UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-K

Commission file number 1-31339

Weatherford International Ltd.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code:

(713) 693-4000

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

None

      Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.     Yes þ          No o

      Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.     Yes o          No þ

      Note — Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Exchange Act from their obligations under those Sections.

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

      Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     o

      Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one):

      Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).     Yes o          No þ

      The aggregate market value of the voting stock held by nonaffiliates of the registrant as of June 30, 2005 was $4,920,938,975 based upon the closing price on the New York Stock Exchange as of such date.

      Indicate the number of shares outstanding of each of the registrant’s classes of common shares, as of the latest practicable date:

DOCUMENTS INCORPORATED BY REFERENCE

      Certain information called for by Items 10, 11, 12, 13 and 14 of Part III will be included in an amendment to this annual report on Form 10-K or incorporated by reference from the registrant’s definitive proxy statement for the annual meeting to be held on May 9, 2006.

PART I

      Weatherford International Ltd. is one of the world’s leading providers of equipment and services used for the drilling, completion and production of oil and natural gas wells. We were originally incorporated in Delaware in 1972, and as a result of our corporate reorganization in 2002, are now incorporated in Bermuda. Many of our businesses, including those of Weatherford Enterra, have been operating for more than 50 years.

      We operate in approximately 100 countries through approximately 670 service and sales locations, which are located in nearly all of the oil and natural gas producing regions in the world. We are among the leaders in each of our primary markets, and our distribution and service network is one of the most extensive in the industry.

      We conduct our operations through four principal operating divisions:

      During the past five years we have completed key acquisitions and divestitures as a component of our strategy. In August 2005, we completed one of our most substantial acquisitions when we acquired Precision Energy Services and Precision Drilling International. Opportunities exist to accelerate the market penetration of the acquired products in the Eastern Hemisphere by utilizing our established infrastructure and to increase pull through sales with our expanded portfolio of technologies. Precision Energy Services is a global provider of cased hole and open hole wireline services, drilling and evaluation services and production services. These operations will substantially broaden our wireline and directional capabilities and will strengthen our underbalanced product lines. Precision Drilling International is a land rig contractor owning and operating 48 rigs, with a concentrated presence in the Eastern Hemisphere and Latin America. The procurement of these assets will allow us to further meet our customers’ comprehensive service needs.

      Our divestitures include the April 2000 spin-off of our Drilling Products Division to our shareholders through a distribution of the stock of our Grant Prideco, Inc. subsidiary. In February 2001, we completed the merger of essentially all of our Compression Services Division into a subsidiary of Universal Compression Holdings, Inc. in exchange for 13.75 million shares of Universal common stock. During 2004 and 2005, we sold our interest in Universal Compression Holdings, Inc. In 2005, we sold our non-core Gas Services International compression fabrication business. This business has been reflected as a discontinued operation in our financial statements.

      The following is a summary of our business strategies and the markets we serve. We have also included a discussion of our divisions, including a description of our products and services offered and our competitors. Divisional and geographic financial information appears in “Item 8. Financial Statements and Supplementary Data — Notes to Consolidated Financial Statements  — Note 21.”

      Our principal executive offices are located at 515 Post Oak Boulevard, Suite 600, Houston, Texas 77027. Our telephone number is (713) 693-4000, and our Internet address is www.weatherford.com. General information about us, including our Corporate Governance Policies and charters for the committees of our board of directors, can be found on our website. We make available, free of charge, on our website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file or furnish them to the SEC.

References to Weatherford

      When referring to Weatherford and using phrases such as “we” and “us,” our intent is to refer to Weatherford International Ltd. and its subsidiaries as a whole or on a divisional basis, depending on the context in which the statements are made.

Strategy

      Our primary objective is to provide our shareholders with above average returns on their investment through income growth and asset appreciation.

      Principal components of our growth strategy include:

Markets

      We are a leading provider of equipment and services to the oil and natural gas exploration and production industry. Demand for our industry’s services and products depends upon the number of oil and natural gas wells being drilled, the depth and drilling conditions of wells, the number of well completions and the level of workover activity worldwide.

      During the mid-1980’s, the drilling industry contracted sharply, correcting a condition of significant over capacity that existed in the supply of oilfield service and equipment. For the last 20 years, global rig count has cycled up and down with factors such as world economic and political trends that influence supply and demand for energy, the price of oil and natural gas and the level of exploration and drilling for those commodities.

      The majority of worldwide drilling activity, as measured by rig counts, has historically been concentrated in North America. Over time, activity in North America has become increasingly driven by natural gas consumption on the continent, particularly in the U.S. The percentage of the U.S. rig count dedicated to natural gas drilling has increased from approximately 50% in the early 1990’s to approximately 84% in late 2005. Canada has experienced a similar trend, with rigs drilling for natural gas increasing from less than 40% seven years ago to over 80% by the end of 2005. A primary reason for the increasing emphasis on natural gas drilling is that North American gas wells have very high production decline rates, so that significant numbers of new wells need to be drilled over time to maintain ongoing natural gas production at desirable levels. Changes in the balance of energy demand and the supply of natural gas affect natural gas storage levels, commodity prices and the volatility of North American drilling activity. In 2005, the North American rig count reached a new recent high, averaging 1,844 for the year, 23% above the previous high in 2001 and 126% above the lowest annual average of the last 15 years, 816, which occurred in 1992.

      Over the last decade, drilling and completion activity has grown faster in international markets than in North America. According to Spears & Associates, in 2005 approximately 40% of the worldwide drilling and completion expenditures occurred in international markets (excluding Russia and China). Drilling activity outside North America tends to be less volatile than the North American market. Most contracts span two to three years due to the significant investment and complexity surrounding international projects. Drilling decisions relating to these projects therefore tend to be evaluated and monitored with a longer-term

perspective in regard to oil and natural gas pricing. Additionally, the international market is dominated by major oil companies and national oil companies, which tend to have longer-term objectives than the typical independent producer in North America. In the last 15 years, the non-North American average annual rig count has cycled between a high of 915 in 1991 and a low of 588 in 1999. In 2005, the annual international rig count averaged 891. Since 1999, the international market has recovered slowly; however, we believe the geological future of the industry is in both international markets and deepwater because of the maturity and declining production of North American fields.

      Historically, the majority of our business was concentrated in the U.S. and Canada. In the late 1990’s, we began a concerted program to expand our operations and shift more of our business internationally by utilizing the strength of Weatherford Enterra’s international presence to introduce new and existing products and services into these markets. Today, we operate in approximately 100 countries in the major oil and natural gas producing areas of North and Latin America, Europe, Africa, Russia, Commonwealth of Independent States, China, Southeast Asia and the Middle East. In 1998, our revenue split was 64% North America and 36% international. In 2005, our revenue split was 55% North America and 45% international.

      In 2005, our Evaluation, Drilling & Intervention Services Division generated approximately 50% of its revenues outside North America, and our Completion & Production Systems Division generated approximately 33% of its revenues from the same regions. Our Pipeline & Specialty Services and Precision Drilling International Divisions generated approximately 80% and 100%, respectively, of their revenues outside North America. With the increasing importance of international oil production, we continue to focus on growth in international markets.

      Due to the maturity of the world’s oil and natural gas reservoirs, the accelerating production decline rates and the focus on complex deepwater prospects, technology has become increasingly critical to the marketplace. Customers continue to seek, test and prove production-enabling technologies at an increasing rate. Technology is an important aspect of our products and services as it helps us provide our customers with more efficient tools to find and produce oil and natural gas. We have invested a substantial amount of our time and resources in building our technology offerings. We believe our new, more efficient products and services are among the best in the industry and enable our customers to reduce their costs of drilling and production and/or increase production rates. Furthermore, these offerings afford us additional opportunities to sell our traditional core products and services to our clients.

Evaluation, Drilling & Intervention Services Division

      Our Evaluation, Drilling & Intervention Services Division provides products and services used by oil and natural gas companies, drilling contractors and other service companies to explore for, drill for, work-over and produce oil and natural gas. The division is a combination of Weatherford’s former Drilling Services Division and Precision Energy Services, a significant acquisition in 2005 that strengthened our offering and expertise in directional drilling, open hole and cased hole wireline services, and well testing.

      We estimate approximately 60% of the products and services offered by this division are used in the initial drilling and completion of oil and natural gas wells. The remainder of the products and services are used in connection with the production phases of wells, including maintenance, re-drilling, re-completion and other remediation and well intervention operations.

      The Division is separated into two primary business units: 1) Performance Drilling & Evaluation Services, and 2) Well Construction & Intervention Services, which focuses on the continued supply of products and services to our established market segments, including drilling tools, tubular running services, well construction systems, and fishing and re-entry services.

      This business unit concentrates on our emerging markets, including drilling services, wireline services, Controlled Pressure Drilling^® (“CPD”^®) and well testing services, and geoscience services, and adds the new measurement component of formation evaluation to our more traditional mechanical capabilities.

      Directional Drilling — Directional drilling uses equipment and engineering to intentionally change the direction of a wellbore. This helps enhance drilling efficiency and circumvent formations or obstructions to reach the pay zone. Directional drilling services are necessary for the industry’s increasing trend toward deviated wells, re-entry and infill drilling applications. Through the acquisition of Precision Energy Services, we now supply a range of specialized, patented equipment for directional drilling, including:

      The Precision acquisition added the Hardy Road Technology Center, which supports our directional drilling capabilities. This state-of-the-art facility houses qualified engineers, scientists and technicians, all focused on developing technologies for the high temperature MWD and LWD market with respect to land-based as well as deepwater drilling markets. We also acquired a portfolio of patents and patent applications directed to key aspects of its MWD, LWD and rotary steerable services. These patents cover key aspects of technology in LWD nuclear and resistivity measurements, electromagnetic telemetry and the Revolution^® rotary steerable system. We also now hold a worldwide, exclusive license to electromagnetic telemetry patents and patent applications for use in MWD services.

      Controlled Pressure Drilling^® — CPD helps clients safely increase the profitability of their reservoirs’ assets at less lifecycle cost by enhancing drilling and reservoir performance through a portfolio of products and services. Weatherford’s CPD offerings are provided through three disciplines: 1) Underbalanced Reservoir Drilling, 2) Performance Drilling, and 3) Managed Pressure Drilling.

      Underbalanced Reservoir Drilling is used in development, exploration and mature field applications to minimize formation damage and maximize productivity. We believe that, in the future, many older fields and reservoirs cannot be economically drilled other than through the use of underbalanced drilling. Underbalanced Reservoir Drilling is defined as drilling with bottomhole pressure that is designed and maintained below reservoir pressure to intentionally invite fluid influx. This permits the reservoir to flow while the drilling takes place, thereby protecting the formation from damage by the drilling fluids.

      Traditional drilling methods, on the other hand, use weighted drilling fluids that not only prevent the flow of hydrocarbons during drilling but permeate the formation, sometimes causing significant formation damage and limiting the production of hydrocarbons. One of the differentiators of our Underbalanced Reservoir Drilling offerings is our Suitable Underbalanced Reservoir Evaluation (“SURE”) Process. Our SURE

Process uses various engineering and software tools to enhance a client’s ability to assess underbalanced drilling prospects suitability.

