governing Law; Jurisdiction	16
SECTION 10.5	Severability	17
SECTION 10.6	Amendment	17
SECTION 10.7	Assignment	17
SECTION 10.8	No Strict Construction	17
SECTION 10.9	Further Assurances	17
SECTION 10.10	Counterparts	17

ii

INTELLECTUAL PROPERTY MATTERS AGREEMENT

This INTELLECTUAL PROPERTY MATTERS AGREEMENT (this “Agreement”) is entered into as of the              day of                                 , 2006 by and between Halliburton Company, a Delaware corporation (“Halliburton”), and KBR, Inc., a Delaware corporation (“KBR”). Capitalized terms used herein and not otherwise defined shall have the respective meanings assigned to them in Article I hereof or in the Master Separation Agreement (as defined below).

WHEREAS, the Board of Directors of Halliburton has determined that it is in the best interests of Halliburton and its shareholders to make an initial public offering (“IPO”) of shares of KBR common stock;

WHEREAS, in order to effectuate the foregoing, Halliburton and KBR have entered into a Master Separation Agreement, dated as of the date hereof (the “Separation Agreement”), which provides, among other things, subject to the terms and conditions thereof, for the Separation, the IPO, and the execution and delivery of certain other agreements, including this Agreement, in order to facilitate and provide for the foregoing; and

WHEREAS, in order to facilitate implementation of the Separation Agreement, Halliburton, on behalf of itself and the Halliburton Group (as defined below), and KBR, on behalf of itself and the KBR Group (as defined below), are entering into this Agreement to allocate between them assets, liabilities and responsibilities with respect to certain intellectual property.

NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements herein contained, the parties, intending to be legally bound, agree as follows:

ARTICLE I

DEFINITIONS

Wherever used in this Agreement, the following terms shall have the meanings indicated below, unless a different meaning is plainly required by the context. The singular shall include the plural, unless the context indicates otherwise. Headings of sections are used for convenience of reference only, and in case of conflict, the text of this Agreement, rather than such headings, shall control:

“Action” means any demand, action, suit, countersuit, arbitration, inquiry, proceeding or investigation by or before any federal, state, local, foreign or international Governmental Authority or any arbitration or mediation tribunal.

“Agreement” means this Intellectual Property Matters Agreement and all amendments made hereto from time to time.

“Appropriate Members of the Halliburton Group” shall have the meaning set forth in Section 8.2.

“Appropriate Members of the KBR Group” shall have the meaning set forth in Section 8.3.

“Change of Control” means that as the result of an event or series of events, one or more parties unaffiliated with KBR or Halliburton, acquires 50% or more of the ownership or control, direct or indirect, of KBR or Halliburton.

“Coal Gasification Field of Use” means the fields of business and operations, whether or not previously conducted by Halliburton or KBR, related to the engineering, construction and operation of facilities for coal gasification.

“Coal Gasification Technology” means the coal gasification technologies identified in Attachment A hereto. For the avoidance of doubt, Coal Gasification Technology is a subset of KBR Patents and KBR Other IP.

“Coal Producing and Processing Companies” means those Persons whose business includes the production, sale or processing of coal, and excludes, without limitation, those Persons whose principal business is the provision of engineering and/or construction services and those Persons whose principal business is the provision of upstream oilfield services.

“Confidential IP Information” shall have the meaning set forth in Section 7.1 hereof.

“Field Processing Field of Use” means the fields of business and operations, whether or not previously conducted by Halliburton or KBR, related to the engineering, construction and operation of facilities for the upgrading of hydrocarbons or non-hydrocarbons associated with production from subterranean formations via wells, and disposition of hydrocarbon and non-hydrocarbon byproduct materials, all of the foregoing when performed generally proximate to the location from which the hydrocarbons and/or non-hydrocarbons are produced in conjunction with an integrated customer project which additionally includes upstream field development activities (e.g., one or more of well construction; formation or reservoir evaluation; completion; production enhancement, monitoring, and/or optimization). To be clear, the Field Processing Field of Use comprises the engineering, construction and operation of facilities for the upgrading of hydrocarbons or non-hydrocarbons as aforesaid and does not comprise the upstream field development activities associated therewith, and also does not comprise the refining of hydrocarbons beyond the scope of the Upgrade Technology.

“Government and Infrastructure Persons” means Persons of the kind and type with which KBR conducts business through its Government and Infrastructure segment as of the IPO Closing Date, and excludes those Persons whose principal business is the provision of upstream oilfield services.

“Halliburton” means Halliburton Company, a Delaware corporation. In all such instances in which “Halliburton” is referred to in this Agreement, it shall also be deemed to include a reference to each or any member of the Halliburton Group, unless it specifically provides otherwise; Halliburton shall be solely responsible to KBR for ensuring that each member of the Halliburton Group complies with the applicable terms of this Agreement.

2

“Halliburton Fields of Use” means (a) the fields of the business and operations conducted by Halliburton on the IPO Closing Date, (b) all fields of use other than the KBR Fields of Use, (c) the Field Processing Field of Use, (d) the Coal Gasification Field of Use, and (e) the Riser Field of Use.

“Halliburton Group” shall have the meaning set forth in the Separation Agreement.

“Halliburton Indemnitees” shall have the meaning set forth in Section 8.3.

“Halliburton Licensed Other IP” means all Halliburton Other IP used by KBR prior to the IPO Closing Date.

“Halliburton Marks” means all trademarks, service marks, logos, trade names, business names and trade dress owned by Halliburton immediately prior to the IPO Closing Date.

“Halliburton Other IP” means all intellectual property (including, without limitation, trade secrets, copyrights, and know-how) owned by Halliburton immediately prior to the IPO Closing Date, but excluding the Halliburton Patents and the Halliburton Marks.

“Halliburton Patents” means those patents and patent applications which are owned by Halliburton immediately prior to the IPO Closing Date.

“Halliburton Third Party Patents” means those patents that are not owned by Halliburton or KBR but to which Halliburton has rights under a license agreement with a third party immediately prior to the IPO Closing Date.

“Indemnifying Party” shall have the meaning set forth in Section 8.4(a).

“Indemnitee” shall have the meaning set forth in Section 8.4(a).

“IP Rights” means the Halliburton Patents, Halliburton Marks, Halliburton Licensed Other IP, KBR Patents, KBR Marks, and KBR Licensed Other IP.

“IPO” has the meaning set forth in the Recitals hereof, as the same is further described in the Separation Agreement.

“IPO Closing Date” means the first date on which the proceeds of any sale of KBR Common Stock to the underwriters in the IPO are received.

“KBR” means KBR, Inc., a Delaware corporation. In all such instances in which KBR is referred to in this Agreement, it shall also be deemed to include a reference to each or any member of the KBR Group, unless it specifically provides otherwise; KBR shall be solely responsible to Halliburton for ensuring that each member of the KBR Group complies with the applicable terms of this Agreement.

“KBR Data” shall have the meaning set forth in Section 5.2.

3

“KBR Fields of Use” means (a) the fields of the business and operations conducted by KBR on the IPO Closing Date, (b) except as otherwise specifically provided in the Separation Agreement, the fields of any terminated, divested or discontinued business or operation that at the time of such termination, divestiture or discontinuation was conducted by KBR, (c) the Field Processing Field of Use, (d) the Coal Gasification Field of Use, (e) the Riser Field of Use, and (f) the fields of the following global engineering, procurement, construction, technology and other services provided to energy and industrial customers and government entities worldwide:

(i) construction, maintenance, procurement, training and logistics services for government or military operations, facilities and installations;

(ii) civil engineering, construction, consulting and project management services for state and local government agencies and private industries;

(iii) integrated security solutions, including threat definition assessments, mitigation and consequence management; design, engineering and program management; construction and delivery; and physical security, operations and maintenance;

(iv) dockyard, military or aircraft facilities operation and management, with services that include design, construction, surface/subsurface/airborne fleet maintenance, nuclear engineering and refueling, and weapons engineering;

(v) privately financed initiatives such as a facility, service or infrastructure for a government client, and the ownership, operation and maintenance of same;

(vi) engineering and construction capabilities, including global engineering execution centers, as well as engineering, construction and program management of liquefied natural gas, gas-to-liquids (“GTL”), ammonia, fertilizers, petrochemicals, crude oil refineries, power generation facilities and natural gas plants;

(vii) oil and gas facilities engineering, marine technology and project management;

(viii) operations, maintenance and start-up services to the oil and gas, petrochemical, forest product, power and commercial markets;

(ix) technology licensing in the areas of: ammonia, fertilizers and synthesis gas; petrochemicals; refining; upgrading of hydrocarbons; chemicals and polymers in non-oil field services industries; subsea risers; and coal monetization at the surface and associated downstream processing; and

(x) consulting services in the form of expert technical and management advice that includes studies, conceptual and detailed engineering, project

4

management, construction supervision and design, and construction verification or certification in upstream, midstream and downstream markets.

Notwithstanding the above, “KBR Fields of Use” excludes the following fields of product or service delivery and technology licensing (including, without limitation, software and data processing):

(A) exploration for hydrocarbons;

(B) products used in well construction or within a well;

(C) services relating to a well or proximate geological formation;

(D) products or services relating to production and/or production optimization from one or more wells and/or reservoirs, including, without limitation, the RTO field of the intellectual properties assigned January 1, 2005 from Kellogg Brown and Root, Inc. to Landmark Graphics Corporation of the Halliburton Group under Contract Number 2005-COM-028432, but not including design or installation of surface or sea-bottom facilities;

(E) hydrocarbon reservoir engineering or modeling;

(F) any of consulting services, project management, and/or supervision, in relation to any of hydrocarbon exploration, well construction, production from one or more wells and/or hydrocarbon reservoirs; and

(G) any of the chemical compositions patented and owned by Halliburton.

“KBR Group” shall have the meaning set forth in the Separation Agreement.

“KBR Indemnitees” shall have the meaning set forth in Section 8.2.

“KBR Licensed Other IP” means the KBR Other IP used by Halliburton prior to the IPO Closing Date, the Upgrade Technology, the Riser Technology, and the Coal Gasification Technology.

“KBR Marks” means all trademarks, service marks, logos, trade names, business names and trade dress owned by KBR immediately prior to the IPO Closing Date.

“KBR Other IP” means all intellectual property (including, without limitation, trade secrets, copyrights, and know-how) owned by KBR immediately prior to the IPO Closing Date, but excluding all KBR Patents and KBR Marks.

“KBR Patents” shall mean those patents and patent applications which are owned by KBR immediately prior to the IPO Closing Date and any patents claiming any of the Upgrade Technology, Riser Technology, or Coal Gasification Technology.

5

“KBR Third Party Patents” means those patents that are not owned by Halliburton or KBR but to which KBR has rights under a license agreement with a third party immediately prior to the IPO Closing Date.

“Losses” shall have the meaning set forth in the Separation Agreement.

“Oil and Gas Producing Companies” means those Persons whose principal business is the production and sale of oil and gas, and excludes, without limitation, those Persons whose principal business is the provision of engineering and/or construction services and those Persons whose principal business is the provision of upstream oilfield services.

“Refining or Industrial Processing Companies” means those Persons whose principal business is the refining of hydrocarbons and sale of refined products, or Persons whose principal business is other industrial processing and whose products are included in the KBR Fields of Use, and excludes, without limitation, those Persons whose principal business is the provision of upstream oilfield services.

“Person” means an individual, a partnership, a corporation, a limited liability company, an association, a joint stock company, a trust, a joint venture, an unincorporated organization or a governmental entity or any department, agency or political subdivision thereof.

“Riser Field of Use” means the fields of business and operations, whether or not previously conducted by Halliburton or KBR, related to the engineering, construction and operation of subsea riser facilities.

“Riser Technology” means the KBR Patents and KBR Other IP covering subsea risers, their interface to other equipment (including, without limitation, either subsea or on platforms), riser construction, operation, installation, removal, and any riser related services, and specifically including KBR’s “Compliant Vertical Access Riser” technology, owned by KBR on or before the effective date of the Intellectual Property Matters Agreement. For the avoidance of doubt, Riser Technology is a subset of KBR Patents and KBR Other IP.

“ROSE™ Technology” means the Residuum Oil Supercritical Extraction heavy oil technology of KBR identified on Attachment B hereto.

“Separation” shall have the meaning set forth in the Separation Agreement.

“Separation Agreement” means the Master Separation Agreement between Halliburton Company and KBR, Inc. entered into as of                             , 2006.

“Software License Agreements” shall have the meaning set forth in Section 5.2.

“Third Party Claims” shall have the meaning set forth in Section 8.4(a).

“Upgrade Technology” means the field upgrade technologies identified in Attachment B hereto including, without limitation, ROSE™ Technology. For the avoidance of doubt, Upgrade Technology is a subset of KBR Patents and KBR Other IP.

6

ARTICLE II

OWNERSHIP OF INTELLECTUAL PROPERTY

SECTION 2.1 KBR’s Ownership. Halliburton expressly acknowledges that, as between the parties, KBR is the sole and exclusive owner of the KBR Patents, the KBR Other IP, and the KBR Marks, and Halliburton agrees that it shall do nothing inconsistent with such ownership. KBR shall exercise full control over KBR Patents, KBR Other IP, and the KBR Marks, which includes (a) the right to sell or transfer its ownership interests in the KBR Patents, KBR Other IP, and the KBR Marks, provided that any such sale or transfer shall be made subject to Halliburton’s rights under this Agreement, and (b) the right to abandon its proprietary rights in the trade secrets and know how which are part of the KBR Other IP by disclosure or otherwise. Halliburton shall not claim or assert any right of ownership in or to the KBR Patents, KBR Other IP, or the KBR Marks and shall not initiate any litigation, administrative proceeding or regulatory or other action that could destroy, damage, or impair in any way the ownership or rights of KBR in and to the KBR Patents, KBR Other IP or the KBR Marks and shall not assist any other Person in doing the same.

SECTION 2.2 Halliburton’s Ownership. KBR expressly acknowledges that, as between the parties, Halliburton is the sole and exclusive owner of the Halliburton Patents, Halliburton Other IP, and the Halliburton Marks, and KBR agrees that it shall do nothing inconsistent with such ownership. Halliburton shall exercise full control over Halliburton Patents, Halliburton Other IP and the Halliburton Marks, which includes (a) the right to sell or transfer its ownership interests in the Halliburton Patents, Halliburton Other IP, and the Halliburton Marks provided that any such sale or transfer shall be made subject to KBR’s rights under this Agreement, and (b) the right to abandon its proprietary rights in the trade secrets and know how which are part of the Halliburton Other IP by disclosure or otherwise. KBR shall not claim or assert any right of ownership in or to the Halliburton Patents, Halliburton Other IP, or Halliburton Marks and shall not initiate any litigation, administrative proceeding or regulatory or other action that could destroy, damage, or impair in any way the ownership or rights of Halliburton in and to the Halliburton Patents, the Halliburton Other IP or the Halliburton Marks and shall not assist any other Person in doing the same.

