By Vivienne Walt in Tehran

(FORTUNE Magazine) – "HALLIBURTON!" CHIRPED THE employee who answered the telephone in Tehran. Tehran, the capital of the Islamic Republic of Iran, part of the "axis of evil"? Yes, the company was a tenant, confirmed the guard in the lobby of a building on Bucharest Street when we dropped in one recent afternoon. The staff rarely invited guests up to their tenth-floor offices, said the guard, and the company's name was not among those displayed on the lobby wall. Halliburton finally dispatched two Iranian staff members to ask this reporter to leave. Said the guard softly: "We're not too sure what the company is up to."

Actually it's no big mystery. In January Halliburton and the local Oriental Kish Oil won a $308 million contract to drill for gas in Iran's giant South Pars field. "Halliburton and Oriental Kish are the final winners," Akbar Torkan, managing director of Pars Oil & Gas, said on national TV. The statement sparked fury among Iran's hardliners. One newspaper warned, "Footsteps of the Yankees heard moving in on Iran's oil sector."

While Halliburton insists its activities in Iran are entirely legal, some in Congress claim that the Houston oil services giant is milking a loophole in the U.S. embargo that allows foreign subsidiaries of American companies to work in Iran. "They are operating on the very boundaries of legality of U.S. law," says Dan Katz, chief counsel for Senator Frank R. Lautenberg (D--New Jersey), who has long argued that Halliburton--once run by Vice President Dick Cheney--is exploiting its political clout.

So are U.S. companies tiptoeing back into Iran, ten years after Bill Clinton imposed sanctions? Iran's deputy petroleum minister for international affairs, Hadi Nejad Hosseinian, certainly thinks so: "The U.S. oil companies are in touch with us," he told FORTUNE in his office in Tehran. "American companies are very interested in investing in Iran," he said, adding that a top U.S. oil executive, unnamed, visited him in Tehran last summer. "They want to show their objection to the U.S. administration." In Halliburton's case, it says Oriental Kish contracted out the work to Halliburton Products & Services Ltd., or HPSL, a Dubai-based subsidiary registered in the Cayman Islands, which works solely in Iran. "These entities and activities are staffed and managed by non-U.S. personnel," says company spokesman Wendy Hall. "Halliburton's business is clearly permissible." A second Houston oil services company, Baker Hughes, is weighing doing part of the work with Oriental Kish, according to sources close to the talks.

Under U.S. law, a foreign subsidiary can legally operate in Iran if it acts independently of its parent and has no American executives. In addition, there's a $40 million limit on how much a non-U.S. company can invest in Iran. Halliburton spokeswoman Beverly Scippa told FORTUNE that HPSL's new contract is worth "between $30 million and $35 million over the next three years."

Nevertheless, Halliburton is under grand-jury investigation for possible sanctions violations in Iran. U.S. Treasury officials began their probe in 2001 after HPSL was found to share its Dubai address and telephone number with Halliburton. Senator Lautenberg plans in February to reintroduce legislation--defeated in the Senate by one vote last year--to ban foreign subsidiaries of U.S. companies from doing business in Iran. Meanwhile, the oilmen in Texas are likely to use the loophole as long as it exists. -- Vivienne Walt in Tehran