      Our Performance Drilling business applies reduced density fluid systems to drill sub-hydrostatically. Performance Drilling is used primarily in hard rock applications to reduce drilling costs by increasing rate of penetration. We offer a variety of fluids, including air drilling systems, mist drilling systems, foam drilling systems, including our patented Trans-Foam^®Recyclable Drilling Fluid System and aerated fluid drilling systems.

      Our Managed Pressure Drilling (“MPD”) business is an advanced form of primary well control that uses a closed, pressurized fluid system that more precisely controls the wellbore pressure profile than mud weight adjustments alone. The main objective of MPD is to optimize drilling processes by decreasing non-productive time and mitigating drilling hazards.

      A full range of downhole equipment, such as high temperature motors, wireline steering tools, drill pipe, air rotary hammer drills, casing exit systems, downhole deployment valves and downhole data acquisition equipment, make our product offering unique. Another is surface equipment, such as specifically designed self-contained mobile or skid-mounted compression and nitrogen membrane or passive exhaust gas generation systems, rotating control heads to control well pressure while circulating drilling mediums during drilling, skid-mounted separators to separate oil, natural gas, drilling media and cuttings, choke manifolds and solids recovery systems.

      In 2005, Weatherford completed more than 4,000 Underbalanced Reservoir Drilling, MPD and Performance Drilling jobs around the world. This includes the first MPD job in the Gulf of Mexico.

      Drilling-with-casing (“DwC” ^tm) Systems — This technique allows operators to simultaneously drill, case and evaluate oil and natural gas wells. Our DwC technique eliminates downhole complexity, reducing expensive rig modifications and the number of trips downhole. Consequently, well construction is simplified, and productivity can be improved when drilling through the reservoir. Our DwC offerings include drillshoe systems, XpandaBit, liner drilling systems, torque head top drive casing, reamer tools and centralizers. At the end of 2005, we had run more than 500 DwC jobs to date.

      Wireline Services — Wireline services are used to measure the physical properties of underground formations to help determine the location and potential deliverability of oil and gas in a reservoir. Wireline services are provided from surface logging units, which lower tools and sensors into the wellbore mainly on a single or multiple conductor wireline. However, other conveyance methods are also available. As the wireline pulls the tools through the wellbore, log measurements are gathered and relayed through the wireline cable to a computerized surface data acquisition and processing system. These systems are an integral component of each wireline unit.

      The provision of wireline services is divided into three categories; open hole, cased hole and slickline services.

      Open hole logging assists in locating oil and gas by measuring certain characteristics of geological formations and providing permanent records called “logs.” Open hole logging may be performed at different intervals during the well drilling process or immediately after a well is drilled.

      This logging data provides a valuable benchmark to which future well management decisions may be referenced. The open hole sensors and tools are used to determine well lithology and the presence of hydrocarbons. Formation characteristics such as resistivity, density and porosity are measured using electrical, nuclear, acoustic, magnetic and mechanical technologies. This data is then used to characterize the reservoir and describe it in terms of porosity, permeability, oil, gas, or water content and an estimation of productivity. This information can be further refined at a later time in one of our log interpretation centers. Wireline services can relay this information from the wellsite on a real time basis via a secure satellite transmission network and secure internet connection to the client’s office for faster evaluation and decisions.

      Most of our open hole tools and sensors are proprietary. Our unique offering is a reliable, cost-effective system known as the Compact^tmsuite of tools. The tool’s design, which is smaller, slimmer and easier to

handle, enables high quality logging data to be acquired more efficiently than the current competitor’s offering. As a result, the focus of open hole wireline research and engineering has been on developing new and/or improved downhole sensors for the Compact^tm and standard logging suites. Compact tools can be conveyed on wireline or using an array of conveyance alternatives such as, tractors or coiled tubing.

      Cased hole logging is performed at various times throughout the life of the well and includes perforating, completion logging, production logging and casing integrity services. After the wellbore is cased and cemented, the cased hole division can perform a number of different services. Perforating creates the flow path between the reservoir and the wellbore. Production logging may be performed throughout the life of the well to measure temperature, fluid type, flow rate, pressure and other reservoir characteristics. This helps the operator analyze and monitor well performance and determine when a well may need a workover or further stimulation. In addition, cased hole services may involve wellbore remediation, which could include the positioning and installation of various plugs and packers to maintain production or repair well problems and casing inspection services that looks for internal or external abnormalities in the casing string. Some of our cased hole tools are proprietary.

      Slickline, which uses a solid steel or braided non-conductor line, in place of a single or multiple conductor braided line used in electric logging, is used primarily in producing wells for running downhole memory tools, manipulating downhole production devices and fishing services.

      Through the acquisition of Precision Energy Services, we now have a total of more than 430 wireline units that can be deployed from our service centers in Canada, the U.S., and internationally.

      Well Testing — Well testing uses specialized equipment and procedures to obtain essential information about oil and gas wells after the drilling process is complete. Typical information derived may include reservoir performance, reservoir pressure, permeability, porosity and formation fluid composition.

      A related application is our separation business that supplies personnel and equipment on a wellsite to recover a mixture of solids, liquids and gases from oil and gas wells. These services are used during drilling, post stimulation or after re-completion to clean up wells. The operator requires a well to be properly cleaned up prior to undertaking a well test to ensure that the true deliverability of the well is attained and that debris and spent stimulation chemicals do not ultimately flow to the process plant.

      Geoscience Services — Geoscience services provided by geologists, geophysicts, and drilling, completion, production and reservoir engineers, serves as the interdisciplinary bridge across our diverse product lines to support customer efforts to maximize their oil and gas assets for the ‘life of the well’ — from well planning, through drilling, evaluation, completion, production enhancement and finally abandonment.

      Major computing centers in Calgary and Houston, along with branches in Europe, Middle East and South America, use the latest internet technology to deliver data to our customers — from real time (LWD) “geosteering” for critical well placement decisions to ongoing reservoir monitoring with permanent “intelligent completion” sensors. We provide advanced reservoir solutions by incorporating open hole, cased hole and production data.

      One of our businesses, Hycal Energy Research Laboratories, Ltd., specializes in advanced core and fluid analysis, formation damage and phase behavior to optimize production. Another business, our proprietary SURE process, is a systematic evaluation to determine whether candidates are suited for special underbalanced and multilateral drilling techniques to reduce formation damage and improve deliverability before the prospect is drilled.

      This business unit focuses on our more traditional mechanical capabilities and spans tubular running, a full line of cementing products, liner systems, solid tubular expandable technologies, drilling tools and well services.

      Tubular Running Services — These services consist of a wide variety of tubular connection and installation services for the drilling, completion and workover of an oil and natural gas well. We are a

significant market leader in tubular running services worldwide. We offer an integrated package of total tubular services management that allows our customers to receive all of their tubular handling, preparation, inspection, cleaning and wellsite installation needs from a single source. We are a leader in rig mechanization technology used for the installation of tubing and casing and offer various products and services to improve rig floor operations by reducing staffing requirements, increasing operational efficiency and improving safety. We offer computerized torque monitoring and testing services to ensure the integrity of tubular connection makeup. We also specialize in critical service installations where operating conditions, such as offshore, and/or metallurgical characteristics call for specific handling technology. Finally, our tubular running services include high-grade completion equipment installation services as well as cementation engineering services.

      Cementation Tools — Cementing operations are one of the most important and expensive phases in the completion of a well. According to Spears & Associates, we are the world’s leading producer of specialized equipment that allows operators to centralize the casing throughout the wellbore and control the displacement of cement and other fluids. Our cementing engineers also analyze complex wells and provide detailed recommendations to help optimize cementing results. Our cementing products group also works closely with our Completion & Production Systems Division in designing integrated completion systems. Our cementing product line includes the following:

      Liner Systems — Liner hangers allow strings of casing to be suspended within a wellbore without having to extend the casing to the surface. Most directional wells include one or more liners to optimize casing programs. We offer both drilling and production liner hangers. Drilling liners are used to isolate areas within the well during drilling operations. Production liners are used in the producing area of the well to support the wellbore and to isolate various sections of the well. Our inflatable packer product line is used to service liner systems and includes annulus casing packers, inflatable production packers and inflatable straddle packer assemblies. We also offer specialized high pressure, high temperature, high performance inflatable thru-tubing and completion packers.

      Solid Tubular Expandable Technologies — Proprietary expandable tools are also being developed for downhole solid tubular applications in well remediation, well completion and well construction. Our solid tubular expandable products include expandable liner hangers, used to create liners and seals, and MetalSkin^tm, used for well cladding to shut off zones, retro-fit corroded sections of casing and strengthen existing casing. Solid Tubular Expandables utilize both fixed cone and our compliant roller expansion technology. We currently expect to commercialize additional solid expandable applications during 2006 for well construction purposes, including open hole MetalSkin^tm clads for controlling unwanted fluid loss or influx, and slimbore drilling liners. Slimbore and, ultimately, monobore liner systems are designed to allow significant cost reductions by reducing consumables for drilling and completion of wells, allowing smaller rigs to be used and reducing cuttings removal needs. The benefits are derived because of expandable technologies’ potential to significantly reduce or eliminate the reverse-telescoping inherent in traditional well construction.

      Drilling Tools — We design and manufacture patented tools, including our drilling jars, rotating control heads and other pressure control equipment. We also offer a broad selection of in-house or third-party manufactured equipment for the drilling, completion and workover of oil and natural gas wells. We offer these proprietary and non-proprietary drilling tools to our customers, primarily operators and drilling contractors, on

a rental basis, allowing the customer to utilize unique equipment without the cost of holding that equipment in inventory.

      The rental of our proprietary and non-proprietary tools permits the equipment to be more efficiently used and allows us to receive value-added returns on the equipment. The breadth of our operations and locations allows us to manage and re-deploy our equipment to locations where the equipment is most needed. Our drilling tools include:

      Intervention Services — Our intervention services helps clients repair wells that have mechanical problems or that need work to prolong production to retrieve remaining oil and natural gas reserves. Our intervention products and services span the spectrum of fishing services, re-entry services, and thru-tubing products and services.

      Fishing Services — Fishing services are provided through teams of experienced fishing tool supervisors and a comprehensive line of fishing tools. Our teams provide conventional fishing services such as removing wellbore obstructions, including stuck or dropped equipment, tools, drill string components and other debris, that were left behind unintentionally during the drilling, completion or work-over of new and old wells. Specialty fishing tools required in these activities include fishing jars, milling tools, casing cutters, overshots and spears. Fishing services also provides well patches and extensive plug and abandonment products.

      Reentry Services — Our reentry services include casing exit services and advanced multilateral systems. Conventional and advanced casing exit systems allow sidetrack and lateral drilling solutions for customers who either cannot proceed down the original well track or want to drill lateral wells from the main or parent wellbore. An example is Weatherford’s QuickCut^tmSingle Trip Casing Exit System, which mills windows in half the conventional time and reduces drilling time in difficult to drill formations. As of December 2005, we had run more than 750 QuickCut systems around the world. In addition, advanced multilateral systems, including selective reentry systems (“SRS”^tm), allow numerous sidetracks from parent wellbores, pre-milled windows utilizing patented “key way” technology and advanced multilateral junction solutions.