SECTION 2.3 KBR Marks and Halliburton Marks. Immediately upon the IPO Closing Date, KBR shall cease all use of the Halliburton Marks, including without limitation any such use on KBR’s websites, and Halliburton shall cease all use of the KBR Marks, including without limitation any such use on Halliburton’s websites. KBR shall not adopt any trademarks, service marks, logos, trade names, business names, or trade dress confusingly similar to the Halliburton Marks, and Halliburton shall not adopt any trademarks, service marks, logos, trade names, business names or trade dress confusingly similar to the KBR Marks. Notwithstanding the above, KBR agrees that Halliburton may continue, after the IPO Closing Date, to use the term “Kellogg,” “KBR” or “Kellogg Brown & Root” as part of the name of one Halliburton Group entity that will serve as a holding company and will not directly provide any goods or services.

7

ARTICLE III

LICENSES TO HALLIBURTON

SECTION 3.1 KBR Patents. Subject to the terms and conditions set forth in this Agreement (and, with respect to the Coal Gasification Technology, to the extent permitted under its current agreements with Southern Company Services, Inc. (“Southern”) and the United States Department of Energy (“DOE”)), KBR hereby grants to Halliburton a royalty-free, non-exclusive, worldwide license in the Halliburton Fields of Use to all rights available under the KBR Patents, limited only by Halliburton’s confidentiality and non-use obligations hereunder. Halliburton shall have the right to grant sublicenses under such KBR Patents in the Halliburton Fields of Use (and with respect to the Coal Gasification Technology, to the extent permitted under KBR’s current agreements with Southern and DOE) only to Oil and Gas Producing Companies and Coal Producing and Processing Companies, and subject to Section 3.4. Except as otherwise provided in this Agreement, the license in this Section 3.1 shall remain in effect for the life of such KBR Patents.

SECTION 3.2 KBR Licensed Other IP. Subject to the terms and conditions set forth in this Agreement, KBR hereby grants to Halliburton a royalty-free, non-exclusive, worldwide license in the Halliburton Fields of Use (and with respect to the Coal Gasification Technology, to the extent permitted under KBR’s current agreements with Southern and DOE) to all rights available under the KBR Licensed Other IP, limited only by Halliburton’s confidentiality and non-use obligations hereunder. Halliburton shall have the right to grant sublicenses only to Oil and Gas Producing Companies and Coal Producing and Processing Companies under such KBR Licensed Other IP in the Halliburton Fields of Use (and with respect to the Coal Gasification Technology, to the extent permitted under KBR’s current agreements with Southern and DOE), subject to Section 3.4, for such Oil and Gas Producing Companies’ and Coal Producing and Processing Companies’ use of products or services that are provided by Halliburton and embody the KBR Licensed Other IP. Except as otherwise provided in this Agreement, the license in this Section 3.2 shall remain in effect for the life of such KBR Licensed Other IP.

SECTION 3.3 KBR Third Party Patents. Upon the request of Halliburton and to the extent permitted under KBR’s license agreements with third parties and under its current agreements with Southern and DOE, KBR shall grant to Halliburton a sublicense to the KBR Third Party Patents in the Halliburton Fields of Use to the full extent, and on the most favorable terms, allowed under KBR’s license agreements. Except as otherwise provided in this Agreement, any such sublicense shall remain in effect so long as KBR’s right to grant sublicenses remains in effect.

SECTION 3.4 Upgrade Technology, Riser Technology and Coal Gasification Technology Fees. Halliburton acknowledges that KBR may charge its customers license and engineering fees in connection with the design and use of the Upgrade Technology, Riser Technology and the Coal Gasification Technology. In the event of (a) a sub-license under the Upgrade Technology or Riser Technology from Halliburton to an Oil and Gas Producing Company or a Coal Producing and Processing Company to practice the Upgrade Technology or Riser Technology, (b) Halliburton’s use of the Riser Technology in the Riser Field of Use, (c) Halliburton’s use of the Upgrade Technology in the Field Processing Field of Use, (d) a sub-license under the Coal Gasification Technology from Halliburton to a Coal Producing and

8

Processing Company or an Oil and Gas Producing Company to practice the Coal Gasification Technology, or (e) Halliburton’s use of the Coal Gasification Technology in the Coal Gasification Field of Use, Halliburton will pay to KBR such license and engineering fees agreed to by KBR, being commercially reasonable and consistent with KBR practices at the time, and upon terms and conditions agreed to by KBR, such terms and conditions also being commercially reasonable and consistent with KBR practices at the time. In the event of Halliburton being a KBR customer (as differentiated from being a licensee, in which case KBR shall include its license and engineering fees in accordance with the preceding sentence) for KBR’s engineering, construction, and/or operation of facilities utilizing Upgrade Technology, Riser Technology or Coal Gasification Technology, then KBR shall include said license and engineering fees and terms, which shall be commercially reasonable and consistent with KBR practices at the time, in its pricing to Halliburton. In the event KBR is obligated to pay any third party any amounts due to the use or sublicense by Halliburton of any rights granted in this Agreement, such amounts being in addition to such license and engineering fees and equally applicable to any party were such party to be in Halliburton’s position, Halliburton shall, at KBR’s discretion, either pay such amounts on KBR’s behalf to such third party when due, or pay such amounts promptly to KBR.

SECTION 3.5 Retained Rights. Except as expressly set forth in Sections 3.1, 3.2 and 3.3 of this Agreement, no other intellectual property rights are granted to Halliburton by KBR hereunder, whether by implication or otherwise, and KBR hereby reserves all such intellectual property rights it otherwise has, including the right to develop and own intellectual property in the Halliburton Fields of Use.

SECTION 3.6 Reports; Audit Right. Halliburton shall provide KBR an annual report on or prior to the first and each subsequent anniversary of the IPO Closing Date describing all activities of Halliburton relating to the offering to sublicense and/or sublicensing of any rights granted to it under this Agreement to which a fee attaches pursuant to Section 3.4. Halliburton shall maintain for a period of three (3) years following the date of each royalty report and payment due under this Agreement accurate and complete books and records which support the determination of the royalty payment which was due under this Agreement on the date of that report and payment. Such books and records shall be kept in accordance with generally accepted accounting principles. Upon twenty (20) days’ written notice, Halliburton shall permit the examination of such records, at KBR’s expense, by the KBR or its designated representative, at any time during normal business hours throughout the term of this Agreement and for three (3) years following its termination, for the purpose of verifying the payments due hereunder. If any such examination reveals that an error has been made in Halliburton’s favor in the amount of royalties paid for any calendar year equal to five percent (5%) or more of such payments, then the cost of the audit shall be paid by Halliburton. Any error in royalty payments shall be corrected by payment of an amount equal to

one hundred ten percent (110%) of that which Halliburton has failed to report or pay, within thirty (30) days of receipt by Halliburton of written notice of such failure to pay.

9

ARTICLE IV

LICENSES TO KBR

SECTION 4.1 Halliburton Patents. Subject to the terms and conditions set forth in this Agreement, Halliburton hereby grants to KBR a royalty-free, non-exclusive, worldwide license in the KBR Fields of Use to all rights available under the Halliburton Patents, limited only by KBR’s confidentiality and non-use obligations hereunder. KBR shall have the right to grant sublicenses only to its customers who are Oil and Gas Producing Companies or Refining or Industrial Processing Companies or Coal Producing and Processing Companies or Government and Infrastructure Persons under the Halliburton Patents in the KBR Fields of Use. Except as otherwise provided in this Agreement, the license in this Section 4.1 shall remain in effect for the life of the Halliburton Patents.

SECTION 4.2 Halliburton Licensed Other IP. Subject to the terms and conditions set forth in this Agreement, Halliburton hereby grants KBR a royalty-free, non-exclusive, worldwide license in the KBR Fields of Use to all rights available under the Halliburton Licensed Other IP, limited only by KBR’s confidentiality and non-use obligations hereunder. KBR shall have the right to grant sublicenses only to its customers who are Oil and Gas Producing Companies or Refining or Industrial Processing Companies or Coal Producing and Processing Companies or Government and Infrastructure Persons under the Halliburton Licensed Other IP in the KBR Fields of Use for such customers’ use of products or services that are provided by KBR and embody the Halliburton Licensed Other IP. Except as otherwise provided in this Agreement, the license in this Section 4.2 shall remain in effect for the life of the Halliburton Licensed Other IP.

SECTION 4.3 Halliburton Third Party Patents. Upon the request of KBR and to the extent permitted under Halliburton’s license agreements with third parties, Halliburton shall grant to KBR a sublicense to the Halliburton Third Party Patents in the KBR Fields of Use to the full extent, and on the most favorable terms, allowed under Halliburton’s license agreements. Except as otherwise provided in this Agreement, any such sublicense shall remain in effect so long as Halliburton’s right to grant sublicenses remains in effect.

SECTION 4.4 Retained Rights. Except as expressly set forth in Sections 4.1, 4.2 and 4.3 of this Agreement, no other intellectual property rights are granted to KBR by Halliburton hereunder, whether by implication or otherwise, and Halliburton hereby reserves all such intellectual property rights it otherwise has, including without limitation the right to develop and own intellectual property in the KBR Fields of Use.

ARTICLE V

OTHER AGREEMENTS

SECTION 5.1 Conflict. In the event of any conflict between the provisions of this Agreement and the Separation Agreement, the provisions of this Agreement shall control.

SECTION 5.2 Software License Agreement. The terms and conditions of this Agreement shall not apply to those Software License Agreements between Halliburton Energy Services, Inc. and Kellogg Brown & Root LLC, dated                                     , providing licenses for the internal use of certain administrative software (the “Software License Agreements”). Except as

10

otherwise explicitly stated in the Software License Agreements, all data associated with or contained in the software assigned or licensed under the Software License Agreements shall be treated as follows: (a) data primarily related to activities in the KBR Fields of Use prior to the IPO Closing Date (“KBR Data”) shall be considered KBR Other IP hereunder and (b) all such data other than KBR Data shall be considered Halliburton Other IP hereunder.

ARTICLE VI

MAINTENANCE AND ENFORCEMENT

SECTION 6.1 Prosecution and Maintenance of IP Rights. The party who is the owner of any of the IP Rights shall, during the term of this Agreement, be responsible for all actions and costs relating to the prosecution, protection, and maintenance of such IP Rights, including without limitation prosecuting patent applications and maintaining existing and future patents. The IP Rights subject to this Agreement shall include all rights which result from any application, prosecution, protection or maintenance of the IP Rights.

SECTION 6.2 Enforcement of IP Rights. In the event that a party learns that any IP Rights licensed to it hereunder are being infringed or used improperly or without authorization by any Person, such party shall promptly notify the owner of such IP Rights. The owner of the infringed IP Rights shall decide in its sole and exclusive discretion what action to take or not to take in response. The owner shall have the right to act to terminate any infringement, including, without limitation, prosecuting a lawsuit or other legal proceeding at its own expense, and such party may retain in full any and all recovery it may receive as a result of its actions to terminate such infringement. The licensee of any IP Rights hereunder agrees to reasonably cooperate with the owner of such IP Rights in connection with any actions of the owner to enforce or defend its IP Rights.

ARTICLE VII

CONFIDENTIALITY

SECTION 7.1 Confidentiality. Notwithstanding anything to the contrary in the Separation Agreement, Halliburton and KBR shall hold and shall each cause their respective officers, employees, agents, consultants and advisors to hold, in strict confidence and not to use, disclose or release without the prior written consent of the other party, any and all Confidential IP Information (as defined herein) of the other party; provided, that the parties may use the other party’s Confidential IP Information pursuant to Sections 3.1, 3.2, 4.1, and/or 4.2, and may disclose, or may permit disclosure of, the other party’s Confidential IP Information under confidentiality and nonuse obligations which are at least as strict as those provided in this Agreement (a) to their respective auditors, attorneys, financial advisors, bankers and other appropriate consultants and advisors who have a need to know such information and are informed of their obligation to hold such information confidential to the same extent as is applicable to the parties and in respect of whose failure to comply with such obligations, Halliburton or KBR, as the case may be, will be responsible, (b) to their customers who are Oil and Gas Producing Companies or Refining or Industrial Processing Companies or Government and Infrastructure Persons to the extent reasonably necessary for such customers’ use of products or services that are provided under this Agreement by Halliburton or KBR, as the case may be, and that embody Confidential IP Information, or (c) to the extent Halliburton or KBR is

11

compelled to disclose any such Confidential IP Information by judicial or administrative process or, in the opinion of legal counsel, by other requirements of law. Notwithstanding the foregoing, in the event that any demand or request for disclosure of Confidential IP Information is made pursuant to clause (c) above, Halliburton or KBR, as the case may be, shall promptly notify the other of the existence of such request or demand and shall provide the other a reasonable opportunity to seek an appropriate protective order or other remedy, which both parties will cooperate in seeking to obtain. In the event that such appropriate protective order or other remedy is not obtained, the party whose Confidential IP Information is required to be disclosed shall or shall cause the other party to furnish, or cause to be furnished, only that portion of the Confidential IP Information that is legally required to be disclosed. As used in this Section 7.1, “Confidential IP Information” shall mean all proprietary, technical or operational information, data or material relating to intellectual property, including without limitation all trade secrets and know-how, of one party which, prior to or following the IPO Closing Date, has been disclosed by Halliburton, on the one hand, or KBR, on the other hand, in written, oral (including by recording), electronic, or visual form to, or otherwise has come into the possession of, the other, including pursuant to any other provision of this Agreement (except to the extent that such Confidential IP Information can be shown to have been (i) in the public domain through no fault of such party, (ii) later lawfully acquired from other sources by the party to which it was furnished or (iii) created independently by such party without the benefit of Confidential IP Information; provided, however, in the case of (ii) that such sources did not provide such Confidential IP Information in breach of any confidentiality obligations). Notwithstanding anything to the contrary set forth herein, Halliburton, on the one hand, and KBR, on the other hand, shall be deemed to have satisfied their obligations hereunder with respect to Confidential IP Information if they exercise the same degree of care (but no less than a reasonable degree of care) as they take to preserve confidentiality for their own similar confidential intellectual property information.