      Thru-tubing Services — Thru-tubing services are used in well re-entry activity that allow operators to perform complex drilling, completion and cementing activities from existing wellbores without removing existing production systems. Thru-tubing services and products include drilling motors, casing exits, fishing and milling, zonal isolation and other well remediation services. In 2005, we launched our PowerStroke^tm Milling System. The PowerStroke System helps operators remediate wells using existing wellbore infrastructure, a benefit that can save up to 60-70% when compared to the cost of drilling new wells.

      We provide Evaluation, Drilling & Intervention Division’s products and services worldwide, and we compete in a variety of distinct segments with a number of competitors. Our major competitors are Baker Hughes, Halliburton, Schlumberger, Smith International and BJ Services. We also compete with other regional suppliers that provide a limited range of equipment and services tailored for local markets. Competition is based on a number of factors including performance, safety, quality, reliability, service, price, response time and in some cases, breadth of products. We believe we are the industry leader in Controlled Pressure Drilling^® (CPD^®) Services, underbalanced services, and tubular running services, a serious contender in the wireline and directional drilling and well testing markets, and one of the largest providers of drilling products and cementation products in the world.

Completion & Production Systems Division

      Our Completion & Production Systems Division provides completion systems, all forms of artificial lift systems, fracturing technologies and production optimization.

      We offer our customers a comprehensive line of completion products as well as engineered and integrated completion systems for oil and natural gas fields. These products and services include:

      Cased Hole Completion Systems — These systems are incorporated into the tubing string used to transport hydrocarbons from the reservoir to the surface. We offer a wide range of devices used to enhance the safety and functionality of the production string, including permanent and retrievable packer systems, sub-surface safety systems, flow controls and tool string, specialized downhole isolation valves and associated servicing equipment.

      Sand Screens — Sand production often results in premature failure of artificial lift and other downhole and surface equipment and can obstruct the flow of oil and natural gas. Conventional sand screen products are used in the fluid-solid separation processes and have a variety of product applications. Our primary application of well screens is for the control of sand in unconsolidated formations. We offer premium, pre-pack and wire-wrap sand screens.

      The Completion & Production Systems Division also operates the water well and industrial screen business of Johnson Screens, which we acquired in 2001. Served markets include water well, petrochemical, polymer/extrusion, mining and general industrial applications.

      Expandable Sand Screens (“ESS”^tm) — Our Expandable Sand Screen systems are proprietary step-change sand control devices that reduce cost and improve production. The ESS consists of three layers, including slotted base pipe, filtration screens and an outer protective shroud. The ESS can be expanded utilizing a fixed cone and/or our proprietary rotary expansion system. This system enables the ESS to be compliant with the walls of the well, which aids productivity because it stabilizes the wellbore and prevents sand from migrating into it. The ESS can replace complex gravel packing techniques in many sand control situations. In August 2005, we installed our 400th expandable system. We also have combined our ESS and MetalSkin^tm Solid Expandable technology to apply expandable reservoir completions to multizone factors, combining open hole productivity with cased hole functionality.

      Production Chemical Systems — Engineered Chemistry^tm combines proprietary chemical solutions with internally developed oilfield equipment technologies. Our high-performance chemistry solutions include custom tailored chemical solutions for production, refining, completion, water treatment and other industrial processes, a total service package — product selection, application and optimization, precise formulations and multi-functional chemical formulations that include the only formulas certified for capillary injection.

      Artificial lift systems are installed in oil wells and to a lesser extent, natural gas wells that do not have sufficient reservoir pressure to raise the produced oil or natural gas to the surface and need to supplement the natural reservoir pressures to produce oil or natural gas from the well. There are six principal types of artificial lift technologies used in the industry. We are the leading producer of artificial lift systems and the only company in the world able to provide all forms of lift including progressing cavity pumps, reciprocating rod systems, gas lift systems, electrical submersible pumps, hydraulic and other lift systems.

      Progressing Cavity Pumps — A progressing cavity pump (“PCP”) is a downhole pump controlled by an above-ground electric motor system connected to the downhole pump via a coupled rod or continuous rod string. These pumps are among the most operationally efficient and are designed to work in wells of depths up to 6,000 feet with production between 10 to 4,500 barrels of oil per day. We are also developing high temperature progressing cavity pumps for steam assisted gravity drilling (“SAGD”) applications. PCPs have had particular success in heavy oil producing basins around the world.

      Reciprocating Rod Lift Systems — A reciprocating rod lift system is an artificial lift pumping system that uses an above-ground mechanical unit connected to a sucker rod and a downhole pump. It uses an up and down suction process to lift the oil from the reservoir. Reciprocating lift is used primarily for the production of oil from wells of depths up to 14,000 feet and production rates from 20 to 8,000 barrels per day. Reciprocating lift systems are generally more expensive to install than other systems but less costly to operate. We offer a complete package of products for rod lift applications ranging from traditional pump jacks to the state-of-the-art RotaFlex^® long stroke pumping unit, as well as all downhole components, including the Corod^® continuous rod, traditional sucker rods and tubing anchors.

      Gas Lift Systems — Gas lift is a form of artificial lift that uses natural gas to lift oil in a producing reservoir to the surface. The process of gas lift involves the injection of natural gas into the well through an above-ground injection system and a series of downhole mandrels and gas lift valves in the production tubing string. The gas injected into the system is either produced from and reinjected into the well, or is injected from gas produced from nearby wells. The injected gas acts as the lifting agent for the oil. Gas lift systems are used primarily for offshore wells and those wells that have a high component of gas in the produced fluid or have a gas supply near the well. Gas lift systems are designed to operate at depths up to 15,000 feet with volumes up to 20,000 barrels of oil per day.

      Electrical Submersible Pumps — An electrical submersible pump (“ESP”) is a pump and electric motor placed downhole near the producing reservoir that is driven by an electric motor controller and supply system above ground. ESPs are designed to operate at depths of 9,000 to 12,000 feet with volumes from 800 to 20,000 barrels per day. Prior to 1999, we did not provide ESPs to the industry. In 2002, we began manufacturing and distributing our own proprietary line of ESP systems.

      Hydraulic Lift Systems — Hydraulic lift is a form of oil pumping system that uses an above-ground surface power unit to operate a downhole hydraulic pump (jet or piston) to lift oil from the reservoir. These systems are designed for wells at depths up to 20,000 feet with volumes up to 15,000 barrels per day. Hydraulic pumps are well-suited for wells with high volumes and low solids.

      Other Lift Systems — We also offer other forms of lift such as “plunger lift.” Plunger lift is the only artificial lift system that requires no assistance from outside energy sources. The typical system consists of a plunger (or piston), top and bottom bumper springs, a lubricator and a surface controller. The plunger cycles between the top and bottom bumper springs. As it travels to the surface, it creates a solid interface between the lifted gas below and produced fluid above to maximize lift energy. The travel cycle is controlled by a surface controller. Plunger lift is a low cost, easily maintained method of lift. It is particularly useful for dewatering gas wells and increasing production from wells with emulsion problems. Plunger lift also keeps wells free of paraffin and other tubing deposit problems and can be used to produce a well to depletion.

      We offer a variety of hybrid artificial lift systems which are engineered for special applications and may incorporate two or more of the artificial lift methods described above.

      Hydraulic reservoir fracturing (“fracturing”) is a stimulation method routinely performed on oil and natural gas wells with low-permeability reservoirs to increase productivity and oil and gas recovery. Current operations are located in most major fracturing markets within the U.S. Its three differentiating features are: 1) cutting-edge equipment standardized to control inventory, maintenance and training costs; 2) robust chemical product portfolio with a focused research and development approach; and 3) a premier workforce with a shared desire to provide the most efficient and effective operations.

      Production optimization is the process of increasing production, reducing production costs, or both, of oil and natural gas fields. The ultimate goal is to assist operators in making better decisions that maximize profits through improved well productivity management. One of the major benefits of production optimization is that

more production can be achieved through the existing infrastructure, deferring capital spending on the debottlenecking processes.

      We were one of the first companies to provide complete artificial lift well optimization services and products. We now offer proprietary software that works with artificial lift and intelligent completion systems to remotely monitor and control wells, as well as optimize field production, from a central location. Our systems are used in more than 40,000 wells worldwide.

      Well Optimization — By providing intelligence at the well site and intelligence at the desktop, we provide the producer with a unique solution for optimizing each well individually. For well site intelligence, we offer specific controllers for each type of artificial lift. These controllers contain computers with specific logic to control the well during changes in the reservoir, artificial lift equipment or the well components. The operational changes are based on the parameters set by the well operator, either at the well site or at a desktop computer. The desktop software provides advanced analytical tools that allow the operator to make changes by controlling the well directly or by changing the parameters that the controller is using to operate the well.

      Reservoir Optimization — Our Intelligent Completion Technology (“ICT”) uses optical sensing to allow operators to remotely monitor the downhole pressure, temperature, flow rate, phase fraction and seismic activity of each well and the surrounding reservoir. This advanced monitoring capability allows the operator to monitor the reaction of the reservoir to the production of the well. Combining this monitoring with multiple-zone downhole flow control allows field pressure management and shut off of unwanted flows of water or gas.

      In November 2005, our optical sensors surpassed the one-million mark for cumulative hours of run time. In addition, over one million feet of installed optical cable now support pressure/temperature, single and multiphase flowmeter, distributed temperature system (“DTS”), and seismic (“Clarion”^®) sensors. This milestone is further augmented by a record 100 optical pressure/temperature sensors installed in over 90 wells, further demonstrating the acceptance of optical technology for use in permanent downhole applications. The system’s acceptance is due to the reliability of the fiber and cane technology, which is used in the sensors. The system also has the ability to integrate different types of in-well production measurements, including distributed temperature sensing and multi-phase flow measurements.

      Work Processes — We provide tools for optimizing work flow. These software tools assist the operators in tracking the needed operations to manage the field optimally. Tasks such as chemical injection, well workovers and injection allocation can easily generate unnecessary expenses by misprioritization of tasks, poor record-keeping and lack of analysis of the effectiveness of the total field operations. Our experienced consultants, coupled with advanced software tools, provide the operators with real-world answers on how to optimize the entire field’s operations.

      In our Completion & Production Systems Division, our principal competitors include Baker Hughes, Halliburton, Schlumberger and BJ Services. We also compete with various smaller providers of completion equipment. In the area of intelligent wells, our main competitors are Schlumberger, Baker Hughes and WellDynamics. Robbins & Myers, Harbison Fischer, Lufkin, National-Oilwell Varco and Dover Corporation are competitors exclusive to our artificial lift products. Competition in hydraulic reservoir fracturing includes principal competitors noted above and several regional companies. The principal methods of competition are performance, quality of products and services, reliability, price, technological innovation and industry reputation. According to Spears & Associates, we are a leading provider of completion equipment in the world and the world’s largest provider of progressing cavity pumps, reciprocating rod lift pump systems and hydraulic lift systems and are the only fully integrated provider of all lift systems.

Precision Drilling International

      Our land drilling business was acquired in 2005 and is being operated under the name Precision Drilling International (“PDI”). This business consists of a total of 48 rigs, of these, 19 are heavy duty land drilling rigs and 29 are light and medium drilling rigs. Our rigs operate in Kuwait, Saudi Arabia, Oman, Egypt, India,

Mexico, the Persian Gulf, Australia and Venezuela. We also own an extensive fleet of specialized rig transport equipment.

      Key market advantages include established businesses complete with high quality equipment and, more importantly, experienced senior management and long serving, indigenized field personnel. Of particular interest to us was the credibility added to our Middle East presence where the newly acquired business has been operating for over 40 years and the potential for future jobs to combine this business with our Evaluation Drilling & Intervention Services Division products and services for national oil companies.

Pipeline and Specialty Services

      We provide a range of services used throughout the lifecycle of pipelines and process facilities, onshore and offshore. Our pipeline group can meet all the requirements of the pipeline, process, industrial and energy markets worldwide. We also can provide any service (or package of services) carried out on permanently installed customer equipment that involves inspecting, cleaning, drying, testing, improving production, running or establishing integrity from the wellhead out.

Properties

      Our operations are conducted in approximately 100 countries. We currently have 85 manufacturing facilities and approximately 670 sales, service and distribution locations throughout the world. The following table describes the material facilities we owned or leased as of December 31, 2005:

Other Business Data

      We purchase a wide variety of raw materials as well as parts and components made by other manufacturers and suppliers for use in our manufacturing. Many of the products sold by us are manufactured by other parties. We are not dependent on any single source of supply for any of our raw materials or purchased components; however, the loss of one or more of our suppliers in our Completion & Production Systems Division could disrupt production.

      Our principal customers consist of major and independent oil and natural gas producing companies. During 2005, 2004 and 2003, none of our customers individually accounted for more than 10% of consolidated revenues.

      Our backlog consists of customer orders for which a purchase order has been received, satisfactory credit arrangements exist and delivery is scheduled. The respective sales backlog was approximately $294 million as of December 31, 2005 and approximately $251 million for the comparable period in the prior year. All backlog is expected to be shipped during 2006.

      We maintain world-class technology and training centers in Houston, Texas, Fort Worth, Texas and Aberdeen, Scotland whose activities are focused on improving existing products and services and developing new technologies to meet customer demands for improved drilling performance and enhanced reservoir productivity. Our expenditures for research and development totaled $107.4 million in 2005, $83.6 million in 2004 and $82.4 million in 2003.

      As many areas of our business rely on patents and proprietary technology, we have followed a policy of seeking patent protection both inside and outside the U.S. for products and methods that appear to have commercial significance. In the U.S., we currently have 821 patents issued and over 515 pending. We have 1,209 patents issued in international jurisdictions and over 1,500 pending. We amortize patents over the years expected to be benefited, ranging from 3 to 20 years.

      Many of our patents provide us with competitive advantages in our markets. Important patented products and technologies include:

      Although in the aggregate our patents are of considerable importance to the manufacturing and marketing of many of our products, we do not believe that the loss of one or more of our patents would have a material adverse effect on our business.

      Weather and natural phenomena can temporarily affect the sale and performance of our products and services. Spring months in Canada and winter months in the North Sea tend to negatively affect operations. In the summer of 2005, the Gulf of Mexico suffered an unusually high number of hurricanes with unusual intensity that adversely impacted our operations. The widespread geographical locations of our operations serve to mitigate the impact of the seasonal nature of our business.

      We currently carry a variety of insurance for our operations. We are partially self-insured for certain claims in amounts we believe to be customary and reasonable.

      Although we believe we currently maintain insurance coverage adequate for the risks involved, there is always a risk our insurance may not be sufficient to cover any particular loss or that our insurance may not cover all losses. For example, while we maintain product liability insurance, this type of insurance is limited in coverage and it is possible an adverse claim could arise in excess of our coverage. Finally, insurance rates have in the past been subject to wide fluctuation. Changes in coverage, insurance markets and our industry may result in further increases in our cost and higher deductibles and retentions.

      Our operations are subject to federal, state and local laws and regulations relating to the energy industry in general and the environment in particular. Environmental laws have, in recent years, become more stringent and have generally sought to impose greater liability on a larger number of potentially responsible parties. While we are not currently aware of any situation involving an environmental claim that would likely have a material adverse effect on our business, it is always possible that an environmental claim with respect to one or more of our current businesses or a business or property that one of our predecessors owned or used could arise that could have a material adverse effect.

      In October 2002, we were notified by a third party that we may be a potentially responsible party to the Force Road Oil and Vacuum Truck Company Superfund site in Brazoria County, Texas. This matter is in the preliminary stages, and based on the information provided, if we are named as a party by the Texas Commission on Environmental Quality (“TCEQ”), it appears we will be a de minimus party. In January 2003, a subsidiary of Precision Energy Services was notified by the U.S. Environmental Protection Agency (“EPA”) that they were a potentially responsible party to the Gulf Nuclear Superfund Sites in Odessa, Tavenor and Webster, Texas. Based upon the information provided, it appears they will be classified as a de minimus party. In August 2004, we were notified by the U.S. Environmental Protection Agency (“EPA”) that we were a potentially responsible party to the Malone Services Co. Superfund Site in Texas City, Texas. We were classified as a de minimus party and paid a settlement payment of approximately $28,000. We are currently awaiting the EPA’s acceptance of our settlement payment.

      Our 2005 expenditures to comply with environmental laws and regulations were not material, and we currently expect the cost of compliance with environmental laws and regulations for 2006 also will not be material.

      We currently employ approximately 25,100 employees. Certain of our operations are subject to union contracts. These contracts, however, cover less than one percent of our employees. We believe that our relationship with our employees is generally satisfactory.

Forward-Looking Statements

      This report, as well as other filings made by us with the Securities and Exchange Commission (“SEC”), and our releases issued to the public contain various statements relating to future results, including certain projections and business trends. We believe these statements constitute “Forward-Looking Statements” as defined in the Private Securities Litigation Reform Act of 1995.

      From time to time, we update the various factors we consider in making our forward-looking statements and the assumptions we use in those statements. However, we undertake no obligation to publicly update or revise any forward-looking events or circumstances that may arise after the date of this report. The following sets forth the various assumptions we use in our forward-looking statements, as well as risks and uncertainties relating to those statements. Certain of the risks and uncertainties may cause actual results to be materially different from projected results contained in forward-looking statements in this report and in our other disclosures. These risks and uncertainties include, but are not limited to, the following:

      Finally, our future results will depend upon various other risks and uncertainties, including, but not limited to, those detailed in our other filings with the SEC. For additional information regarding risks and uncertainties, see our other filings with the SEC under the Securities Exchange Act of 1934, as amended, and the Securities Act of 1933, as amended, available free of charge at the SEC’s website at www.sec.gov. We will generally update our assumptions in our filings as circumstances require.

      An investment in our common shares involves various risks. When considering an investment in our company, you should consider carefully all of the risk factors described below, as well as other information included and incorporated by reference in this report.

     International Exposure

      Like most multinational oilfield service companies, we have operations in certain international areas, including parts of the Middle East, North and West Africa, Latin America, the Asia Pacific region and the Commonwealth of Independent States, that are subject to risks of war, political disruption, civil disturbance, economic and legal sanctions (such as restrictions against countries that the U.S. government may deem to sponsor terrorism) and changes in global trade policies. We participated in the United Nations oil-for-food program governing sales of goods and services into Iraq. The SEC has asked us to provide them copies of certain documents relating to our participation in that program in connection with a fact-finding inquiry

related to that program. We are complying with that request. Our operations may be restricted or prohibited in any country in which the foregoing risks occur. In particular, the occurrence of any of these risks could result in the following events, which in turn, could materially and adversely impact our results of operations:

     Currency Exposure

      Approximately 40.7% of our net assets are located outside the U.S. and are carried on our books in local currencies. Changes in those currencies in relation to the U.S. dollar result in translation adjustments, which are reflected as accumulated other comprehensive income in the shareholders’ equity section in our Consolidated Balance Sheets. We recognize remeasurement and transactional gains and losses on currencies in our Consolidated Statements of Income which may adversely impact our results of operations. We enter into foreign currency forward contracts and other derivative instruments to reduce our exposure to currency fluctuations.

      In certain foreign countries, a component of our cost structure is U.S. dollar denominated, whereas our revenues are partially local currency based. In those cases, a devaluation of the local currency would adversely impact our operating margins.

      In the ordinary course of business, we become the subject of various claims and litigation. We maintain insurance to cover many of our potential losses and we are subject to various self-retentions and deductibles with respect to our insurance. Although we are subject to various ongoing items of litigation, we do not believe any of our current items of litigation will result in any material uninsured losses to us. However, it is possible an unexpected judgment could be rendered against us in cases in which we could be uninsured and beyond the amounts we currently have reserved or anticipate incurring.

      We are also subject to various federal, state and local laws and regulations relating to the energy industry in general and the environment in particular. Environmental laws have in recent years become more stringent and have generally sought to impose greater liability on a larger number of potentially responsible parties. While we are not currently aware of any situation involving an environmental claim that would be likely to have a material adverse effect on our business, it is always possible that an environmental claim with respect to one or more of our current businesses or a business or property that one of our predecessors owned or used could arise and could involve material expenditures.

      The concentration of our customers in the energy industry may impact our overall exposure to credit risk as customers may be similarly affected by prolonged changes in economic and industry conditions. Further, laws in some jurisdictions in which we operate could make collection difficult or time consuming. We perform ongoing credit evaluations of our customers and do not generally require collateral in support of our trade receivables. While we maintain reserves for potential credit losses, we cannot assure such reserves will be sufficient to meet write-offs of uncollectible receivables or that our losses from such receivables will be consistent with our expectations.

      The terrorist attacks that took place in the U.S. on September 11, 2001 were unprecedented events that have created many economic and political uncertainties, some of which may materially impact our businesses. The potential for future terrorist attacks, the national and international responses to terrorist attacks, and other acts of war or hostility have created many economic and political uncertainties that could adversely affect our businesses.

      On June 26, 2002, the stockholders and Board of Directors of Weatherford International, Inc. (“Weatherford Inc.”) approved our corporate reorganization, and Weatherford International Ltd. (“Weatherford Limited”), a newly formed Bermuda company, became the parent holding company of Weatherford International, Inc. The realization of the tax benefit of this reorganization could be impacted by changes in tax laws, tax treaties or tax regulations or the interpretation or enforcement thereof or differing interpretation or enforcement of applicable law by the U.S. Internal Revenue Service or other taxing jurisdictions. The inability to realize this benefit could have a material impact on our financial statements.

      In August of 2005, we acquired Precision Energy Services and Precision Drilling International. The Precision divisions purchased are substantial businesses, and integrating those businesses with our other operations and product lines will take significant focus and effort from our management and employees. The integration of this or any other acquisition we make may include unexpected costs and temporarily divert attention from our normal operations. We also cannot be certain that we will realize anticipated synergies from any acquisition. The Precision acquisition is subject to a post-closing purchase price adjustment to reflect changes in working capital and related items. We are negotiating with Precision Drilling Corporation regarding this adjustment, but at this point we cannot determine how much, if any, we will be required to pay to Precision Drilling Corporation or Precision Drilling Corporation will be required to pay to us in connection with this adjustment.