SECTION 7.2 Equitable Relief. Each party acknowledges that a breach of its obligations under Section 7.1 may cause the other party irreparable and significant harm and that, in addition to any other remedies available to it, such party may seek immediate injunctive relief without the need for posting any bond in connection therewith.

ARTICLE VIII

WARRANTIES AND INDEMNIFICATION

SECTION 8.1 No Representation or Warranty. Halliburton and KBR make no representations or warranties of any kind, express or implied, with respect to any of the IP Rights licensed hereunder, all of which are provided “AS IS”, and neither party makes any representations or warranties as to the completeness, sufficiency or accuracy of any IP Rights licensed hereunder, or the freedom from infringement of third party rights by the exercise of any IP Rights licensed hereunder.

SECTION 8.2 Indemnification by Halliburton. Except as otherwise provided in this Agreement, Halliburton and the Appropriate Members of the Halliburton Group shall indemnify, defend and hold harmless KBR, each member of the KBR Group and their respective successors and assigns (collectively, the “KBR Indemnitees”), from and against any and all Losses of the KBR Indemnitees relating to, arising out of or resulting from the Halliburton Business (as

12

defined in the Separation Agreement), provided that (a) such Losses are in connection with the subject matter of this Agreement and (b) the Losses do not relate to, arise out of, or result from KBR Indemnitees operating in the Halliburton Field of Use. Halliburton shall not indemnify, defend or hold harmless the KBR Indemnitees for any Losses arising out of KBR’s use of the Halliburton Patents or Halliburton Other IP. As used in this Section 8.2, “Appropriate Members of the Halliburton Group” means the member or members of the Halliburton Group, if any, whose acts, conduct or omissions or failures to act caused, gave rise to or resulted in the Loss from and against which indemnity is provided.

SECTION 8.3 Indemnification by KBR. Except as otherwise provided in this Agreement, KBR and the Appropriate Members of the KBR Group shall indemnify, defend and hold harmless Halliburton, each member of the Halliburton Group and their respective successors and assigns, (collectively, the “Halliburton Indemnitees”) from and against any and all Losses of the Halliburton Indemnitees relating to, arising out of or resulting from the KBR Business (as defined in the Separation Agreement), provided that (a) such Losses are in connection with the subject matter of this Agreement and (b) the Losses do not relate to, arise out of, or result from Halliburton Indemnitees operating in the KBR Field of Use. KBR shall not indemnify, defend or hold harmless the Halliburton Indemnitees for any such Losses arising out of Halliburton’s use of the KBR Patents or KBR Other IP. As used in this Section 8.3, “Appropriate Members of the KBR Group” means the member or members of the KBR Group, if any, whose acts, conduct or omissions or failures to act caused, gave rise to or resulted in the loss from and against which indemnity is provided.

SECTION 8.4 Procedures for Indemnification of Third Party Claims

(a) If any Person entitled to indemnification hereunder (“Indemnitee”) shall receive notice or otherwise learn of the assertion by a Person (including any Governmental Authority) who is not a member of the Halliburton Group or the KBR Group of any claims or of the commencement by any such Person of any action (collectively, a “Third Party Claim”) with respect to which any party (an “Indemnifying Party”) may be obligated to provide indemnification to such Indemnitee pursuant to this Article VIII, such Indemnitee shall give such Indemnifying Party written notice thereof within twenty (20) days after becoming aware of such Third Party Claim. Any such notice shall describe the Third Party Claim in reasonable detail. Notwithstanding the foregoing, the failure of any Indemnitee or other Person to give notice as provided in this Section 8.4(a) shall not relieve the related Indemnifying Party of its obligations under this Article VIII, except to the extent that such Indemnifying Party is actually prejudiced by such failure to give notice.

(b) An Indemnifying Party may elect to defend (and, unless the Indemnifying Party has specified any reservations or exceptions, to seek to settle or compromise), at such Indemnifying Party’s own expense and by such Indemnifying Party’s own counsel, any Third Party Claim for which indemnification is available under this Article VIII. Within thirty (30) days after the receipt of notice from an Indemnitee in accordance with Section 8.4(a) (or sooner, if the nature of such Third Party Claim so requires), the Indemnifying Party shall notify the Indemnitee of its election whether the Indemnifying Party will assume responsibility for defending such Third Party Claim, which election

13

shall specify any reservations or exceptions. After notice from an Indemnifying Party to an Indemnitee of its election to assume the defense of a Third Party Claim, such Indemnitee shall have the right to employ separate counsel and to participate in (but not control) the defense, compromise or settlement thereof, but the fees and expenses of such counsel shall be the expense of such Indemnitee except as set forth in the next sentence. In the event that the Indemnifying Party has elected to assume the defense of a Third Party Claim for which indemnification is available under this Article VIII but has specified, and continues to assert, any reservations or exceptions in such notice, then, in any such case, the reasonable fees and expenses of one separate counsel for all Indemnitees shall be borne by the Indemnifying Party.

(c) If an Indemnifying Party elects not to assume responsibility for defending a Third Party Claim for which indemnification is available under this Article VIII, or fails to notify an Indemnitee of its election as provided in Section 8.4(b), such Indemnitee may defend such Third Party Claim at the cost and expense (including allocated costs of in-house counsel and other personnel) of the Indemnifying Party.

(d) Unless the Indemnifying Party has failed to assume the defense of the Third Party Claim for which indemnification is available under this Article VIII in accordance with the terms of this Agreement, no Indemnitee may settle or compromise such Third Party Claim without the consent of the Indemnifying Party.

(e) No Indemnifying Party shall consent to entry of any judgment or enter into any settlement of the Third Party Claim without the consent of an Indemnitee if the effect thereof is to permit any injunction, declaratory judgment, other order or other nonmonetary relief to be entered, directly or indirectly, against such Indemnitee.

(f) In the event of payment by or on behalf of any Indemnifying Party to any Indemnitee in connection with any Third Party Claim under this Article VIII, such Indemnifying Party shall be subrogated to and shall stand in the place of such Indemnitee as to any events or circumstances in respect of which such Indemnitee may have any right, defense or claim relating to such Third Party Claim against any claimant or plaintiff asserting such Third Party Claim or against any other person. Such Indemnitee shall cooperate with such Indemnifying Party in a reasonable manner, and at the cost and expense (including allocated costs of in-house counsel and other personnel) of such Indemnifying Party, in prosecuting any subrogated right, defense or claim. In the event of an Action in which the Indemnifying Party is not a named defendant, if either the Indemnitee or Indemnifying Party shall so request, the parties shall endeavor to substitute the Indemnifying Party for the named defendant, if at all practicable. If such substitution or addition cannot be achieved for any reason or is not requested, the named defendant shall allow the Indemnifying Party to manage the Action as set forth in this Section 8.4 and the Indemnifying Party shall fully indemnify the named defendant against all costs of defending the Action (including court costs, sanctions imposed by a court, attorneys’ fees, experts’ fees and all other external expenses, and the allocated costs of in-house counsel and other personnel), the costs of any judgment or settlement, and the costs of any interest or penalties relating to any judgment or settlement.

14

SECTION 8.5 Mitigation of Damages. The parties each agree to attempt to mitigate, and to cause each of their respective Affiliates to attempt to mitigate, any Losses that such party may suffer as a consequence of any matter giving rise to a right to indemnification under this Article VIII by taking all actions which a reasonable person would undertake to minimize or alleviate the amount of Losses and the consequences thereof, as if such person would be required to suffer the entire amount of such Losses and the consequences thereof by itself, without recourse to any remedy against another person, including pursuant to any right of indemnification hereunder.

ARTICLE IX

TERM AND TERMINATION

SECTION 9.1 Term. This Agreement shall be effective as of the IPO Closing Date and shall continue until the last to expire of the KBR Patents or Halliburton Patents. The licenses to use the trade secrets and know-how which are part of the KBR Licensed Other IP or Halliburton Licensed Other IP shall survive the expiration of this Agreement, except to the extent any such license is earlier terminated under this Article IX.

SECTION 9.2 Termination.

(a) KBR may terminate this Agreement including any licenses granted in Article III if Halliburton fails to cure a material breach of this Agreement within sixty (60) days after Halliburton’s receipt of written notice of the alleged breach, specifying the provisions of the Agreement at issue and the actions or omissions alleged to constitute a material breach.

(b) Halliburton may terminate this Agreement including any licenses granted in Article IV if KBR fails to cure a material breach of this Agreement within sixty (60) days after KBR’s receipt of written notice of the alleged breach, specifying the provisions of the Agreement at issue and the actions or omissions alleged to constitute a material breach.

(c) KBR may terminate this Agreement including any licenses granted in Article III upon written notice with respect to Halliburton if there has been a Change of Control of Halliburton where the Person acquiring a controlling interest is a competitor of KBR; provided, however, such termination shall be limited only to the particular entity that has undergone a Change of Control. Halliburton may terminate this Agreement including any licenses granted in Article IV upon written notice with respect to KBR if there has been a Change of Control of KBR where the Person acquiring a controlling interest is a competitor of Halliburton; provided, however, such termination shall be limited only to the particular entity that has undergone a Change of Control.

(d) The provisions of Articles 6, 7, 8, 9 and 10 shall survive the earlier termination of this Agreement.

(e) Notwithstanding any termination of this Agreement, any sublicense extended to an Oil and Gas Producing Company, a Coal Producing and Processing Company, a Refining or Industrial Processing Company, or a Government and

15

Infrastructure Person and/or any rights to use by KBR or Halliburton under Sections 3.1, 3.2, 4.1, or 4.2 to which a party has already become committed for a particular project to an Oil and Gas Producing Company, a Coal Producing and Processing Company, a Refining or Industrial Processing Company, or a Government and Infrastructure Person, shall continue in full force and effect so long as all required payments are made and the participants in the project(s) continue to abide by all other applicable terms and conditions which survive such termination.

ARTICLE X

GENERAL PROVISIONS

SECTION 10.1 Effect if IPO does not Occur. If the IPO does not occur, then all actions and events that are, under this Agreement, to be taken or occur effective as of the IPO Closing Date, or otherwise in connection with the IPO, shall not be taken or occur except to the extent specifically agreed by the parties.

SECTION 10.2 Relationship of Parties. Nothing in this Agreement shall be deemed or construed by the parties or any third party as creating a fiduciary relationship, a relationship of principal and agent, partnership or joint venture between the parties, the understanding and agreement being that no provision contained herein, and no act of the parties, shall be deemed to create any relationship between the parties other than the relationship set forth herein. This Agreement shall be binding upon and inure solely to the benefit of and be enforceable by each party and its respective successors and permitted assigns. Nothing in this Agreement, express or implied, is intended to or shall confer upon any other person any right, benefit or remedy of any nature whatsoever under or by reason of this Agreement.

SECTION 10.3 Incorporation of Separation Agreement Provisions. If a dispute, claim or controversy results from or arises out of or in connection with this Agreement, the parties agree to use the procedures set forth in Article VII of the Separation Agreement in lieu of other available remedies, to resolve same. The provisions of Sections 9.1 (Limitation of Liability) and 9.5 (Notices) of the Separation Agreement are hereby incorporated herein by reference, and unless otherwise expressly specified herein, such provisions shall apply as if fully set forth herein (references in this Section 10.3 to an “Article” or a “Section” shall mean Articles or Sections of the Separation Agreement, and, except as expressly set forth herein, references in the material incorporated herein by reference shall be references to the Separation Agreement).

SECTION 10.4 Governing Law; Jurisdiction. This Agreement shall be governed by, construed and interpreted in accordance with the laws of the United States and the State of Texas, irrespective of the choice of law principles of the State of Texas, as to all matters, including matters of validity, construction, effect, performance and remedies. The parties hereby agree to submit to the exclusive jurisdiction of the state and federal courts located in Houston, Texas, in connection with any action or other proceeding relating to this Agreement or the transactions contemplated hereby. Each party irrevocably waives and agrees not to make, to the fullest extent permitted by law, any objection which it may now or hereafter have to the jurisdiction of any such court or to the laying of venue of any such action or proceeding brought in any such court and any claim that any such action or proceeding brought in any such court has been brought in an inconvenient forum.

16

SECTION 10.5 Severability. If any term or other provision of this Agreement is determined to be invalid, illegal or incapable of being enforced by any rule of law or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to either party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible and in an acceptable manner to the end that transactions contemplated hereby are fulfilled to the fullest possible extent.

SECTION 10.6 Amendment. No change or amendment will be made to this Agreement except by an instrument in writing signed on behalf of each of the parties to this Agreement.

SECTION 10.7 Assignment. Neither this Agreement nor any of the rights, interests or obligations hereunder may be assigned by a party without the prior written consent of the other party, except that either party may at any time assign any or all of its rights or obligations hereunder to one of its wholly owned subsidiaries (but no such assignment shall relieve such party of any of its obligations under this Agreement).

SECTION 10.8 No Strict Construction. The language this Agreement uses shall be deemed to be the language the parties hereto have chosen to reflect their mutual intent, and no rule of strict construction or presumption based upon the party that has drafted this Agreement shall be applied against any party hereto.

SECTION 10.9 Further Assurances. The parties agree (a) to furnish upon request to each other such further information, (b) to execute and deliver to each other such other documents, and (c) to do such other acts and things, all as the other party may reasonably request for the purpose of carrying out the intent of this Agreement.

SECTION 10.10 Counterparts. This Agreement may be executed in two or more counterparts each of which shall be deemed to be an original, but all of which together shall constitute but one and the same Agreement.

17

IN WITNESS WHEREOF, each of the parties has caused this Intellectual Property Matters Agreement to be executed on its behalf by its officers thereunto duly authorized on the day and year first above written.

HALLIBURTON COMPANY

By:

Name:

Title:

KBR, INC.

By:

Name:

Title:

18

EX-10.23

Exhibit 10.23

FORM OF

KBR, INC.

2006 STOCK AND INCENTIVE PLAN

I. PURPOSE

The purpose of the KBR, Inc. 2006 Stock and Incentive Plan (the “Plan”) is to provide a means whereby KBR, Inc., a Delaware corporation (the “Company”), and its Subsidiaries may attract, motivate and retain highly competent employees and to provide a means whereby selected employees can acquire and maintain stock ownership and receive cash awards, thereby strengthening their concern for the long-term welfare of the Company. The Plan is also intended to provide employees with additional incentive and reward opportunities designed to enhance the profitable growth of the Company over the long term. A further purpose of the Plan is to allow awards under the Plan to Non-employee Directors in order to enhance the Company’s ability to attract and retain highly qualified Directors. Accordingly, the Plan provides for granting Incentive Stock Options, Options which do not constitute Incentive Stock Options, Stock Appreciation Rights, Restricted Stock Awards, Restricted Stock Unit Awards, Performance Awards, Stock Value Equivalent Awards, or any combination of the foregoing, as is best suited to the circumstances of the particular employee or Non-employee Director as provided herein. The Plan is effective as of the closing date of the IPO as defined later in this document.