      This acquisition was not subjected to management’s evaluation of internal control over financial reporting during 2005. Management will undertake their evaluation of internal control over financial reporting during 2006, and any control weaknesses identified, if any, could have an adverse affect on our financial condition and results of operations.

      Our acquisition of the international contract drilling division of Precision Drilling Corporation included 48 land rigs primarily working in the Middle East, North Africa and Latin America and an extensive fleet of specialized rig transport equipment. The contract drilling business is highly competitive. Drilling contracts are generally awarded through a competitive bid process. Price competition, rig availability and the quality and technical capability of service and equipment are the most significant competitive factors. If our Precision Drilling International division is not able to compete with larger drilling companies, we may not be able to secure the most lucrative drilling contracts, which could adversely impact this division’s results of operations.

      Prolonged periods of low utilization and dayrates could cause us to recognize impairment charges on our drilling rigs if future cash flow estimates, based upon information available to management at the time, indicate that the carrying value of these rigs may not be recoverable.

      Our contracts generally provide for a basic dayrate during drilling operations, with lower rates or no payment for periods of equipment breakdown, adverse weather or other conditions that may be beyond our reasonable control. During periods of lower dayrates, our revenues under these contracts may be materially reduced, although the cost structure is largely fixed, which could significantly reduce this division’s cash flows and profitability.

      When a rig mobilizes to or demobilizes from an operating area, a contract may provide for different dayrates, specified fixed payments or no payment during the mobilization or demobilization. In some cases, the mobilization or demobilization rates negotiated in those contracts may not match the expenses we incur in connection with mobilization or demobilization, which could negatively impact this division’s cash flows.

Bermuda Governance Risks

      We are a Bermuda exempt company, and it may be difficult for you to enforce judgments against us or our directors and executive officers. The rights of holders of our shares will be governed by Bermuda law and our memorandum of association and bye-laws. The rights of shareholders under Bermuda law may differ from the rights of shareholders of companies incorporated in other jurisdictions. One of our directors is not a resident of the U.S., and a substantial portion of our assets are located outside the U.S. As a result, it may be difficult for investors to effect service of process on those persons in the U.S. or to enforce in the U.S. judgments obtained in U.S. courts against us or those persons based on the civil liability provisions of the U.S. securities laws. Uncertainty exists as to whether courts in Bermuda will enforce judgments obtained in other jurisdictions, including the U.S., against us or our directors or officers under the securities laws of those jurisdictions or entertain actions in Bermuda against us or our directors or officers under the securities laws of other jurisdictions.

      Our bye-laws restrict shareholders from bringing legal action against our officers and directors.

      Our bye-laws contain a broad waiver by our shareholders of any claim or right of action, both individually and on our behalf, against any of our officers or directors. The waiver applies to any action taken by an officer or director, or the failure of an officer or director to take any action, in the performance of his or her duties, except with respect to any matter involving any fraud or dishonesty on the part of the officer or director. This waiver limits the right of shareholders to assert claims against our officers and directors unless the act or failure to act involves fraud or dishonesty.

      Our bye-laws have anti-takeover provisions that may discourage a change of control. These anti-takeover provisions could result in a lower market price for our shares and may limit a shareholder’s ability to obtain a premium for our shares.

      Our bye-laws contain provisions that could make it more difficult for a third party to acquire us without the consent of our board of directors, even if the third party’s offer may be considered beneficial by many shareholders. As a result, shareholders may be limited in their ability to obtain a premium for their shares and this may cause the market price of our shares to decrease significantly. These provisions also provide for:

      Our board of directors may issue preference shares and determine their powers, preferences and rights and their qualifications, limitations and restrictions. The issuance of preference shares may delay, defer or prevent a merger, amalgamation, tender offer or proxy contest involving us.

      None.

      See “Item 1. Business — Properties” on page 12 of this report, which is incorporated by reference into this item.

      In the ordinary course of business, we become the subject of various claims and litigation. We maintain insurance to cover many of our potential losses, and we are subject to various self-retention limits and deductibles with respect to our insurance.

      See “Item 1. Business — Other Business Data — Federal Regulation and Environmental Matters” on page 14 of this report, which is incorporated by reference into this item.

      Although we are subject to various ongoing items of litigation, we do not believe any of the items of litigation to which we are currently subject will result in any material uninsured losses to us. It is possible, however, an unexpected judgment could be rendered against us in the cases in which we are involved that could be uninsured and beyond the amounts we currently have reserved.

      No matters were submitted to a vote of shareholders of the Company during the fourth quarter of the year ended December 31, 2005.

PART II

      Our common shares are traded on the New York Stock Exchange under the symbol “WFT.” As of March 1, 2006, there were 2,287 shareholders of record. Additionally, there were 505 stockholders of Weatherford International, Inc. as of the same date who had not yet exchanged their shares. The following table sets forth, for the periods indicated, the range of high and low sales prices per common share as reported on the New York Stock Exchange. In 2005, our Board of Directors approved a two-for-one split of our common shares. As a result, all prices have been restated to reflect the two-for-one share split.

      On March 1, 2006, the closing sales price of our common shares as reported by the New York Stock Exchange was $43.14 per share. We have not declared or paid cash dividends on our common shares since 1984.

      On February 28, 2002, we issued a warrant to purchase up to 6.5 million of our common shares at $30.00 per share as part of the consideration given to obtain a worldwide license to Shell Technology Ventures Inc.’s expandable technology. This warrant has a nine-year exercisable life beginning one year after the issue date.

      On August 31, 2005, in connection with our acquisition of Precision Energy Services and Precision Drilling International, we issued 52.0 million of our common shares to Precision Drilling Corporation in a private placement exempt from registration under Section 4(2) of the Securities Act of 1933, as amended.

      On December 14, 2005, our Board of Directors approved a share repurchase program that authorizes us to repurchase up to $1.0 billion of our outstanding common shares, as market conditions warrant. We may conduct our share repurchases in the open market and in privately negotiated transactions. The repurchase program does not require us to acquire any specific number of shares and may be terminated or suspended at any time.

      Information concerning securities authorized for issuance under equity compensation plans is set forth in Part III of this report under “Item 12. Security Ownership of Certain Beneficial Owners and Management — Equity Compensation Plan Information,” which is incorporated herein by reference.

      The following table sets forth certain selected historical consolidated financial data and should be read in conjunction with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Consolidated Financial Statements and Notes thereto included elsewhere herein. The following information may not be deemed indicative of our future operating results. The information presented has been restated to reflect our fourth quarter 2005 two-for-one share split and the years ended December 31, 2003, 2002 and 2001 have been restated to reflect Gas Services International compression fabrication business as a discontinued operation.

      Our Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) discussion begins with an executive overview which provides a general description of our company today, a synopsis of industry market trends, insight into management’s perspective of the opportunities and challenges we face and our outlook for 2006 and 2007. Next, we analyze the results of our operations for the last three years, including the trends in our business and a summary of our severance, restructuring and asset impairment charges. Then we review our cash flows and liquidity, capital resources and contractual commitments. We conclude with an overview of our critical accounting judgments and estimates and a summary of recently issued accounting pronouncements.

      The following discussion should be read in conjunction with our Consolidated Financial Statements and Notes thereto included in “Item 8. Financial Statements and Supplementary Data.” Our discussion includes various forward-looking statements about our markets, the demand for our products and services and our future results. These statements are based on certain assumptions we consider reasonable. For information about these assumptions, you should refer to the section entitled “Item 1. Business — Forward-Looking Statements.”

Overview

      Weatherford provides equipment and services used for drilling, completion and production of oil and natural gas wells throughout the world. We conduct operations in approximately 100 countries and have service and sales locations in nearly all of the oil and natural gas producing regions in the world. Our offerings include drilling and evaluation services, including directional drilling, measurement while drilling and logging while drilling, well installation services, fishing and intervention services, drilling equipment including land rigs, completion systems, production optimization and all forms of artificial lift. We operate under four segments: Evaluation, Drilling & Intervention Services, Completion & Production Systems, Precision Drilling International and Pipeline & Specialty Services.

      In July 2005, we sold our Gas Services International compression fabrication business. Results of this business were formerly reported within our Completion & Production Systems business segment and have been reclassified as a discontinued operation for all periods presented.

      Changes in the current price and expected future prices of oil and natural gas influence the level of energy industry spending. Changes in expenditures result in an increased or decreased demand for our products and services. Rig count is an indicator of the level of spending for the exploration for and production of oil and natural gas reserves.

      The following chart sets forth certain statistics that reflect historical market conditions:

      Although oil and natural gas prices have continued to fluctuate over the last several years, the average annual price of oil and natural gas has continued to increase. Oil prices ranged from a high of $69.81 per barrel in August of 2005 to a low of $17.97 per barrel in January of 2002. Natural gas prices ranged from a high of $15.42 per MM/BTU in December of 2005 to a low of $1.91 per MM/BTU in January of 2002. Factors influencing oil and natural gas prices during the three year period include persistent low inventories, strong economic growth in both

the U.S. and China, the lack of excess capacity within the Organization of Petroleum Exporting Countries (“OPEC”), weather and geopolitical uncertainty, including the uncertainty of Iraqi oil production.

      Historically, the majority of worldwide drilling activity has been concentrated in North America. From mid-1999 through mid-2001, North American rig count improved steadily, peaking in the first quarter of 2001 at a quarterly average of 1,636 rigs. The level of drilling and completion spending in North America also improved steadily for this same time period with an overall improvement greater than 100%. During the latter part of 2001, the rig count started to decline, and the decline continued through mid-2002. Since mid-2002, the North American rig count has improved to a fourth quarter 2005 rig count average of 2,051 rigs; furthermore, according to Spears & Associates, the 2005 level of drilling and completion spending in North America improved over 95% from 2001 spending levels.

      Drilling and completion spending has grown faster in international markets than in North America. According to Spears & Associates international drilling and completion spending has steadily increased since 1999, and the total spending in 2005 reached record levels of approximately $60 billion (excluding Russia and China). The international market experienced a 9% improvement in the 2005 average annual rig count as compared to the previous year and an 18% improvement as compared to 2003. In 2005, all regions had rig count activity improvements.

      The nature of our industry offers many opportunities and challenges. We have created a long-term strategy aimed at growing our business, servicing our customers, and most importantly, creating value for our shareholders. The success of our long-term strategy will be determined by our ability to withstand the cyclicality of the energy industry, respond to industry demands, apply capital discipline, and successfully maximize the benefits from our 2005 acquisition.

      The cyclicality of the energy industry impacts the demand for our products and services. Certain of our products and services, such as our drilling and evaluation services, well installation services and well completion services, depend on the level of exploration and development activity and the completion phase of the well life cycle. Other products and services, such as our production optimization and artificial lift systems, are dependent on production activity. Decline rates, a measure of the fall in production from a well over time, are accelerating. The market for oilfield services will grow year on year relative to the decline rates and the implicit rate of demand growth. We are aggressively, but methodically, expanding our people, manufacturing and equipment capacity to meet the demands of the industry. Throughout 2003 and 2004, we expanded the size and scope of our Eastern Hemisphere infrastructure as we believe this region will continue to see an increase in development of its reservoirs over the next five years. The reservoirs in the Eastern Hemisphere are the industry’s best reservoirs in terms of size, quality and level of production maturity.

      In the third quarter of 2005, we acquired Precision Energy Services and Precision Drilling International. This acquisition significantly strengthens and expands our service offering. Opportunities exist to accelerate the market penetration of the acquired products in the Eastern Hemisphere by utilizing our established infrastructure and to increase pull through sales with our expanded portfolio of technologies. The magnitude we will benefit from this acquisition will be dependent upon our success in integrating these businesses.

      In general, we believe the outlook for our businesses is favorable. As decline rates are accelerating and reservoir productivity complexities are increasing, our clients are having difficulty securing desired rates of production growth. Assuming the demand for hydrocarbons does not weaken, these phenomena provide us with the following general market assumptions:

      Looking into 2006 and 2007 on a worldwide basis, we expect average rig activity to grow about 7% as compared to fourth quarter 2005 levels and we expect our business to grow at a faster rate than the underlying activity.

      Geographic Markets. Both Canada and the U.S. should experience modest improvements in rig activity. Improvements in the U.S. will result from unconventional hydrocarbon land projects and a recovery of the decline in Gulf of Mexico activity resulting from the 2005 hurricanes. We expect a slight volume increase in Latin America with improvements stemming from Brazil and Venezuela. The North Sea is expected to show modest growth throughout 2006 and 2007. Excluding the North Sea, we expect substantial growth in the Eastern Hemisphere to initially originate from the Caspian Region, the Middle East and North Africa. Later, we expect the growth to spread to sub-Sahara Africa and pockets of Asia Pacific.

      Pricing. The overall pricing outlook is positive. Pricing trends are occurring concurrently with raw material and labor cost inflation. We expect pricing net of cost increases to be positive in 2006. Price improvements are being realized on a contract-by-contract basis and are occurring in different classes of products and service lines depending upon the region.

      Business Segments. Overall, we expect our operating segments to outpace market activity. In our Evaluation Drilling & Intervention Division, underbalanced services and the tools and technology acquired from Precision Drilling Corporation are expected to have the highest growth rate. We expect strong growth from our underbalanced systems in Asia Pacific, Latin America, Middle East and North Africa. Our acquired directional and wireline technology are expected to grow internationally, in particular in the Middle East and North Africa region, as we utilize our eastern hemisphere infrastructure to accelerate this market penetration. Furthermore, we expect our well construction product line to gain deepwater market share in both the U.S. and international markets. In our Completion & Production Systems Division, we anticipate our production optimization product lines and completion systems to have strong top line growth, and our new ESP product line is initially expected to grow in the Middle East, North Sea and the U.S. We also expect steady growth from our stimulation services in 2006. Our Precision Drilling International Division revenues are expected to increase in 2006 as mobilization is completed and those rigs go on contract.

      Overall, the level of market improvements for our businesses in 2006 will continue to depend heavily on our ability to contain our costs, our gains in market share outside North America, primarily in the Eastern Hemisphere, and the acceptance of our new technologies. The continued strength of the industry is uncertain and will be highly dependent on many external factors, such as world economic and political conditions, member country quota compliance within OPEC and weather conditions. The extreme volatility of our markets makes predictions regarding future results difficult.

Results of Operations

      On August 31, 2005, we completed the acquisition of Precision Energy Services and Precision Drilling International, divisions of Precision Drilling Corporation in exchange for 52.0 million common shares and approximately 1.1 billion Canadian dollars, or approximately $942.7 million, in cash. Our 2005 results include four months of activity from these acquired businesses. We are unable to provide certain information regarding our results excluding the impact of acquisitions due to the integration of these businesses.

      In connection with our acquisition, the Company realigned its operating segments. Our two historical reporting segments of Drilling Services and Production Systems are now reported as: Evaluation, Drilling & Intervention Services and Completion & Production Systems. Our Pipeline and Specialty Services, which was historically included in Drilling Services, and Precision Drilling International businesses are reported as Other Operations.

      The following charts contain selected financial data comparing our consolidated and segment results from operations for 2005, 2004 and 2003. The information presented has been restated to reflect our fourth quarter 2005 two-for-one share split and our segment realignment.

Company Results

      Consolidated revenues increased $1,201.5 million, or 38.4%, in 2005 as compared to 2004. The acquisition of Precision Energy Services and Precision Drilling International contributed $448.3 million of the increase. Organic growth of $753.2 million was due primarily to market activity, share gains and pricing initiatives. North America generated revenue growth of 43.8%, and included revenue increases of 41.0% and 49.7% in the U.S. and Canada, respectively. Excluding the current year’s acquisitions, North American revenues increased $481.1 million, or 28.8%. This increase is compared to an average annual North American rig count increase of 18.1%, and was due to product specific market share gains, activity increases and pricing improvement. Although our U.S. operations generated substantial revenue growth during 2005, certain of our U.S. manufacturing and distribution facilities were negatively impacted by devastating hurricane activity in the Gulf Coast region. Internationally, revenues increased $470.3 million, 32.2%, or $272.1 million, 18.6%, excluding acquisitions, as compared to the 8.6% increase in the average annual international rig count. Excluding our acquisitions, the revenue increase was generated by increased volume through market share and activity improvement and increased pricing obtained through the renewal of long-term contracts. Our international revenue growth, excluding acquisitions, was led by increases of 29.8%, 19.6% and 15.8% in the Asia Pacific, Middle East and North Africa and Europe, CIS and West Africa regions, respectively.

      Consolidated revenues increased $569.7 million, or 22.2%, in 2004 as compared to 2003 and were the result of growth in all of our regions. North American revenues increased $371.6 million, or 28.6%, and included increases of 33.4% and 19.4% in the U.S. and Canada, respectively. This 28.6% increase compared to an 11% increase in the average annual North American rig count. Price increases in the U.S. market implemented during the second quarter of 2004, strong heavy oil activity and product specific U.S. market share gains were key contributors to revenue growth in addition to the increase in underlying activity. International revenues improved by $198.1 million, or 15.7%, as compared to the 8% increase in average annual international rig count. All international regions experienced revenue growth, led by increases of 24.3% in the Middle East and North Africa, 22.3% in Latin America and 10.8% in Europe, CIS and West Africa.

      Our gross profit as a percentage of revenues increased from 31.1% in 2004 to 31.9% in 2005. The increase in our gross profit percentage in 2005 was primarily volume related, with additional contributions from stronger North American and international pricing increases. This increase was offset by increasing labor costs, the inventory write downs of $20.7 million associated with our 2005 integration/reorganization plan and the lower margins of businesses acquired in 2005.

      Our gross profit as a percentage of revenues increased from 29.8% in 2003 to 31.1% in 2004. The increase is due primarily to product mix, stronger North American pricing and benefits from our supply chain initiatives. The 2003 gross profit percentage includes a $5.3 million charge for severance and severance related costs.

      Research and development expenses increased $23.8 million, or 28.5%, in 2005 as compared to 2004 and $1.1 million, or 1.4%, in 2004 as compared to 2003. Research and development expenses as a percentage of revenues were 2.5%, 2.7% and 3.2% in 2005, 2004 and 2003, respectively. Our 2005 acquisition accounted for approximately $15.4 million of the current year’s increase. The remaining increases of research and development expenditures reflect our continued focus on developing and commercializing new technologies as well as investing in our core product offerings.

      Corporate general and administrative expenses increased $21.3 million, or 38.0%, from 2004 to 2005 due primarily to increases in stock-based compensation, severance, increases in professional fees and increased costs associated with our 2005 acquisition. Corporate general and administrative expenses increased $13.7 million, or 32.4%, from 2003 to 2004 primarily as a result of increased costs associated with our Sarbanes-Oxley Section 404 project and benefit related expenses.

      Equity in earnings of unconsolidated affiliates decreased $2.5 million, or 11.1%, from 2004 to 2005 due primarily to $4.0 million, our portion of exit and debt restructuring charges incurred by Universal Compression in our first quarter of 2005, offset by an increase in Universal Compression’s earnings. Equity in earnings of unconsolidated affiliate increased $7.5 million, or 49.9%, from 2003 to 2004 due primarily to $4.4 million, our portion, of Universal Compression’s debt restructuring charge incurred in 2003 and an increase in Universal Compression’s earnings.

      During 2005, we underwent both a restructuring related to our acquisition of Precision and reorganization activities related to our historical businesses, including a change in management, a change in regional structure and an evaluation of product lines. We incurred exit costs of $114.2 million related to exit and reorganization. The charge included an inventory write-down of $20.7 million which has been recorded in Cost of Products and a remaining amount of $93.6 million which has been recorded as Exit Costs and Restructuring Charges in the accompanying Consolidated Statements of Income.

      The exit plan related to the Precision acquisition resulted in exit costs and restructuring charges of $105.5 million. We initiated an integration plan to combine worldwide operations, rationalize product lines, and eliminate certain products, services and locations. Product line rationalization included wireline, underbalanced and directional product and service offerings. Inventory totaling $20.7 million was written-down. Asset impairment charges included $20.9 million for fixed assets, $12.9 million related to information technology and $1.7 million related to investments. Employee severance and termination benefits totaled $33.0 million. Contract terminations and facility closures of $7.3 million were also recorded.

      In connection with the valuation of the Precision assets, $9.0 million was identified as purchased in process research and development and was written-off.

      The exit plan related to the reorganization activities surrounding our historical businesses resulted in exit costs and restructuring charges of $8.7 million. We incurred severance and termination benefits of $3.6 million and recorded $2.6 million of facility termination charges related to the rationalization of two facilities in the United Kingdom and the U.S. The remaining $2.5 million charge related to the write-off of other assets.

      The 2005 integration and reorganization plans are expected to be completed during the first half of 2006. As of December 31, 2005, all employees had been notified and 120 of the 164 specifically identified employees had been terminated. We do not anticipate future charges relating to these activities.

      During the second quarter of 2003, we recorded approximately $7.7 million, $5.6 million net of taxes, in severance and severance related costs in connection with the realignment of our segments. Severance and severance related costs summarized by segment and by financial statement classification were as follows:

      In accordance with our announced plan to terminate employees company-wide, we recorded severance costs for 515 specifically identified employees. All identified employees had been terminated and all costs had been incurred as of December 31, 2003.

      We sold our remaining 6.75 million shares of Universal Compression common stock during 2005 for net proceeds of $276.8 million and recognized a gain of $115.5 million with no related tax impact. During 2004, we sold 7.0 million shares of Universal Compression common stock for net proceeds of $231.8 million and recognized a gain of $77.6 million with no related tax impact.

      During the third quarter of 2005, we settled our Zero Coupon Convertible Senior Debentures and expensed $4.7 million, $3.3 million net of taxes, of unamortized issuance costs. During 2003, we redeemed our 5% Convertible Subordinated Preferred Equivalent Debentures and expensed $10.1 million related to the call premium and $10.8 million of unamortized debt issuance costs.

      Interest income increased $7.4 million from 2004 to 2005 due primarily to an increase in our average outstanding cash balance prior to our August 2005 acquisition and an increase in prevailing interest rates.