II. DEFINITIONS

The following definitions shall be applicable throughout the Plan unless specifically modified by any paragraph:

(a) “Award” means, individually or collectively, any Option, Stock Appreciation Right, Restricted Stock Award, Restricted Stock Unit Award, Performance Award or Stock Value Equivalent Award.

(b) “Award Document” means the relevant award agreement or other document containing the terms and conditions of an Award.

(c) “Beneficial Owners” shall have the meaning set forth in Rule 13d-3 promulgated under the Exchange Act.

(d) “Board” means the Board of Directors of KBR, Inc.

(e) “Change of Control Value” means, for the purposes of Paragraph (f) of Article XIII, the amount determined in Clause (i), (ii) or (iii), whichever is applicable, as follows: (i) the per share price offered to stockholders of the Company in any merger, consolidation, sale of assets or dissolution transaction, (ii) the per share price offered to stockholders of the Company in any tender offer or exchange offer whereby a Corporate Change takes place or (iii) if a Corporate Change occurs other than as described in Clause (i) or Clause (ii), the fair market value per share determined by the Committee as of the date determined by the

Committee to be the date of cancellation and surrender of an Award. If the consideration offered to stockholders of the Company in any transaction described in this Paragraph (e) consists of anything other than cash, the Committee shall determine the fair cash equivalent of the portion of the consideration offered which is other than cash.

(f) “Code” means the Internal Revenue Code of 1986, as amended. Reference in the Plan to any section of the Code shall be deemed to include any amendments or successor provisions to such section and any regulations under such section.

(g) “Committee” means, on or prior to the closing date of the IPO, the committee selected by the board of directors of Halliburton to administer the Plan in accordance with Paragraph (a) of Article IV of the Plan and following the closing date of the IPO, the committee selected by the Board to administer the Plan in accordance with Paragraph (a) of Article IV of the Plan.

(h) “Common Stock” means the Common Stock, par value $0.001 per share, of the Company.

(i) “Company” means KBR, Inc., a Delaware corporation.

(j) “Corporate Change” shall conclusively be deemed to have occurred on a Corporate Change Effective Date if an event set forth in any one of the following paragraphs shall have occurred:

(i) any Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its affiliates) representing 20% or more of the combined voting power of the Company’s then outstanding securities (the “Outstanding Company Voting Securities”) provided, however, that for purposes of this subsection (i), the following acquisitions shall not constitute a Corporate Change: (1) an acquisition of securities effected in connection with a distribution of any class of common stock of the Company to shareholders of Halliburton in a transaction (including any distribution in exchange for shares of capital stock or other securities of Halliburton) intended to qualify as a tax-free distribution under Section 355 of the Code (a “Tax-Free Spin Off”), (2) any acquisition by Halliburton Company or any of its affiliates excluding the Company and its Subsidiaries (collectively, “Halliburton Companies”), (3) any acquisition from Halliburton Companies pursuant to a public offering of securities registered under a registration statement filed with the Securities and Exchange Commission, or (4) any acquisition immediately following which Halliburton Companies have beneficial ownership of at least 50% or more of the Outstanding Company Voting Securities; provided that any such acquisition that, but for this clause (4), would otherwise constitute a Corporate Change under this Section II.(j)(i) shall be deemed to be a Corporate Change at the time that Halliburton

-2-

Companies no longer have beneficial ownership of at least 50% or more of the Outstanding Company Voting Securities, if such individual, entity or group that made such acquisition continues to own 20% or more of the Outstanding Company Voting Securities following such time that Halliburton Companies no longer have such beneficial ownership; or

(ii) the following individuals cease for any reason to constitute a majority of the number of Directors then serving: individuals who, on the date hereof, constitute the Board and any new Director (other than a Director whose initial assumption of office is in connection with an actual or threatened election contest relating to the election of Directors of the Company) whose appointment or election by the Board or nomination for election by the Company’s stockholders was approved or recommended by a vote of at least two-thirds (2/3) of the Directors then still in office who either were Directors on the date hereof or whose appointment, election or nomination for election was previously so approved or recommended (the “Incumbent Board); provided, however, that for purposes of this Section II.(j)(ii), any individual becoming a Director subsequent to the date hereof whose election, or nomination for election by the Company’s shareholders, was approved by either (a) a vote of at least a majority of the Directors then comprising the Incumbent Board or (b) Halliburton, shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of Directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than either Halliburton or the Board; or

(iii) there is consummated a merger or consolidation of the Company or any direct or indirect Subsidiary of the Company with any other corporation, other than (A) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof), in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of the Company or any Subsidiary of the Company, at least 50% of the combined voting power of the securities of the Company or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (B) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or any of its affiliates other than in connection with the acquisition by the Company or any of its affiliates of a business) representing 20% or more of the combined voting power of the Company’s then outstanding securities; or

-3-

(iv) the stockholders of the Company approve a plan of complete liquidation or dissolution of the Company, other than in connection with the transfer of all or substantially all of the assets of the Company to the Halliburton Companies, or there is consummated an agreement for the sale, disposition, lease or exchange by the Company of all or substantially all of the Company’s assets, other than a sale, disposition, lease or exchange by the Company of all or substantially all of the Company’s assets to the Halliburton Companies or to an entity, at least 50% of the combined voting power of the voting securities of which are owned by stockholders of the Company in substantially the same proportions as their ownership of the Company immediately prior to such sale.

Notwithstanding the foregoing, a “Corporate Change” shall not be deemed to have occurred by virtue of the consummation of any transaction or series of integrated transactions immediately following which the record holders of the Common Stock of the Company immediately prior to such transaction or series of transactions continue to have substantially the same proportionate ownership in an entity which owns all or substantially all of the assets of the Company immediately following such transaction or series of transactions.

(k) “Corporate Change Effective Date” shall mean:

(i) the first date that the direct or indirect ownership of 20% or more combined voting power of the Company’s outstanding securities results in a Corporate Change as described in clause (i) of such definition above; or

(ii) the date of the election of Directors that results in a Corporate Change as described in clause (ii) of such definition; or

(iii) the date of the merger or consideration that results in a Corporate Change as described in clause (iii) of such definition; or

(iv) the date of stockholder approval that results in a Corporate Change as described in clause (iv) of such definition.

(l) “Director” means an individual serving as a member of the Board.

(m) “Exchange Act” means the Securities Exchange Act of 1934, as amended.

(n) “Fair Market Value” means, as of any specified date, the closing price of the Common Stock on the New York Stock Exchange (or, if the Common Stock is not then listed on such exchange, such other national securities exchange on which the Common Stock is then listed) on that date, or if no prices are reported on that date, on the last preceding date on which such prices of the Common Stock are so reported or, in the sole discretion of the Committee for purposes of

-4-

determining the Fair Market Value of the Common Stock at the time of exercise of an Option or a Stock Appreciation Right, such Fair Market Value shall be the prevailing price of the Common Stock as of the time of exercise. If the Common Stock is not then listed or quoted on any national securities exchange but is traded over the counter at the time a determination of its Fair Market Value is required to be made hereunder, its Fair Market Value shall be deemed to be equal to the average between the reported high and low sales prices of Common Stock on the most recent date on which Common Stock was publicly traded. If the Common Stock is not publicly traded at the time a determination of its value is required to be made hereunder, the determination of its Fair Market Value shall be made by the Committee in such manner as it deems appropriate.

(o) “Halliburton” means Halliburton Company, a Delaware corporation.

(p) “Holder” means an employee or Non-employee Director of the Company who has been granted an Award.

(q) “IPO” means the first registered underwritten public offering of shares of Common Stock of the Company.

(r) “Immediate Family” means, with respect to a particular Holder, the Holder’s spouse, parent, brother, sister, children and grandchildren (including adopted and step children and grandchildren).

(s) “Incentive Stock Option” means an Option within the meaning of Section 422 of the Code.

(t) “Minimum Criteria” means a Restriction Period that is not less than three (3) years from the date of grant of a Restricted Stock Award or Restricted Stock Unit Award.

(u) “Non-employee Director” means a member of the Board who is not an employee or former employee of the Company or its Subsidiaries.

(v) “Option” means an Award granted under Article VII of the Plan and includes both Incentive Stock Options to purchase Common Stock and Options which do not constitute Incentive Stock Options to purchase Common Stock.

(w) “Option Agreement” means a written agreement between the Company and a Holder with respect to an Option.

(x) “Optionee” means a Holder who has been granted an Option.

(y) “Parent Corporation” shall have the meaning set forth in Section 424(e) of the Code.

(z) “Performance Award” means an Award granted under Article XI of the Plan.

-5-

(aa) “Person” shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof, except that such term shall not include (i) Halliburton or its subsidiaries or the Company or any of its Subsidiaries, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of Halliburton, or the Company or any of their affiliates, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, or (iv) a corporation owned, directly or indirectly, by the stockholders of Halliburton or the Company in substantially the same proportions as their ownership of stock of the Halliburton or the Company.

(bb) “Plan” means the KBR, Inc. 2006 Stock and Incentive Plan.

(cc) “Restricted Stock Award” means an Award granted under Article IX of the Plan.

(dd) “Restricted Stock Award Agreement” means a written agreement between the Company and a Holder with respect to a Restricted Stock Award.

(ee) “Restricted Stock Unit” means a unit evidencing the right to receive one share of Common Stock or an equivalent value equal to the Fair Market Value of a share of Common Stock (as determined by the Committee) that is restricted or subject to forfeiture provisions.

(ff) “Restricted Stock Unit Award” means as Award granted under Article X of the Plan.

(gg) “Restricted Stock Unit Award Agreement” means a written agreement between the Company and a Holder with respect to a Restricted Stock Unit Award.

(hh) “Restriction Period” means a period of time beginning as of the date upon which a Restricted Stock Award or Restricted Stock Unit Award is made pursuant to the Plan and ending as of the date upon which the Common Stock subject to such Award is issued (if not previously issued), no longer restricted or subject to forfeiture provisions.

(ii) “Spread” means, in the case of a Stock Appreciation Right, an amount equal to the excess, if any, of the Fair Market Value of a share of Common Stock on the date such right is exercised over the exercise price of such Stock Appreciation Right.

(jj) “Stock Appreciation Right” means an Award granted under Article VIII of the Plan.

(kk) “Stock Appreciation Rights Agreement” means a written agreement between the Company and a Holder with respect to an Award of Stock Appreciation Rights.

(ll) “Stock Value Equivalent Award” means an Award granted under Article XII of the Plan.

-6-

(mm) “Subsidiary” means a company (whether a corporation, partnership, joint venture or other form of entity) in which the Company or a corporation in which the Company owns a majority of the shares of capital stock, directly or indirectly, owns a greater than 50% equity interest, except that with respect to the issuance of Incentive Stock Options the term “Subsidiary” shall have the same meaning as the term “subsidiary corporation” as defined in Section 424(f) of the Code.

(nn) “Successor Holder” shall have the meaning given such term in Paragraph (f) of Article XV.

III. EFFECTIVE DATE AND DURATION OF THE PLAN

The Plan shall be effective as of the closing date of the IPO. Subject to the provisions of Article XIII, the Plan shall remain in effect until all Options and Stock Appreciation Rights granted under the Plan have been exercised or expired by reason of lapse of time, all restrictions imposed upon Restricted Stock Awards and Restricted Stock Unit Awards have lapsed and all Performance Awards and Stock Value Equivalent Awards have been satisfied; provided, however, that, notwithstanding any other provision of the Plan, Awards shall not be granted under the Plan after                     , 2016.

IV. ADMINISTRATION

(a) Composition of Committee. The Plan shall be administered by the Committee.

(b) Powers. The Committee shall have authority, in its discretion, to determine which eligible individuals shall receive an Award, the time or times when such Award shall be made, whether an Incentive Stock Option, nonqualified Option or Stock Appreciation Right shall be granted, the number of shares of Common Stock which may be issued under each Option, Stock Appreciation Right, Restricted Stock Award and Restricted Stock Unit Award, and the value of each Performance Award and Stock Value Equivalent Award. The Committee shall have the authority, in its discretion, to establish the terms and conditions applicable to any Award, subject to any specific limitations or provisions of the Plan. In making such determinations the Committee may take into account the nature of the services rendered by the respective individuals, their responsibility level, their present and potential contribution to the Company’s success and such other factors as the Committee in its discretion shall deem relevant.

(c) Additional Powers. The Committee shall have such additional powers as are delegated to it by the other provisions of the Plan. Subject to the express provisions of the Plan, the Committee is authorized to construe the Plan and the respective Award Documents executed thereunder, to prescribe such rules and regulations relating to the Plan as it may deem advisable to carry out the Plan, and to determine the terms, restrictions and provisions of each Award, including such terms, restrictions and provisions as shall be requisite in the judgment of the Committee to cause designated Options to qualify as Incentive Stock Options, and to make all other determinations necessary or advisable for administering the

-7-

Plan. The Committee may correct any defect or supply any omission or reconcile any inconsistency in any Award Document relating to an Award in the manner and to the extent the Committee shall deem expedient to carry the Award into effect. The determinations of the Committee on the matters referred to in this Article IV shall be conclusive.

(d) Delegation of Authority. The Committee may delegate some or all of its power to the Chief Executive Officer of the Company as the Committee deems appropriate; provided, however, that (i) the Committee may not delegate its power with regard to the grant of an Award to any person who is a “covered employee” within the meaning of Section 162(m) of the Code or who, in the Committee’s judgment, is likely to be a covered employee at any time during the period an Award to such employee would be outstanding; (ii) the Committee may not delegate its power with regard to the selection for participation in the Plan of an officer or other person subject to Section 16 of the Exchange Act or decisions concerning the timing, pricing or amount of an Award to such an officer or other person and (iii) any delegation of the power to grant Awards shall be permitted by applicable law.

(e) Engagement of an Agent. The Company may, in its discretion, engage an agent to (i) maintain records of Awards and Holders’ holdings under the Plan, (ii) execute sales transactions in shares of Common Stock at the direction of Holders, (iii) deliver sales proceeds as directed by Holders, and (iv) hold shares of Common Stock owned without restriction by Holders, including shares of Common Stock previously obtained through the Plan that are transferred to the agent by Holders at their discretion. Except to the extent otherwise agreed by the Company and the agent, when an individual loses his or her status as an employee or Non-employee Director of the Company, the agent shall have no obligation to provide any further services to such person and the shares of Common Stock previously held by the agent under the Plan may be distributed to the person or his or her legal representative.