      Interest expense increased $16.8 million, or 26.4%, in 2005 as compared to 2004. This increase was due primarily to the incremental borrowings used to fund the cash portion of our 2005 acquisition, offset by the settlement of our Zero Coupon Convertible Senior Debentures during the third quarter of 2005. Interest expense decreased $12.9 million, or 16.9%, in 2004 as compared to 2003. The benefits from the redemption of our $402.5 million Convertible Preferred Debentures in the third quarter of 2003, our interest rate swap transactions and lower overall short-term debt balances were partially offset by a full year of interest expense related to the October 2003 issuance of our $250.0 million 4.95% Senior Notes.

      Other, net increased $18.1 million from 2004 to 2005 as a result of the sale of non-core assets and the favorable impact of fair value changes in foreign exchange and interest rate derivative instruments not accounted for as hedging instruments. Our other, net decreased approximately $11.7 million from 2003 to 2004 primarily due to foreign currency losses as the U.S. dollar weakened against various foreign currencies.

      Our effective tax rates were 25.4% in 2005, 21.5% in 2004 and 25.9% in 2003. During 2005, we incurred exit and restructuring charges, debt redemption expense and a gain on sale of Universal Compression common stock with no related tax impact. We also incurred additional tax expense associated with the impairment of certain foreign tax credits resulting from the integration of our current acquisition into our current tax structure. These items and their associated income tax impact, if any, lowered our 2005 effective income tax rate by 180 basis points.

      Our 2004 effective tax rate was reduced by 470 basis points due to the 2004 sale of Universal common stock which generated a $77.6 million gain with no related tax impact.

Segment Results

      The acquisition of Precision Energy Services will provide or expand our existing offerings related to cased and open hole wireline, directional drilling and evaluation technologies and underbalanced systems. This segment’s results for the year ended December 31, 2005 include four months of activity from this acquired business.

      Evaluation, Drilling & Intervention Services revenues increased $730.7 million, or 43.0%, in 2005 as compared to 2004. Excluding the impact of acquisitions, the increase was $382.8 million, or 22.6%. Our underbalanced systems, proprietary drilling tools, well installation systems and intervention services all posted significant growth during 2005, excluding the impact of acquisitions. Our current year acquisition provided significant top-line growth to our cased and open hole wireline and directional drilling product line offerings. Geographically, the North American revenue increase of $446.9 million, or 57.2%, included $250.1 million of revenues from the Precision Energy Services acquisition. The increase of 25.2% before acquisitions was due to volume growth above the 18.1% increase in the average annual North American rig count and price increases in the U.S. market implemented throughout 2005. International revenues increased $283.8 million, or 31.0%, from 2004 to 2005. Precision Energy Services contributed $97.8 million of international revenue of which approximately 40% were derived in Latin America. Excluding acquisitions, the international revenue increase of $186.0 million, or 20.3%, was generated primarily by increases of 25.0%, 20.6%, and 20.2% in the Latin America region, Europe, CIS and West Africa region and Asia Pacific region. This increase in international revenues was over two times the increase in activity as measured by the average annual international rig count,

which increased 8.6%, and reflects our continued investment in the Eastern Hemisphere and new, technologically advanced product offerings.

      This segment’s revenues increased $250.8 million, or 17.3%, in 2004 as compared to 2003. North American revenues increased $137.6 million, or 21.4%, due both to volume and price. Volume increases were due in part to the 11% increase in North American rig count. Price increases in the U.S. market were implemented during the second quarter of 2004. International revenues increased $113.2 million, or 14.1%, and experienced growth in all regions led by increases of 26.9% in Latin America and 25.0% in the Middle East and North Africa. The increase in international revenues of 14.1%, which was generated by capital investment in the Eastern Hemisphere and new product offerings, was substantially higher than the average annual international rig count increase of 8%. On a product line basis, Evaluation, Drilling & Intervention Services’ highest revenue growth was from its underbalanced systems and drilling tools products and services.

      Our gross profit as a percentage of revenue was 35.3% in 2005, 33.9% in 2004 and 32.1% in 2003. The increase in our gross profit percentage in 2005 was due primarily to increases in pricing and volume, offset by increasing labor and raw material costs, the impact of the hurricanes on our U.S. operations, an inventory write down of $20.7 million associated with our 2005 integration/reorganization plan and the impact of the 2005 acquisition. Although the acquired product lines have similar margins to our historical divisional margins in North America, the start-up nature of the operations in the Eastern Hemisphere had a negative impact on overall gross profit margins of the acquired business. The increase in our gross profit percentage in 2004 was due primarily to improved pricing in the U.S. market and changes in product mix.

      Research and development expenses increased $17.7 million, or 45.0%, from 2004 to 2005 due to the incremental expenses of the current year acquisition. As a percentage of revenues, research and development expenses for 2005 and 2004 remained static at 2.3%. Research and development expenses were relatively flat from 2003 to 2004. The current level of research and development expenditures reflect the division’s continued focus on developing products that enhance its core offerings and new technologies.

      Selling, general and administrative expenses as a percentage of revenues were 12.2%, 13.0% and 13.3% in 2005, 2004 and 2003. The decline as a percentage of revenues was due primarily to our higher revenue base and certain inherent fixed costs included in our selling, general and administrative expenses such as intangible asset amortization.

      Completion & Production Systems revenues increased $364.4 million, or 26.8%, in 2005 as compared to 2004. Significant revenue growth was generated by our portfolio of artificial lift products and services and our continued introduction of our fracturing technologies. We also realized revenue growth in our sand screen applications, including expandable sand screens. North American revenues increased $285.2 million, or 32.8%, and included increases of 44.9% and 16.9% in the U.S. and Canada, respectively. In addition to an increase in activity, as indicated by an 18.1% increase in the average annual North American rig count, changes in product mix, increases in pricing and product specific U.S. market share gains attributed to the increase in revenue. Our international operations realized revenue growth of $79.2 million, or 16.2%. The Eastern Hemisphere fueled this robust growth with increases of 36.9%, 19.3% and 15.6% in the Asia Pacific, Middle East and North Africa and Europe, CIS and West Africa regions.

      Revenues in our Completion & Production Systems segment increased $290.0 million, or 27.1%, in 2004 as compared to 2003. This increase was driven primarily by higher demand for our artificial lift product lines, our U.S. introduction of stimulation services and our technology offerings in our production optimization product lines. From a geographic perspective, all of our regions generated revenue increases in 2004 as compared to 2003. Our North American revenues increased $222.7 million, or 34.4%, and included increases of $162.4 million, or 49.0%, and $60.3 million, or 19.1%, in the U.S. and Canada, respectively. Improvements in the U.S., beyond the increase in activity, were primarily due to increases in product mix and pricing. International revenues increased $67.3 million, or 16.0%, over 2003 and were led by revenue growth of 24.3% in Europe, CIS and West Africa, 16.2% in Latin America and 14.6% in Middle East and North Africa.

      Gross profit as a percentage of revenue was 28.8% in 2005, 27.3% in 2004 and 26.7% in 2003. The continued increase in this segment’s gross profit percentages was due primarily to the higher revenue base, increases in pricing in the U.S. market and changes in product mix.

      Research and development expenses increased $6.4 million, or 15.0%, in 2005 as compared to 2004 and $2.0 million, or 5.0%, in 2004 as compared to 2003. The increases in our research and development expenditures is due to new prototype testing and reflects our continued focus on developing and commercializing technology-related product lines. Research and development as a percentage of revenues was 2.8%, 3.1% and 3.8% in 2005, 2004 and 2003. The decline in research and development expenses as a percentage of revenue is due primarily to this segment’s higher revenue base.

      Selling, general and administrative expenses as a percentage of revenues were 14.0%, 15.4% and 15.6% in 2005, 2004 and 2003. The percentage decline was due primarily to our higher revenue base and certain inherent fixed costs included in our selling, general and administrative expenses such as intangible asset amortization.

      Our Other Operations segment includes the historical activities related to pipeline services and the August 2005 acquisition of Precision Drilling International.

      Both the increase in revenues and reduction in selling, general and administrative expenses as a percentage of revenues from 2004 to 2005 are primarily attributable to the acquisition. The revenue increase of $28.9 million, or 61.8%, from 2003 to 2004 was due primarily to certain pipeline service contracts initiated and completed in 2004. Selling, general and administrative expense as a percentage of revenues remained static from 2003 to 2004.

      Both the contract drilling and pipeline services revenue base is highly contractual by nature and operating results vary based on when contracts are signed or renewed. Gross profit as a percentage of revenues approximated 16.6% in 2005 as compared to 34.3% in 2004. Gross profit margins in 2004 were supported by several pipeline services contracts that were initiated and completed in 2004. In addition, this segment incurred additional expenses in 2005 related to asset mobilizations. Gross profit as a percentage of revenues increased from 25.3% in 2003 to 34.3% in 2004 due to the pipeline contracts that were initiated and completed in 2004.

Discontinued Operation

      Our discontinued operation consists of our Gas Services International compression fabrication business. We generated a gain from our discontinued operation of $1.2 million, net of taxes, for the year ended December 31, 2005 and incurred a loss from our discontinued operation, net of taxes, of $7.2 million and $3.9 million for the years ended December 31, 2004 and 2003, respectively. The sale of this business was finalized in July 2005 for a gain of approximately $0.6 million. Included in the 2004 loss were non-cash charges related to goodwill and asset impairments of $3.1 million and an income tax provision of $2.4 million to record a valuation allowance against unrealized deferred tax assets.

Liquidity and Capital Resources

      Our historical cash flows for the years ended December 31, 2005 and 2004 were as follows:

      Our sources of liquidity are reserves of cash, cash generated from operations, and committed availabilities under bank lines of credit. In 2005 and 2004, we generated cash proceeds from the sale of our investment in Universal Compression Holdings, Inc. and non-core businesses. We also historically have accessed banks for short-term loans from uncommitted borrowing arrangements and the capital markets with debt, equity and convertible offerings. In June 2004, we filed a shelf Registration Statement on Form S-3 which covers the future issuance of various types of securities, including debt, common shares, preferred shares, warrants and units, up to an aggregate offering price of $750.0 million. To date, we have issued $350.0 million of securities under this shelf registration statement.

      The following summarizes our short-term committed financing facilities and our usage and availability as of December 31, 2005:

      In August 2005, we entered into a 364-Day Revolving Credit Agreement. Under this agreement, we were allowed to borrow up to $1.2 billion to fund the redemption of our Zero Coupon Convertible Senior Debentures and the acquisition of Precision Energy Services and Precision Drilling International, and we currently are allowed to fund certain possible refinancings, including commercial paper repayments or common share repurchases. The 364-Day Facility matures August 23, 2006, and is subject to mandatory prepayments and reductions if we undertake certain types of capital market transactions or if we replace our

existing 2003 Revolving Credit Facility with a general purpose revolving credit facility with greater borrowing capacity.

      On February 17, 2006, the Company completed an offering of $350.0 million Senior Notes. Net proceeds of $346.2 million were used to reduce outstanding borrowings on our commercial paper program. In association with the transaction, the committed availability of the 364-Day Revolving Credit Agreement was reduced from $1.2 billion to $850.0 million.

      In May 2003, we entered into a three-year unsecured, syndicated revolving credit facility that provides for borrowings or issuances of letters of credit up to an aggregate of $500.0 million. The 2003 Revolving Credit Facility matures on May 12, 2006. Amounts outstanding under either of these facilities accrue interest at a variable rate based on either the U.S. prime rate or LIBOR and the credit rating assigned to our long-term senior debt.