V. GRANT OF OPTIONS, STOCK APPRECIATION RIGHTS,

RESTRICTED STOCK AWARDS, RESTRICTED STOCK UNIT AWARDS,

PERFORMANCE AWARDS AND STOCK VALUE EQUIVALENT AWARDS;

SHARES SUBJECT TO THE PLAN

(a) Award Limits. The Committee may from time to time grant Awards to one or more individuals determined by it to be eligible for participation in the Plan in accordance with the provisions of Article VI. The aggregate number of shares of Common Stock that may be issued under the Plan shall not exceed 10,000,000 shares, of which no more than 3,500,000 may be issued in the form of Restricted Stock Awards or Restricted Stock Unit Awards, or pursuant to Performance Awards. Notwithstanding anything contained herein to the contrary, the number of Option shares or Stock Appreciation Rights, singly or in combination, together with shares or share equivalents under Performance Awards granted to any Holder in any one calendar year, shall not in the aggregate exceed 500,000. The cash value determined as of the date of grant of any Performance Award not

-8-

denominated in Common Stock granted to any Holder for any one calendar year shall not exceed $5,000,000. Any shares which remain unissued and which are not subject to outstanding Options or Awards at the termination of the Plan shall cease to be subject to the Plan, but, until termination of the Plan, the Company shall at all times reserve a sufficient number of shares to meet the requirements of the Plan. Shares shall be deemed to have been issued under the Plan only to the extent actually issued and delivered pursuant to an Award. To the extent that an Award lapses or the rights of its Holder terminate or the Award is paid in cash, any shares of Common Stock subject to such Award shall again be available for the grant of an Award. The aggregate number of shares which may be issued under the Plan shall be subject to adjustment in the same manner as provided in Article XIII with respect to shares of Common Stock subject to Options then outstanding. The 500,000-share limit on Stock Options, Stock Appreciation Rights Awards and Performance Awards denominated in shares to a Holder in any calendar year shall be subject to adjustment in the same manner as provided in Article XIII. Separate stock certificates shall be issued by the Company for those shares acquired pursuant to the exercise of an Incentive Stock Option and for those shares acquired pursuant to the exercise of any Option which does not constitute an Incentive Stock Option. The Committee may from time to time adopt and observe such procedures concerning the counting of shares against the Plan maximum as it may deem appropriate.

(b) Stock Offered. The stock to be offered pursuant to the grant of an Award may be authorized but unissued Common Stock or Common Stock previously issued and reacquired by the Company.

VI. ELIGIBILITY

Awards made pursuant to the Plan may be granted to individuals who, at the time of grant, are employees of the Company or any Parent Corporation or Subsidiary of the Company or are Non-employee Directors. An Award may also be granted to a person who has agreed to become an employee of the Company or any Parent Corporation or Subsidiary of the Company within the subsequent three (3) months. An Award made pursuant to the Plan may be granted on more than one occasion to the same person, and such Award may include an Incentive Stock Option, an Option which is not an Incentive Stock Option, an Award of Stock Appreciation Rights, a Restricted Stock Award, a Restricted Stock Unit Award, a Performance Award, a Stock Value Equivalent Award or any combination thereof. Each Award shall be evidenced in such manner and form as may be prescribed by the Committee.

VII. STOCK OPTIONS

(a) Stock Option Agreement. Each Option shall be evidenced by an Option Agreement between the Company and the Optionee which shall contain such terms and conditions as may be approved by the Committee. The terms and conditions of the respective Option Agreements need not be identical. Specifically, an Option Agreement may provide for the payment of the option price, in whole or in part, by the delivery of a number of shares of Common Stock (plus cash if necessary) having a Fair Market Value equal to such option price.

-9-

(b) Option Period. The term of each Option shall be as specified by the Committee at the date of grant; provided that, in no case, shall the term of an Option exceed ten (10) years.

(c) Limitations on Exercise of Option. An Option shall be exercisable in whole or in such installments and at such times as determined by the Committee.

(d) Option Price. The purchase price of Common Stock issued under each Option shall be determined by the Committee, but such purchase price shall not be less than the Fair Market Value of Common Stock subject to the Option on the date the Option is granted.

(e) Options and Rights in Substitution for Stock Options Granted by Other Corporations. Options and Stock Appreciation Rights may be granted under the Plan from time to time in substitution for stock options and Stock Appreciation Rights held by employees of corporations who become, or who became prior to the effective date of the Plan, employees of the Company or of any Subsidiary as a result of a merger or consolidation of the employing corporation with the Company or such Subsidiary, or the acquisition by the Company or a Subsidiary of all or a portion of the assets of the employing corporation, or the acquisition by the Company or a Subsidiary of stock of the employing corporation with the result that such employing corporation becomes a Subsidiary.

(f) Repricing Prohibited. Except for adjustments pursuant to Article XIII, the purchase price of Common Stock for any outstanding Option granted under the Plan may not be decreased after the date of grant nor may an outstanding Option granted under the Plan be surrendered to the Company as consideration for the grant of a new Option with a lower purchase price. Any other action that is deemed to be a repricing under any applicable rule of the New York Stock Exchange shall be prohibited.

VIII. STOCK APPRECIATION RIGHTS

(a) Stock Appreciation Rights. A Stock Appreciation Right is the right to receive an amount equal to the Spread with respect to a share of Common Stock upon the exercise of such Stock Appreciation Right. Stock Appreciation Rights may be granted in connection with the grant of an Option, in which case the Option Agreement will provide that exercise of Stock Appreciation Rights will result in the surrender of the right to purchase the shares under the Option as to which the Stock Appreciation Rights were exercised. Alternatively, Stock Appreciation Rights may be granted independently of Options in which case each Award of Stock Appreciation Rights shall be evidenced by a Stock Appreciation Rights Agreement between the Company and the Holder which shall contain such terms and conditions as may be approved by the Committee. The terms and conditions

-10-

of the respective Stock Appreciation Rights Agreements need not be identical. The Spread with respect to a Stock Appreciation Right may be payable either in cash, shares of Common Stock with a Fair Market Value equal to the Spread or in a combination of cash and shares of Common Stock. Upon the exercise of any Stock Appreciation Rights granted hereunder, the number of shares reserved for issuance under the Plan shall be reduced only to the extent that shares of Common Stock are actually issued in connection with the exercise of such Right.

(b) Exercise Price. The exercise price of each Stock Appreciation Right shall be determined by the Committee, but such exercise price shall not be less than the Fair Market Value of a share of Common Stock on the date the Stock Appreciation Right is granted.

(c) Exercise Period. The term of each Stock Appreciation Right shall be as specified by the Committee at the date of grant; provided that, in no case, shall the term of a Stock Appreciation Right exceed ten (10) years.

(d) Limitations on Exercise of Stock Appreciation Right. A Stock Appreciation Right shall be exercisable in whole or in such installments and at such times as determined by the Committee.

(e) Repricing Prohibited. Except for adjustments pursuant to Article XIII, the exercise price of a Stock Appreciation Right may not be decreased after the date of grant nor may an outstanding Stock Appreciation Right granted under the Plan be surrendered to the Company as consideration for the grant of a new Stock Appreciation Right with a lower exercise price. Any other action that is deemed to be a repricing under any applicable rule of the New York Stock Exchange shall be prohibited.

IX. RESTRICTED STOCK AWARDS

(a) Restricted Period To Be Established by the Committee. At the time a Restricted Stock Award is made, the Committee shall establish the Restriction Period applicable to such Award; provided, however, that, except as set forth below and as permitted by Paragraph (b) of this Article IX, such Restriction Period shall not be less than the Minimum Criteria. An Award which provides for the lapse of restrictions on shares applicable to such Award in equal annual installments over a period of at least three (3) years from the date of grant shall be deemed to meet the Minimum Criteria. The foregoing notwithstanding, with respect to Restricted Stock Awards and Restricted Stock Unit Awards of up to an aggregate of 500,000 shares (subject to adjustment as set forth in Article XIII), the Minimum Criteria shall not apply and the Committee may establish such lesser Restriction Periods applicable to such Awards as it shall determine in its discretion. Subject to the foregoing, each Restricted Stock Award may have a different Restriction Period, in the discretion of the Committee. The Restriction Period applicable to a particular Restricted Stock Award shall not be changed except as permitted by Paragraph (b) of this Article or by Article XIII.

-11-

(b) Other Terms and Conditions. Common Stock awarded pursuant to a Restricted Stock Award shall be represented by a stock certificate registered in the name of the Holder of such Restricted Stock Award or, at the option of the Company, in the name of a nominee of the Company. The Holder shall have the right to receive dividends during the Restriction Period, to vote the Common Stock subject thereto and to enjoy all other stockholder rights, except that (i) the Holder shall not be entitled to possession of the stock certificate until the Restriction Period shall have expired, (ii) the Company shall retain custody of the stock during the Restriction Period, (iii) the Holder may not sell, transfer, pledge, exchange, hypothecate or otherwise dispose of the stock during the Restriction Period, and (iv) a breach of the terms and conditions established by the Committee pursuant to the Restricted Stock Award shall cause a forfeiture of the Restricted Stock Award. At the time of such Award, the Committee may, in its sole discretion, prescribe additional terms, conditions or restrictions relating to Restricted Stock Awards, including, but not limited to, rules pertaining to the termination of a Holder’s service (by retirement, disability, death or otherwise) prior to expiration of the Restriction Period as shall be set forth in a Restricted Stock Award Agreement.

(c) Payment for Restricted Stock. A Holder shall not be required to make any payment for Common Stock received pursuant to a Restricted Stock Award, except to the extent otherwise required by law and except that the Committee may, in its discretion, charge the Holder an amount in cash not in excess of the par value of the shares of Common Stock issued under the Plan to the Holder.

(d) Miscellaneous. Nothing in this Article shall prohibit the exchange of shares issued under the Plan (whether or not then subject to a Restricted Stock Award) pursuant to a plan of reorganization for stock or securities in the Company or another corporation a party to the reorganization, but the stock or securities so received for shares then subject to the restrictions of a Restricted Stock Award shall become subject to the restrictions of such Restricted Stock Award. Any shares of stock received as a result of a stock split or stock dividend with respect to shares then subject to a Restricted Stock Award shall also become subject to the restrictions of the Restricted Stock Award.

X. RESTRICTED STOCK UNIT AWARDS

(a) Restricted Period To Be Established by the Committee. At the time a Restricted Stock Unit Award is made, the Committee shall establish the Restriction Period applicable to such Award; provided, however, that except as set forth below and as permitted by Paragraph (b) of this Article X, such Restriction Period shall not be less than the Minimum Criteria. An Award which provides for the lapse of restrictions applicable to such Award in equal annual installments over a period of at least three (3) years from the date of grant shall be deemed to meet the Minimum Criteria. The foregoing notwithstanding, with respect to Restricted Stock Awards and Restricted Stock Unit Awards of up to an aggregate of 500,000 shares (subject to adjustment as set forth in Article XIII), the Minimum Criteria

-12-

shall not apply and the Committee may establish such lesser Restriction Periods applicable to such Awards as it shall determine in its discretion. Subject to the foregoing, each Restricted Stock Unit Award may have a different Restriction Period, in the discretion of the Committee. The Restriction Period applicable to a particular Restricted Stock Unit Award shall not be changed except as permitted by Paragraph (b) of this Article or by Article XIII.

(b) Other Terms and Conditions. At the time of a Restricted Stock Unit Award, the Committee may, in its sole discretion, prescribe additional terms, conditions or restrictions relating to the Restricted Stock Unit Award, including, but not limited to, rules pertaining to the termination of a Holder’s service (by retirement, disability, death or otherwise) prior to expiration of the Restriction Period as shall be set forth in a Restricted Stock Unit Award Agreement. Cash dividend equivalents may be paid during, or may be accumulated and paid at the end of, the Restriction Period with respect to a Restricted Stock Unit Award, as determined by the Committee. The Committee, in its sole discretion, may provide for the deferral of a Restricted Stock Unit Award. If a payment of cash or issuance of Common Stock is to be made on a deferred basis, the Committee shall establish whether interest or dividend equivalents shall be credited on the deferred amounts and any other terms and conditions applicable thereto.

(c) Payment for Restricted Stock Unit. A Holder shall not be required to make any payment for Common Stock received pursuant to a Restricted Stock Unit Award, except to the extent otherwise required by law and except that the Committee may, in its discretion, charge the Holder an amount in cash not in excess of the par value of the shares of Common Stock issued under the Plan to the Holder.

(d) Restricted Stock Units in Substitution for Units or Restricted Stock Granted by Other Corporations. Restricted Stock Unit Awards may be granted under the Plan from time to time in substitution for restricted stock units or restricted stock held by employees of corporations who become, or who became prior to the effective date of the Plan, employees of the Company or of any Subsidiary as a result of a merger or consolidation of the employing corporation with the Company or such Subsidiary, or the acquisition by the Company or a Subsidiary of all or a portion of the assets of the employing corporation, or the acquisition by the Company or a Subsidiary of stock of the employing corporation with the result that such employing corporation becomes a Subsidiary.

XI. PERFORMANCE AWARDS

(a) Performance Period. The Committee shall establish, with respect to and at the time of each Performance Award, a performance period over which the performance applicable to the Performance Award of the Holder shall be measured.

(b) Performance Awards. Each Performance Award may have a maximum value established by the Committee at the time of such Award.

-13-

(c) Performance Measures. A Performance Award granted under the Plan that is intended to qualify as qualified performance-based compensation under Section 162(m) of the Code shall be awarded contingent upon the achievement of one or more performance measures. The performance criteria for Performance Awards shall consist of objective tests based on the following: earnings, cash flow, cash value added performance, stockholder return and/or value, revenues, operating profits (including EBITDA), net profits, earnings per share, stock price, cost reduction goals, debt to capital ratio, financial return ratios, profit return and margins, market share, working capital and customer satisfaction. The Committee may select one criterion or multiple criteria for measuring performance. Performance criteria may be measured on corporate, subsidiary or business unit performance, or on a combination thereof. Further, the performance criteria may be based on comparative performance with other companies or other external measure of the selected performance criteria. A Performance Award that is not intended to qualify as qualified performance-based compensation under Section 162(m) of the Code shall be based on achievement of such goals and be subject to such terms, conditions and restrictions as the Committee or its delegate shall determine.

(d) Payment. Following the end of the performance period, the Holder of a Performance Award shall be entitled to receive payment of an amount, not exceeding the maximum value of the Performance Award, if any, based on the achievement of the performance measures for such performance period, as determined by the Committee in its sole discretion. Payment of a Performance Award (i) may be made in cash, Common Stock or a combination thereof, as determined by the Committee in its sole discretion, (ii) shall be made in a lump sum or in installments as prescribed by the Committee in its sole discretion, and (iii) to the extent applicable, shall be based on the Fair Market Value of the Common Stock on the payment date. If a payment of cash or issuance of Common Stock is to be made on a deferred basis, the Committee shall establish whether interest or dividend equivalents shall be credited on the deferred amounts and any other terms and conditions applicable thereto.

(e) Termination of Service. The Committee shall determine the effect of termination of service during the performance period on a Holder’s Performance Award.

XII. STOCK VALUE EQUIVALENT AWARDS

(a) Stock Value Equivalent Awards. Stock Value Equivalent Awards are rights to receive an amount equal to the Fair Market Value of shares of Common Stock or rights to receive an amount equal to any appreciation or increase in the Fair Market Value of Common Stock over a specified period of time, which vest over a period of time as established by the Committee, without payment of any amounts by the Holder thereof (except to the extent otherwise required by law) or satisfaction of any performance criteria or objectives. Each Stock Value Equivalent Award may have a maximum value established by the Committee at the time of such Award.

-14-

(b) Award Period. The Committee shall establish, with respect to and at the time of each Stock Value Equivalent Award, a period over which the Award shall vest with respect to the Holder.

(c) Payment. Following the end of the determined period for a Stock Value Equivalent Award, the Holder of a Stock Value Equivalent Award shall be entitled to receive payment of an amount, not exceeding the maximum value of the Stock Value Equivalent Award, if any, based on the then vested value of the Award. Payment of a Stock Value Equivalent Award (i) shall be made in cash, (ii) shall be made in a lump sum or in installments as prescribed by the Committee in its sole discretion, and (iii) shall be based on the Fair Market Value of the Common Stock on the payment date. Cash dividend equivalents may be paid during, or may be accumulated and paid at the end of, the determined period with respect to a Stock Value Equivalent Award, as determined by the Committee. If payment of cash is to be made on a deferred basis, the Committee shall establish whether interest shall be credited, the rate thereof and any other terms and conditions applicable thereto.

(d) Termination of Service. The Committee shall determine the effect of termination of service during the applicable vesting period on a Holder’s Stock Value Equivalent Award.

XIII. RECAPITALIZATION OR REORGANIZATION

(a) After the closing date of the IPO, except as hereinafter otherwise provided, in the event of any recapitalization, reorganization, merger, consolidation, combination, exchange, stock dividend, stock split, extraordinary dividend or divestiture (including a spin-off) or any other change in the corporate structure or shares of Common Stock occurring after the date of the grant of an Award, the Committee shall, in its discretion, make such adjustment as to the number and price of shares of Common Stock or other consideration subject to such Awards as the Committee shall deem appropriate in order to prevent dilution or enlargement of rights of the Holders.

(b) The existence of the Plan and the Awards granted hereunder shall not affect in any way the right or power of the Board or the stockholders of the Company to make or authorize any adjustment, recapitalization, reorganization or other change in the Company’s capital structure or its business, any merger or consolidation of the Company, any issue of debt or equity securities having any priority or preference with respect to or affecting Common Stock or the rights thereof, the dissolution or liquidation of the Company or any sale, lease, exchange or other disposition of all or any part of its assets or business or any other corporate act or proceeding.

(c) The shares with respect to which Options, Stock Appreciation Rights or Restricted Stock Units may be granted are shares of Common Stock as presently constituted, but, after the closing date of the IPO, if, and whenever, prior to the

-15-

expiration of an Option, Stock Appreciation Rights or Restricted Stock Unit Award, the Company shall effect a subdivision or consolidation of shares of Common Stock or the payment of a stock dividend on Common Stock without receipt of consideration by the Company, the number of shares of Common Stock with respect to which such Award relates or may thereafter be exercised (i) in the event of an increase in the number of outstanding shares shall be proportionately increased, and, as applicable, the purchase price per share shall be proportionately reduced, and (ii) in the event of a reduction in the number of outstanding shares shall be proportionately reduced, and, as applicable, the purchase price per share shall be proportionately increased.

(d) After the closing date of the IPO, if the Company recapitalizes or otherwise changes its capital structure, thereafter upon any exercise of an Option or Stock Appreciation Rights or payment in settlement of a Restricted Stock Unit Award theretofore granted, the Holder shall be entitled to purchase or receive, as applicable, under such Award, in lieu of the number of shares of Common Stock as to which such Award relates or shall then be exercisable, the number and class of shares of stock and securities and the cash and other property to which the Holder would have been entitled pursuant to the terms of the recapitalization if, immediately prior to such recapitalization, the Holder had been the holder of record of the number of shares of Common Stock then covered by such Award (or, if a cash payment would otherwise be payable, an amount determined by reference to the value attributable thereto).

(e) In the event of a Corporate Change, unless an Award Document otherwise provides, as of the Corporate Change Effective Date (i) any outstanding Options and Stock Appreciation Rights shall become immediately vested and fully exercisable, (ii) any restrictions on Restricted Stock Awards or Restricted Stock Unit Awards shall immediately lapse, (iii) all performance measures upon which an outstanding Performance Award is contingent shall be deemed achieved and the Holder shall receive a payment equal to the maximum amount of the Award he or she would have been entitled to receive, prorated to the Corporate Change Effective Date, and (iv) any outstanding cash Awards including, but not limited to, Stock Value Equivalent Awards shall immediately vest and be paid based on the vested value of the Award.

(f) In the relevant Award Document, the Committee may provide that, no later than two (2) business days prior to any Corporate Change referenced in Clause (ii), (iii) or (iv) of the definition thereof or ten (10) business days after any Corporate Change referenced in Clause (i) of the definition thereof, the Committee may, in its sole discretion, (i) require the mandatory surrender to the Company by all or selected Optionees of some or all of the outstanding Options held by such Optionees (irrespective of whether such Options are then exercisable under the provisions of the Plan) as of a date (before or after a Corporate Change) specified by the Committee, in which event the Committee shall thereupon cancel such Options and pay to each Optionee an amount of cash per share equal to the excess, if any, of the Change of Control Value of the shares subject to such

-16-

Option over the exercise price(s) under such Options for such shares, (ii) require the mandatory surrender to the Company by all or selected Holders of Stock Appreciation Rights of some or all of the outstanding Stock Appreciation Rights held by such Holders (irrespective of whether such Stock Appreciation Rights are then exercisable under the provisions of the Plan) as of a date (before or after a Corporate Change) specified by the Committee, in which event the Committee shall thereupon cancel such Stock Appreciation Rights and pay to each Holder an amount of cash equal to the Spread (if any) with respect to such Stock Appreciation Rights with the Fair Market Value of the Common Stock at such time to be deemed to be the Change of Control Value, or (iii) require the mandatory surrender to the Company by selected Holders of Restricted Stock Awards, Restricted Stock Unit Awards or Performance Awards of some or all of the outstanding Awards held by such Holder (irrespective of whether such Awards are vested under the provisions of the Plan) as of a date (before or after a Corporate Change) specified by the Committee, in which event the Committee shall thereupon cancel such Awards and pay to each Holder an amount of cash equal to the Change of Control Value of the shares, if the Award value is determined by the full value of shares of Common Stock, or an amount of cash equal to the value of the Award at such time, if the Award is not determined on that basis.

(g) Except as hereinbefore expressly provided, the issuance by the Company of shares of stock of any class or securities convertible into shares of stock of any class, for cash, property, labor or services, upon direct sale, upon the exercise of rights or warrants to subscribe therefor, or upon conversion of shares or obligations of the Company convertible into such shares or other securities, and in any case whether or not for fair value, shall not affect, and no adjustment by reason thereof shall be made with respect to, the number of shares of Common Stock subject to Awards theretofore granted, the purchase price per share of Common Stock subject to Options or the calculation of the Spread with respect to Stock Appreciation Rights.

XIV. AMENDMENT OR TERMINATION OF THE PLAN

The Board in its discretion may terminate the Plan or alter or amend the Plan or any part thereof from time to time; provided that no change in the Plan may be made which would impair the rights of the Holder in any Award theretofore granted without the consent of the Holder, and provided, further, that the Board may not, without approval of the stockholders, amend the Plan to effect a “material revision” of the Plan, where a “material revision” includes, but is not limited to, a revision that: (a) materially increases the benefits accruing to a Holder under the Plan, (b) materially increases the aggregate number of securities that may be issued under the Plan, (c) materially modifies the requirements as to eligibility for participation in the Plan, (d) changes the types of awards available under the Plan, or (e) amends or deletes the provisions that prevent the Committee from amending the terms and conditions of an outstanding Option or Stock Appreciation Rights to alter the exercise price.

-17-

XV. OTHER

(a) No Right To An Award. Neither the adoption of the Plan nor any action of the Board or of the Committee shall be deemed to give an employee or a Non-employee Director any right to be granted an Award or any other rights hereunder except as may be evidenced by an Award Document duly executed on behalf of the Company, and then only to the extent of and on the terms and conditions expressly set forth therein. The Plan shall be unfunded. The Company shall not be required to establish any special or separate fund or to make any other segregation of funds or assets to assure the payment of any Award.

(b) No Employment Rights Conferred. Nothing contained in the Plan or in any Award made hereunder shall:

(i) confer upon any employee any right to continuation of employment with the Company or any Subsidiary; or

(ii) interfere in any way with the right of the Company or any Subsidiary to terminate his or her employment at any time.

(c) No Rights to Serve as a Director Conferred. Nothing contained in the Plan or in any Award made hereunder shall confer upon any Director any right to continue their position as a Director of the Company.

(d) Other Laws; Withholding. The Company shall not be obligated to issue any Common Stock pursuant to any Award granted under the Plan at any time when the offering of the shares covered by such Award has not been registered under the Securities Act of 1933, such other state and federal laws, rules or regulations, and non-U.S. laws, rules, or regulations as the Company or the Committee deems applicable and, in the opinion of legal counsel for the Company, there is no exemption from the registration requirements of such laws, rules or regulations available for the issuance and sale of such shares. No fractional shares of Common Stock shall be delivered, nor shall any cash in lieu of fractional shares be paid. The Company shall have the right to deduct in connection with all Awards any taxes required by law to be withheld and to require any payments necessary to enable it to satisfy its withholding obligations. The Committee may permit the Holder of an Award to elect to surrender, or authorize the Company to withhold, shares of Common Stock (valued at their Fair Market Value on the date of surrender or withholding of such shares) in satisfaction of the Company’s withholding obligation, subject to such restrictions as the Committee deems appropriate.

(e) No Restriction on Corporate Action. Nothing contained in the Plan shall be construed to prevent the Company or any Subsidiary from taking any corporate action which is deemed by the Company or such Subsidiary to be appropriate or in its best interest, whether or not such action would have an adverse effect on the Plan or any Award made under the Plan. No Holder, beneficiary or other person shall have any claim against the Company or any Subsidiary as a result of any such action.

-18-

(f) Restrictions on Transfer. Except as otherwise provided herein, an Award shall not be sold, transferred, pledged, assigned or otherwise alienated or hypothecated by a Holder other than by will or the laws of descent and distribution or pursuant to a “qualified domestic relations order” as defined by the Code or Title I of the Employee Retirement Income Security Act of 1974, as amended, and shall be exercisable during the lifetime of the Holder only by such Holder, the Holder’s guardian or legal representative, a transferee under a qualified domestic relations order or a transferee as described below. The Committee may prescribe and include in the respective Award Documents hereunder other restrictions on transfer. Any attempted assignment or transfer in violation of this section shall be null and void. Upon a Holder’s death, the Holder’s personal representative or other person entitled to succeed to the rights of the Holder (the “Successor Holder”) may exercise such rights as are provided under the applicable Award Document. A Successor Holder must furnish proof satisfactory to the Company of his or her rights to exercise the Award under the Holder’s will or under the applicable laws of descent and distribution. Notwithstanding the foregoing, the Committee shall have the authority, in its discretion, to grant (or to sanction by way of amendment to an existing grant) Awards (other than Incentive Stock Options) which may be transferred by the Holder for no consideration to or for the benefit of the Holder’s Immediate Family, to a trust solely for the benefit of the Holder and his Immediate Family, or to a partnership or limited liability company in which the Holder and members of his Immediate Family have at least 99% of the equity, profit and loss interest, in which case the Award Document shall so state. A transfer of an Award pursuant to this Paragraph (f) shall be subject to such rules and procedures as the Committee may establish. In the event an Award is transferred as contemplated in this Paragraph (f), such Award may not be subsequently transferred by the transferee except by will or the laws of descent and distribution, and such Award shall continue to be governed by and subject to the terms and limitations of the Plan and the relevant written instrument for the Award and the transferee shall be entitled to the same rights as the Holder under Articles XIII and XIV hereof as if no transfer had taken place. No transfer shall be effective unless and until written notice of such transfer is provided to the Committee, in the form and manner prescribed by the Committee. The consequences of termination of employment shall continue to be applied with respect to the original Holder, following which the Awards shall be exercised by the transferee only to the extent and for the periods specified in the Plan and the related Award Document. The Option Agreement, Stock Appreciation Rights Agreement, Restricted Stock Award Agreement, Restricted Stock Unit Award Agreement or other Award Document shall specify the effect of the death of the Holder on the Award.

(g) Governing Law. This Plan shall be construed in accordance with the laws of the State of Texas, except to the extent that it implicates matters which are the subject of the General Corporation Law of the State of Delaware which matters shall be governed by the latter law.

-19-

(h) Foreign Awardees. The Committee may, without amending the Plan, grant Awards to eligible persons who are foreign nationals on such terms and conditions different from those specified in the Plan as may, in the judgment of the Committee, be necessary or desirable to foster and promote achievement of the purposes of the Plan and, in furtherance of such purposes, the Committee may make such modifications, amendments, procedures, subplans and the like as may be necessary or advisable to comply with the provisions of laws and regulations in other countries or jurisdictions in which the Company or its Subsidiaries operate.

(i) Section 409A. Notwithstanding anything in this Plan to the contrary, if any Plan provision or Award under the Plan, or any deferral permitted under the Plan, would result in the imposition of an applicable tax under Section 409A of the Code and related regulations and Treasury pronouncements (“Section 409A”), that Plan provision or Award will be reformed, and that deferral provision will be structured, to avoid imposition of the applicable tax and no action taken to comply with Section 409A shall be deemed to adversely affect the Participant’s rights with respect to an Award.

-20-

EX-10.24

Exhibit 10.24

FORM OF

AMENDMENT NO. 2 TO THE

FIVE YEAR REVOLVING CREDIT AGREEMENT

Dated as of ________, 2006

AMENDMENT NO. 2 TO THE FIVE YEAR REVOLVING CREDIT AGREEMENT (this “Second Amendment”), among KBR HOLDINGS, LLC, a Delaware limited liability company (the “Borrower”), the banks, financial institutions and other institutional lenders parties to the Credit Agreement referred to below (collectively, the “Banks”), and Citibank, N.A., as paying agent (the “Agent”) for the Banks.

PRELIMINARY STATEMENTS

(1) The Borrower, the Banks and the Agent have entered into a Five Year Revolving Credit Agreement, dated as of December 16, 2005 (as amended, amended and restated, supplemented or otherwise modified through the date hereof, the “Credit Agreement”). Capitalized terms not otherwise defined in this Second Amendment have the same meanings as specified in the Credit Agreement.

(2) The Borrower and the Required Banks have agreed to amend the Credit Agreement as hereinafter set forth.

SECTION 1. Amendments to Credit Agreement. The Credit Agreement is, effective as of the date hereof and subject to the satisfaction of the conditions precedent set forth in Section 3, hereby amended as follows:

(a) Section 1.01 is amended as follows:

(i) a new defined term is inserted in the appropriate alphabetical order to read as follows: “‘Change of Control’ means the occurrence of any of the following at any time from and after the Borrower ceases to be a consolidated subsidiary of the Parent in accordance with GAAP: (a) any Person or two or more Persons acting in concert shall have acquired beneficial ownership (within the meaning of Rule 13d-3 of the Securities and Exchange Commission under the Securities Exchange Act of 1934), directly or indirectly, of Voting Interests of the Borrower (or other securities convertible into such Voting Interests) representing 25% or more of the combined voting power of all Voting Interests of the Borrower or (b) during any period of up to 24 consecutive months, commencing after the date the Borrower ceases to be a consolidated subsidiary of the Parent in accordance with GAAP, the Continuing Directors shall cease for any reason (other than death or disability) to constitute a majority of the board of directors of the Borrower; provided that if the Borrower becomes a wholly-owned subsidiary of another Person (“New Parent”) at the time or before it ceases to be a consolidated subsidiary of the Parent in accordance with GAAP, the tests for Change of Control shall relate to New Parent rather than the Borrower.”;

KBR Five-Year Revolving Credit Agreement

Amendment No. 2

(ii) the definition of “Consolidated Debt” is amended by deleting the words “and Permitted Non-Recourse Indebtedness” immediately following the words “Project Financing” in the third line thereof;

(iii) a new defined term is inserted in the appropriate alphabetical order to read as follows: “‘Continuing Directors’ means the directors of the Borrower on the date the Borrower ceases to be a consolidated subsidiary of the Parent in accordance with GAAP, and each other director if, in each case, such other director’s nomination for election to the board of directors of the Borrower is recommended by at least a majority of the then Continuing Directors; provided that if there is at the time Borrower ceases to be a consolidated subsidiary of the Parent in accordance with GAAP a New Parent, references to Borrower in this definition shall be deemed to be references to New Parent.”;

(iv) the definition of “EBITDA” is deleted in its entirety and restated as follows: “‘EBITDA’ means, for any period, (a) the sum, determined on a consolidated basis, of (i) net income (or net loss), (ii) interest expense, including commissions and fees incurred in respect of letters of credit, (iii) income tax expense, (iv) depreciation expense, (v) amortization expense, (vi) minority interest in income of Subsidiaries, (vii) charges related to restructuring, asset impairment or other extraordinary items or related to non-cash estimate project losses (including non-extraordinary items), (viii) charges indemnified or required to be indemnified pursuant to the Indemnity Agreement or in respect of which a subordinated loan or a capital contribution is or will be required to be made pursuant to the Subordination Agreement, minus (b) cash payments related to restructuring, asset impairment or other extraordinary items or related to non-cash estimate project losses (including non-extraordinary items) to the extent previously included in the computation of EBITDA pursuant to clause (a)(vii) of this definition (except to the extent indemnified or required to be indemnified pursuant to the Indemnity Agreement or in respect of which a subordinated loan or a capital contribution is or will be required to be made pursuant to the Subordination Agreement), in each case of the Borrower and its Subsidiaries (excluding any Project Finance Subsidiary), determined in accordance with GAAP for such period; provided, however, that with respect to any Project Finance Subsidiary, any cash distribution made by such Project Finance Subsidiary to the Borrower or any Subsidiary of the Borrower (other than any Project Finance Subsidiary) to the extent not previously included in the equity and earnings of such Person shall be included for purposes of calculation of EBITDA.”;

(v) a new defined term is inserted in the appropriate alphabetical order to read as follows: “‘Extended Letter of Credit’ has the meaning specified in Section 2.01(b).”;

(vi) the definition of “Fixed Charge Coverage Ratio” is amended by deleting the words “and Permitted Non-Recourse Indebtedness” in the seventh line thereof;

(vii) the definition of “Intercompany Note” is deleted in its entirety and restated as follows: “‘Intercompany Note’ means, collectively, (i) that certain existing note made by the Borrower to HESI in an amount not to exceed $489 million and (ii) that certain existing note made by Georgetown Finance Ltd. to Avalon Financial Services, Ltd. in an amount not to exceed $285 million, or, in either case, any note hereafter issued as contemplated by Section 5.02(l) hereof.”;

KBR Five-Year Revolving Credit Agreement

Amendment No. 2

2

(viii) the definition of “Loan Document” is deleted in its entirety and restated as follows: “Loan Documents” means this Agreement, the Guarantee, the New Parent Guarantee, the Notes, the Indemnity Agreement, the Pre-IPO Reimbursement Agreement and the Subordination Agreement.”;

(ix) the definition of “Loan Parties” is deleted in its entirety and restated as follows: “‘Loan Parties’ means the Borrower, the New Parent and the Subsidiary Guarantors.”;

(x) the definition of “Maturity Date” is deleted in its entirety and restated as follows: “‘Maturity Date’ means June 29, 2010; provided that if the unpaid balance of the Intercompany Note shall have been irrevocably reduced to zero on or prior to the effectiveness of Amendment No. 2 to this Agreement, the “Maturity Date” shall mean December 16, 2010.”;

(xi) a new defined term is inserted in the appropriate alphabetical order to read as follows: “‘New Parent’ shall have the meaning given to such term in the proviso to the definition of “Change of Control”;

(xii) a new defined term is inserted in the appropriate alphabetical order to read as follows: “‘New Parent Guarantee’ means a guarantee to be executed by New Parent within three Business Days following such Person becoming the controlling shareholder of the Borrower, which New Parent Guarantee shall:

(a) be substantially in the form of the Subsidiary Guarantee with such conforming changes as the Agent shall reasonably require, and

(b) provide that the New Parent shall assume all of the affirmative and negative covenants of the Borrower contained herein, as such guarantee may be amended, amended and restated, modified or otherwise supplemented.”;

(xiii) the definition of “Permitted Non-Recourse Indebtedness” is deleted in its entirety and restated as follows: “‘Permitted Non-Recourse Indebtedness’ means Indebtedness and other Obligations of:

(a) the Borrower, any Subsidiary, or any Project Finance Subsidiary of the Borrower incurred in connection with the acquisition or construction by the Borrower, such Subsidiary, or such Project Finance Subsidiary of any property with respect to which the holders of such Indebtedness and other Obligations agree that they will look solely to the property so acquired or constructed and securing such Indebtedness and other Obligations, and neither the Borrower nor any such Subsidiary (i) provides any direct or indirect credit support, including any undertaking, agreement or instrument that would constitute Indebtedness or (ii) is otherwise directly or indirectly

liable for such Indebtedness; or

(b) any Special Purpose Subsidiary incurred in connection with the acquisition or construction by a Special Purpose Subsidiary of any property with

KBR Five-Year Revolving Credit Agreement

Amendment No. 2

3

respect to which the holders of such Indebtedness and other Obligations agree that they will look solely to Special Purpose Subsidiaries, and neither the Borrower nor any Subsidiary (other than any Special Purpose Subsidiary) (i) provides any direct or indirect credit support, including any undertaking, agreement or instrument that would constitute Indebtedness or (ii) is otherwise directly or indirectly liable for such Indebtedness;

provided that in the case of either (a) or (b) no default with respect to such Indebtedness or Obligations would cause, or permit (after notice or passage of time or otherwise), according to the terms thereof, any holder (or any representative of any such holder) of any other Indebtedness (other than Project Financing or Permitted Non-Recourse Indebtedness) of the Borrower or such Subsidiary (other than a Project Finance Subsidiary, a Special Purpose Subsidiary and Subsidiaries thereof) to declare a default on such other Indebtedness or cause the payment, repurchase, redemption, defeasance or other acquisition or retirement for value thereof to be accelerated or payable prior to any scheduled principal payment, scheduled sinking fund or maturity.”;

(xiv) a new defined term is inserted in the appropriate alphabetical order to read as follows: “‘Special Purpose Subsidiary’ means (i) any Subsidiary of the Borrower (other than a Loan Party) that incurs Permitted Non-Recourse Indebtedness and owns and operates its permitted assets, and/or acts as an operator of third-party assets, and substantially all of the assets of such Subsidiary are limited to (a) those assets for which the acquisition, improvement, installation, design, engineering, construction, development, completion, maintenance, operation, securitization or monetization is being, or has been financed in whole or in part by Permitted Non-Recourse Indebtedness, (b) equity interests in its Subsidiaries, and/or (c) capital contributed to such Subsidiary, and (ii) any Subsidiary (other than a Loan Party) of a Subsidiary described in clause (i) above.”;

(xv) the definition of “Termination Date” is amended by deleting the date “December 16, 2010” and substituting therefor the words “Maturity Date”; and

(xvi) a new defined term is inserted in the appropriate alphabetical order to read as follows: “Voting Interests” means shares of capital stock issued by a corporation, or equivalent Equity Interests in any other Person, the holders of which are ordinarily, in the absence of contingencies, entitled to vote to the election of directors (or persons performing similar functions) of such Person, even if the right so to vote has been suspended by the happening of such contingency.”

(b) Section 2.01(b) is deleted in its entirety and restated as follows:

“(b) Letters of Credit. Each Issuing Bank agrees, on the terms and conditions hereinafter set forth, to issue letters of credit (collectively, the “Letters of Credit”, and each a “Letter of Credit”) for the account of the Borrower (such issuance, and any funding of a draw thereunder, to be made by the Issuing Banks (including through such branches or Affiliates as such Issuing Bank and the Borrower shall jointly agree) in reliance on the agreements of the other Banks pursuant to Section 2.03) from time to time on any Business Day during the period from the Effective Date until 10 days prior to the Maturity Date in an aggregate Available Amount (i) for all Letters of Credit issued by the Issuing Banks not to exceed at any time the

KBR Five-Year Revolving Credit Agreement

Amendment No. 2

4

lesser of (A) the aggregate Letter of Credit Commitments at such time and (B) the Letter of Credit Commitment of such Issuing Bank at such time (or such greater amount as such Issuing Bank shall approve) and (ii) for each such Letter of Credit not to exceed an amount equal to the Unused Revolving Credit Commitments of the Banks at such time. No Letters of Credit shall have expiration dates later than 10 Business Days prior to the Maturity Date; provided, however, that if the applicable Issuing Bank and the Agent each consent, in their sole discretion, the expiration date (including, without limitation, any expiration date which may be extended automatically under the terms of the Letters of Credit) of any Letter of Credit may extend beyond the date referred to in this sentence (each such Letter of Credit, together with any Letter of Credit outstanding on the effective date of Amendment No. 2 to this Agreement with an expiration date beyond the Maturity Date, an “Extended Letter of Credit”); provided, further, that, on or prior to the date that is 95 days prior to the Maturity Date (or, if later, the date of issuance of the applicable Extended Letter of Credit), the Borrower shall provide cash collateral for each Extended Letter of Credit that is outstanding or is issued after the date that is 95 days prior to the Maturity Date in an amount equal to 102% of the face amount of such Extended Letter of Credit; provided, further, that at no time shall the aggregate amount of Extended Letters of Credit plus the unpaid principal amount of Revolving Credit Advances exceed the sum of the Borrowing Sublimit plus the amount of cash collateral then held with respect to the Extended Letters of Credit. The cash collateral specified in the foregoing sentence shall be provided to the Agent by the Borrower by requesting a Revolving Credit Advance pursuant to Section 2.01(a). If the Borrower shall fail to make such request, the Agent may make such request on the Borrower’s behalf. The Banks agree that they will make such Revolving Credit Advance whether or not the applicable conditions precedent in Section 3.02 are then satisfied. Upon the furnishing by the Borrower of such cash collateral on the ninety-fifth day prior to the Maturity Date to the Agent, the Agent shall transfer to individual cash collateral accounts established by each Issuing Bank which has issued an Extended Letter of Credit the pro rata share of such cash collateral allocable to such Issuing Bank. Simultaneous with receipt of such cash collateral, such Extended Letters of Credit, shall for all purposes cease to be Letters of Credit hereunder. Thereafter, fees, costs and expenses, as well as terms for release of such cash collateral, shall be as agreed from time to time between the Borrower and such Issuing Bank. Within the limits referred to above, the Borrower may request the issuance of Letters of Credit under this Section 2.01(b), repay any Letter of Credit Advances resulting from drawings thereunder pursuant to Section 2.03(c) and request the issuance of additional Letters of Credit under this Section 2.01(b).”;

(c) Section 5.01(d) is amended by deleting the words “a reconciliation in reasonable detail of excluding” in clause (B) of subsection (i) and the words “reconciling in reasonable detail the effect of excluding” in clause (C) of subsection (ii) thereof and substituting therefor the words “a reconciliation in reasonable detail of the effect on EBITDA of non-cash estimate project losses (including non-extraordinary items) and cash payments related thereto and the effect of excluding”.;

(d) Section 5.01 (h) is amended by inserting the words “or the New Parent” immediately following the word “Parent” in the sixth line thereof;

KBR Five-Year Revolving Credit Agreement

Amendment No. 2

5

(e) Section 5.02(a) is amended by:

(i) inserting the words “surety bonds” and a comma immediately thereafter, immediately prior to the word “acceptances” in the fourth line thereof;

(ii) amending subsection (ix) thereof by deleting it in its entirety and restating it to read as follows: “Liens securing reimbursement obligations in respect of overdraft facilities, letters of credit, surety bonds, acceptances or bank guarantees and other Indebtedness, provided that at the time of the creation, incurrence or assumption of any reimbursement obligations in respect of overdraft facilities, letters of credit, surety bonds (other than surety bonds permitted by subsection (x) hereof), acceptances or bank guarantees or other Indebtedness secured by such Liens and after giving effect thereto, the sum of the principal amount of such reimbursement obligations in respect of overdraft facilities, letters of credit, surety bonds, acceptances or bank guarantees and other Indebtedness secured by Liens permitted by this clause (ix) shall not exceed, in the aggregate, the sum of (A) $150,000,000 and (B) the aggregate amount of letters of credit which had been Extended Letters of Credit but ceased to be Letters of Credit hereunder following being cash collateralized as contemplated by Section 2.01(b) hereof.”; and

(iii) adding a new subsection (x) thereto after the end of subsection (ix) thereof to read as follows: “Liens securing obligations under joint venture agreements, surety bonds, and indemnification agreements related thereto on any assets related to such joint venture or bonded work, as the case may be, including, without limitation, equipment, property, contracts, distributions and accounts related thereto and cash collateral required thereby.”;

(f) Section 5.02(b) is amended by:

(i) deleting subsection (vi) thereof in its entirety and restating it to read as follows: “(vi) Indebtedness in respect of any Project Financing or any Permitted Non-Recourse Indebtedness;”;

(ii) deleting the figure “$75,000,000” contained in the third line of subsection (viii) thereof and substituting therefor the figure “$150,000,000”;

(iii) deleting the period following the word “Agreement” at the end of subsection (ix) thereof and substituting therefor the following “; provided further that, in the event that the Borrower ceases to be a consolidated subsidiary of the Parent in accordance with GAAP, then, thirty (30) days from and after such event, there shall be no Indebtedness of the Borrower or any Subsidiary of Borrower owed to the Parent or HESI in respect of the KBR Cash Management Note or any other cash management system; and”; and

(iv) adding a new subsection (x) thereto after the end of subsection (ix) thereof to read as follows: “(x) Indebtedness representing letter of credit reimbursement obligations secured as contemplated by clause (B) of the proviso to Section 5.02(a)(ix).”

(g) Section 5.02(f) is amended by:

(i) deleting subsection (iii) thereof in its entirety and restating it to read as follows: “(iii) advances under the Halliburton Cash Management Note; provided that (A) such transfers are consistent with past practices, (B) Parent’s senior unsecured long term debt is

KBR Five-Year Revolving Credit Agreement

Amendment No. 2

6

rated at least BBB- by S&P and Baa3 by Moody’s at the time of each such transfer, and (C) no Default or Event of Default shall have occurred and be continuing; provided, further, that in the event that the Borrower ceases to be a consolidated subsidiary of the Parent in accordance with GAAP, then, thirty (30) days from and after such event, there shall be no Indebtedness of the Parent or HESI owed to the Borrower of any of its Subsidiaries in respect of the Halliburton Cash Management Note or any other cash management system.” ;

(ii) inserting the words “or the New Parent or its Subsidiaries” immediately following the words “the Parent or its Subsidiaries” in the second line of subsections (vi) and (vii) thereof;

(iii) deleting the figure “$75,000,000” contained in clause (C) of subsection (viii) thereof and substituting therefor the figure “$150,000,000”;

(iv) (A) deleting the word “and” at the end of subsection (x) thereof, (B) deleting the period at the end of subsection (xi) thereof and substituting therefor “; and”, and (C) adding a new subsection (xii) thereto to read as follows: “loans from Subsidiaries to the Borrower and loans permitted by Section 5.02(g)(x) and (xi).”; and

(v) adding a new paragraph following the end of the last subsection thereof to read as follows: “For purposes of this Section 5.02(f), the amount of an Investment shall be determined as of the date of such Investment, and such amount shall be equal to the cash amount or the fair market value of other property or asset invested.”

(h) Section 5.02(g) is amended by:

(i) deleting the word “Subsidiary” following the word “any” in the first line of subsection (vi) thereof and substituting therefor “Person (other than the Borrower)”;

(ii) deleting the word “and” at the end of subsection (ix) thereof and inserting at the end thereof a semicolon; and

(iii) deleting the period at the end of clause (x) and adding the following:

“(xi) the Borrower may pay cash dividends or loans to New Parent in amounts equal to:

(A) the amounts required for New Parent to pay any federal, state or local income taxes to the extent that such income taxes are directly attributable to the income of the Borrower and its Subsidiaries;

(B) the amounts required for New Parent to pay franchise taxes and other fees required to maintain its legal existence;

KBR Five-Year Revolving Credit Agreement

Amendment No. 2

7

(C) an amount to permit New Parent to pay its corporate overhead expenses incurred in the ordinary course of business, and to pay salaries or other compensation of employees who perform services for both New Parent and the Borrower;

(xii) the Borrower or any Subsidiary of the Borrower may redeem, repurchase, retire or otherwise acquire any of its Equity Interests in connection with a compensation plan, program or practice (or pay cash dividend or loans to New Parent to accomplish such actions); provided that the aggregate price paid for all such repurchased, redeemed, acquired or retired Equity Interests shall not exceed $25 million in any fiscal year of the Borrower; and

(xiii) the Borrower and any Subsidiary of the Borrower may grant, issue, distribute or dividend Equity Interests to its directors, officers and employees and make or permit the vesting, lapse, exercise or payment of Equity Interests in options, restricted stock, performance awards (in the form of either cash or stock of the Borrower), and other similar grants and awards pursuant to existing (or substantially similar replacement or amended) compensation plans, programs or practices.

For purposes of this Section 5.02(g), to the extent that a Subsidiary issues any Equity Interests which result in a reduction in the proportionate interest of the Borrower or any Subsidiary in such Subsidiary, then such transaction shall be treated as a sale.”;

(i) Section 5.02(l) is deleted in its entirety and restated to read as follows: “Amendment to Intercompany Note. Amend, modify or change in any manner any term or condition of the Intercompany Note, agree in any manner to any other amendment, modification or change of any term or condition of the Intercompany Note or take any other action in connection with the Intercompany Note that would impair the interest or rights of the Agent or any Bank, or permit any of its Subsidiaries to do any of the foregoing; provided that notwithstanding the foregoing, the Intercompany Note may be amended, modified, changed, replaced or refinanced so long as (i) the maturity date of such amended, modified, or changed Intercompany Note or any replacement or refinancing thereof shall not be earlier than June 30, 2010, and (ii) any other amendment, modification or change is not adverse to the Banks in any respect.”;

(j) Section 6.01(c) is amended to insert the words “or the New Parent” following the words “the Borrower” in the first line thereof;

(k) Section 6.01(d) is amended by deleting the words “Permitted Non-Recourse Debt” in the third line thereof and substituting therefor the words “Permitted Non-Recourse Indebtedness.”;

(l) Section 6.01(i) is amended by deleting it in its entirety and restating it as follows: “A Change of Control shall occur; or”;

KBR Five-Year Revolving Credit Agreement

Amendment No. 2

8

(m) Schedule 5.02(b)(ii) to the Credit Agreement is hereby replaced with a new Schedule 5.02(b)(ii) thereto attached hereto as Annex A;

(n) Schedule I to the Subordination Agreement is hereby replaced with a new Schedule I thereto attached hereto as Annex B; and

(o) Schedule II to the Subordination Agreement is hereby replaced with a new Schedule II thereto attached hereto as Annex C.

SECTION 3. Conditions of Effectiveness. This Second Amendment shall become effective as of the date first above written when, and only when, the Agent shall have received counterparts of this Second Amendment executed by the Borrower and the Required Banks or, as to any of the Banks, advice satisfactory to the Agent that such Bank has executed this Second Amendment and the consent attached hereto executed by each Relevant Party (other than the Borrower). This Second Amendment is subject to the provisions of Section 8.01 of the Credit Agreement.

SECTION 4. Representations and Warranties of the Borrower. The Borrower represents and warrants as follows:

(a) the representations and warranties contained in each Loan Document are correct on and as of the date hereof (except (i) those representations and warranties contained in (A) Section 4.01(i) of the Credit Agreement to the extent such matters are subject to, and covered by, (x) the Indemnity Agreement and (y) the Disclosed Litigation, and (B) Section 4.01(f) of the Credit Agreement and (ii) those other representations and warranties that expressly relate solely to a specific earlier date, which shall remain correct as of such earlier date) after giving effect to this Second Amendment, as though made on and as of the date hereof; and

(b) no event has occurred and is continuing, after giving effect to this Second Amendment, which constitutes a Default or an Event of Default.

SECTION 5. Reference to and Effect on the Loan Document. (a) On and after the effectiveness of this Second Amendment, each reference in the Credit Agreement to “this Agreement”, “hereunder”, “hereof” or words of like import referring to the Credit Agreement, and each reference in the Notes and each of the other Loan Documents to “the Credit Agreement”, “thereunder”, “thereof” or words of like import referring to the Credit Agreement, shall mean and be a reference to the Credit Agreement, as amended by this Second Amendment.

(b) The Credit Agreement and each of the other Loan Documents, as specifically amended by this Second Amendment, are and shall continue to be in full force and effect and are hereby in all respects ratified and confirmed.

(c) The execution, delivery and effectiveness of this Second Amendment shall not, except as expressly provided herein, operate as a waiver of any right, power or remedy of any Bank or the Agent under any of the Loan Documents, nor constitute a waiver of any provision of any of the Loan Documents.

KBR Five-Year Revolving Credit Agreement

Amendment No. 2

9

SECTION 6. Costs and Expenses. The Borrower agrees to pay on demand all costs and expenses of the Agent in connection with the preparation, execution, delivery and administration, modification and amendment of this Second Amendment and the other instruments and documents to be delivered hereunder (including, without limitation, the reasonable fees and expenses of counsel for the Agent) in accordance with the terms of Section 8.04 of the Credit Agreement.

SECTION 7. Execution in Counterparts. This Second Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute but one and the same agreement. Delivery of an executed counterpart of a signature page to this Second Amendment by telecopier shall be effective as delivery of a manually executed counterpart of this Second Amendment.

SECTION 8. Governing Law. This Amendment shall be governed by, and construed in accordance with, the laws of the State of New York.

[signature page follows]

KBR Five-Year Revolving Credit Agreement

Amendment No. 2

10

Exhibit 10.24

IN WITNESS WHEREOF, the parties hereto have caused this Second Amendment to be executed by their respective officers thereunto duly authorized, as of the date first above written.

KBR HOLDINGS, LLC
By
	Title:

CITIBANK, N.A.,
as Paying Agent and as Bank
By
	Title:

KBR Five-Year Revolving Credit Agreement

Amendment No. 2

Exhibit 10.24

[Name of Bank]

By:

Name:

Title:

KBR Five-Year Revolving Credit Agreement

Amendment No. 2

CONSENT

Dated as of_________ , 2006

The undersigned, one of the Relevant Parties referred to in the Credit Agreement referred to in the foregoing Second Amendment, hereby consents to such Second Amendment and hereby confirms and agrees that notwithstanding the effectiveness of such Second Amendment, each Loan Document to which it is a party is, and shall continue to be, in full force and effect and is hereby ratified and confirmed in all respects, except that, on and after the effectiveness of such Second Amendment, each reference in each Loan Document to the “Credit Agreement”, “thereunder”, “thereof” or words of like import shall mean and be a reference to the Credit Agreement, as amended by such Second Amendment .

KELLOGG BROWN & ROOT LLC (FKA

KELLOGG BROWN & ROOT, INC.)

KELLOGG BROWN & ROOT SERVICES, INC.

KELLOGG BROWN & ROOT

    INTERNATIONAL, INC.

By:

Name:

Title:

HALLIBURTON COMPANY

HALLIBURTON ENERGY SERVICES, INC.

By:

Name:

Title:

KBR Five-Year Revolving Credit Agreement

Amendment No. 2

EX-21.1

Exhibit 21.1

KBR, INC.

Subsidiaries of Registrant as of December 20, 2005

NAME OF COMPANY	STATE OR COUNTRY OF               INCORPORATION
BITC (US) LLC	Delaware
Brown & Root Toll Road Investment Partners, Inc.	Delaware
Devonport Management Limited	United Kingdom, England & Wales
Devonport Royal Dockyard Limited	United Kingdom, England & Wales
HBR NL Holdings, LLC	Delaware
KBR Group Holdings, LLC	Delaware
KBR Holdings, LLC	Delaware
Kellogg Brown & Root Holding B.V.	The Netherlands
Kellogg Brown & Root Holdings Limited	United Kingdom, England & Wales
Kellogg Brown & Root Holdings (U.K.) Limited	United Kingdom, England & Wales
Kellogg Brown & Root Limited	United Kingdom, England & Wales
Kellogg Brown & Root LLC	Delaware
Kellogg Brown & Root Netherlands B.V.	The Netherlands
Kellogg Brown & Root Services, Inc.	Delaware

EX-23.1

Exhibit 23.1

Consent of Independent Registered Public Accounting Firm

The Member and the Board of Directors of KBR Holdings, LLC

The Board of Directors and Shareholder of KBR, Inc.

We consent to the use of our reports dated April 11, 2006, except as to Note 4, which is as of September 20, 2006, and except as to Note 2, which is as of October 30, 2006, with respect to the consolidated balance sheets of KBR Holdings, LLC and subsidiaries as of December 31, 2005 and 2004, and the related consolidated statements of operations, member’s equity and cash flows for each of the years in the three-year period ended December 31, 2005, and the related financial statement schedule, included herein.

We consent to the use of our report dated April 11, 2006, except as to Note 2, which is as of October 27, 2006, with respect to the balance sheet of KBR, Inc. as of March 21, 2006, included herein.

We consent to the reference to our firm under the heading “Experts” in the prospectus.

/s/ KPMG LLP

KPMG LLP

Houston, Texas

October 30, 2006

EX-23.3

Exhibit 23.3

CONSENT OF PERSON TO BE NAMED A DIRECTOR NOMINEE

I hereby consent to the use of my name and any references to me as a person nominated to serve as a director of KBR, Inc., a Delaware corporation (the “Company”), in the Registration Statement of the Company on Form S-1 (File No. 333-133302), and any and all amendments or supplements thereto, to be filed with the U.S. Securities and Exchange Commission pursuant to the Securities Act of 1933, as amended. I also consent to the filing of this consent as an exhibit to the Registration Statement.

Dated: October 27, 2006

/s/ Richard J. Slater

Richard J. Slater

CORRESP

SEC Response Letter