      The two revolving credit facilities contain customary affirmative and negative covenants, including a maximum debt to capitalization ratio, a minimum interest coverage ratio (on the 2003 Revolving Credit Facility only), a limitation on liens, a limitation on incurrence of indebtedness and a limitation on asset dispositions. We are in compliance with all covenants set forth in the credit facilities. The committed revolving credit facilities do not contain any provisions that make their availability dependent upon our credit ratings; however, the interest rates are dependent upon the credit rating of our long-term senior debt.

      On October 25, 2005, we initiated a commercial paper program under which we may from time to time issue short-term unsecured notes in an aggregate amount not to exceed $1.5 billion. In connection with this program, we entered into agreements with third party lending institutions under which each of these lending institutions may act as dealers of this commercial paper. Also in connection with the program, Weatherford International, Inc., one of our wholly-owned indirect subsidiaries, provided a guarantee of any commercial paper notes that we may issue. Our commercial paper issuances are supported by the two committed lending facilities. As of December 31, 2005, we had $716.9 million of outstanding commercial paper issuances with maturities ranging from 3 to 87 days. The weighted average interest rate related to outstanding commercial paper issuances was 4.5% at December 31, 2005. Subsequent to year end, we reduced our outstanding issuances with net proceeds of $346.2 million received from the February 2006 senior note issuance.

      In association with the February 2006 Senior Note issuance, the committed availability of the commercial paper program was reduced from $1.5 billion to $1.2 billion.

      During 2006, we anticipate our cash requirements to include working capital needs, capital expenditures, refinancing obligations and the repurchase of our common shares.

      Capital expenditures for 2006 are projected to be $600 - $650 million. The expenditures are expected to be used primarily to support the growth of our business and operations. Capital expenditures during the year ended December 31, 2005 were $493.1 million, net of proceeds from tools lost down hole of $33.5 million.

      The two committed revolving credit facilities and the $200.0 million 2006 Senior Notes will mature in the upcoming year. We anticipate executing a new committed revolving credit facility to replace a portion of the committed availability under the two existing revolving credit facilities. We may access either the bank or capital markets to repay some of the commercial paper currently outstanding as well as to fund the maturity of the 2006 Notes.

      We have authorization to repurchase up to $1 billion of outstanding common shares. We may from time to time repurchase our common shares depending upon the price of our common shares, our liquidity and other considerations.

      The following summarizes our contractual obligations and contingent commitments by period. The obligations we pay in future periods may vary from those reflected here due to certain assumptions including the duration of our obligations and anticipated actions by third parties.

      We have short-term borrowings with various domestic and international institutions pursuant to uncommitted facilities. At December 31, 2005, we had $24.6 million in short-term borrowings outstanding under these arrangements with a weighted average interest rate of 9.2%.

      On February 17, 2006, we completed an offering of $350.0 million of 5.50% Senior Notes due 2016. The notes are fully and unconditionally guaranteed by Weatherford Inc. Interest on the notes is payable semi-annually in arrears on February 15 and August 15 of each year. Net proceeds from the offering were $346.2 million and were used to reduce borrowings on our commercial paper program.

      On October 7, 2003, we issued $250.0 million of 4.95% Senior Notes due 2013. The notes are fully and unconditionally guaranteed by Weatherford Inc. Interest on the notes is payable semi-annually in arrears on April 15 and October 15 of each year.

      On November 16, 2001, we issued $350.0 million of 6⁵/8% Senior Notes due 2011. Interest on the 6⁵/8% Senior Notes is payable semi-annually on May 15 and November 15.

      We have outstanding $200.0 million of publicly traded 7¹/4% Senior Notes issued in 1996 which mature on May 15, 2006. Interest on the 7¹/4% Senior Notes is payable semi-annually on May 15 and November 15.

      As of December 31, 2005, we had various other debt outstanding of $29.3 million, primarily related to capital leases and foreign and other bank debt.

      From time to time, we enter into derivative transactions to hedge existing or projected exposures to changes in interest rates and foreign currency exchange rates. We do not enter into derivative transactions for speculative or trading purposes.

      Throughout 2005 we entered into and terminated derivative instruments to hedge projected exposures to interest rates in anticipation of future debt issuance. As of December 2005, we recorded a $4.2 million loss in other comprehensive income and a $2.7 million gain in current year earnings based on the designation and type of hedge transaction.

      During 2004, we entered into and terminated separate interest rate swap agreements on notional amounts of $200.0 million and $150.0 million of our 4.95% Senior Notes and $70.0 million and $170.0 million of our 6⁵/8% Senior Notes. As a result of these terminations, we received cash proceeds, net of accrued interest, of approximately $12.8 million. There were no interest rate swap agreements outstanding as of December 31, 2005.

      The gains associated with our interest rate swap terminations have been deferred and are amortized over the remaining term of the debt. Interest expense was reduced by $6.8 million, $12.3 million and $6.0 million for the 2005, 2004 and 2003 year, respectively, as a result of our interest rate swap activity.

      We also have the following cash commitments and contractual obligations:

      On February 28, 2002, we issued Shell Technology Ventures Inc. a warrant to purchase up to 6.5 million common shares at a price of $30.00 per share. The warrant has a nine-year exercisable life beginning one year after the issue date. The warrant holder may exercise the warrant and settlement may occur through physical delivery, net share settlement, net cash settlement or a combination thereof. The warrant also may be converted into common shares at any time after the third anniversary of the issue date. The number of common shares issuable upon conversion would be equal to the value of the warrant determined by the Black-Scholes option pricing model divided by the average of the closing price of common shares for the 10-day period prior to the date of conversion. Any shares received upon such conversion are non-transferable for two years.

      We have defined benefit pension plans covering certain of our U.S. and international employees that provide various pension benefits. During 2005, we contributed $9.2 million towards those plans, and for 2006, we anticipate funding approximately $7.3 million through cash flows from operating activities.

      Our nonqualified supplemental executive retirement plan is unfunded; however, we maintain life insurance policies on the participants with the intent to use the proceeds from such policies to meet the plan’s benefit requirements.

      On June 30, 2000, we completed the private placement of $910.0 million face amount of Zero Coupon Debentures. These debentures were issued at $501.6 million, providing the holders with an annual 3% yield to maturity. At June 30, 2005, the holders had the option to require us to repurchase the Zero Coupon Debentures at the accreted amount which was $582.2 million. In total, $11.0 million of face value for an aggregate accreted value of $7.1 million was put to us. We settled this obligation during July 2005 with cash on hand.

      On July 28, 2005, we called for redemption on August 29, 2005 all of the outstanding Zero Coupon Debentures. At their option, certain holders tendered for conversion an aggregate of $367.4 million principal amount at maturity. The debentures were converted to an aggregate of approximately 7.3 million of our common shares. We redeemed the remaining $531.6 million aggregate principal amount at maturity for a cost of $341.8 million. We funded $240.0 million of that amount at that time through a borrowing on our 364-Day Revolving Credit Agreement and the remaining $101.8 million with available cash.

      The following obligations of Weatherford Inc. were guaranteed by Weatherford Limited as of December 31, 2005: (1) the 7¹/4% Senior Notes, and (2) the 6⁵/8% Senior Notes. The following obligations of Weatherford Limited were guaranteed by Weatherford Inc. as of December 31, 2005: (i) the 2003 Revolving Credit Facility, (ii) the 4.95% Senior Notes, (iii) the 364-Day Revolving Credit Facility and (iv) issuances of notes under the Commercial Paper Program. In addition, prior to its termination, Weatherford Limited and Weatherford Inc. fully and unconditionally guaranteed certain domestic subsidiaries’ performance obligations relating to the asset securitization.

      We execute letters of credit in the normal course of business. While these obligations are not normally called, it should be noted that these obligations could be called by the beneficiaries at any time before the expiration date should we breach certain contractual or payment obligations. As of December 31, 2005, we had $115.2 million of letters of credit and bid and performance bonds outstanding, consisting of $97.5 million outstanding under various uncommitted credit facilities and $17.7 million letters of credit outstanding under our committed facilities.

      We are committed under various operating lease agreements primarily related to office space and equipment. Generally, these leases include renewal provisions as well as provisions which permit the adjustment of rental payments for taxes, insurance and maintenance related to the property.

Related Party Agreements

      In April 2000, we completed the spin-off of our Grant Prideco, Inc. subsidiary to our shareholders. Three of our directors serve on both our and Grant Prideco’s Boards of Directors. In connection with the spin-off, we entered into a preferred customer agreement which expired on March 31, 2005.

      See “Item 8. Financial Statements and Supplementary Data — Notes to Consolidated Financial Statements — Note 20” for additional discussion of related party transactions.

Critical Accounting Policies and Estimates

      Our discussion and analysis of our financial condition and results of operation is based upon our consolidated financial statements. We prepare these financial statements in conformity with U.S. generally accepted accounting principles. As such, we are required to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. We base our estimates on historical experience, available information and various other assumptions we believe to be reasonable under the circumstances. On an on-going basis, we evaluate our estimates; however, actual results may differ from these estimates under different assumptions or conditions. The accounting policies we believe require management’s most difficult, subjective or complex judgments and are the most critical to our reporting of results of operations and financial position are as follows:

      Goodwill and intangible assets acquired in connection with business combinations represent the excess of consideration over the fair value of tangible net assets acquired. Certain assumptions and estimates are employed in determining the fair value of assets acquired, the fair value of liabilities assumed, as well as in determining the allocation of goodwill to the appropriate reporting unit.

      We perform an impairment test for goodwill and indefinite-lived intangible assets annually as of October 1, or earlier if indicators of potential impairment exist. Our goodwill impairment test involves a

comparison of the fair value of each of our reporting units with their carrying value. Our impairment test for indefinite-lived intangible assets involves the comparison of the fair value of the intangible asset and its carrying value. The fair value is determined using discounted cash flows and other market-related valuation models. Certain estimates and judgments are required in the application of the fair value models. We have determined no impairment exists; however, if for any reason the fair value of our goodwill or that of any of our reporting units or the fair value of our intangible assets with indefinite lives declines below the carrying value in the future, we may incur charges for the impairment.

      Long-lived assets, which includes property, plant and equipment and definite-lived intangibles, comprise a significant amount of our total assets. In accounting for long-lived assets, we must make estimates about the expected useful lives of the assets and the potential for impairment based on the fair value of the assets and the cash flows they are expected to generate. The value of the long-lived assets is then amortized over its expected useful life. A change in the estimated useful lives of our long-lived assets would have an impact on our results of operations. We estimate the useful lives of our long-lived asset groups as follows:

      In estimating the useful lives of our property, plant and equipment, we rely primarily on our actual experience with the same or similar assets. The useful lives of our intangible assets are determined by the years over which we expect the assets to generate a benefit based on legal, contractual or regulatory terms.

      Long-lived assets to be held and used by us are reviewed to determine whether any events or changes in circumstances indicate that we may not be able to recover the carrying amount of the asset. Factors that might indicate a potential impairment may include, but are not limited to, significant decreases in the market value of the long-lived asset, a significant change in the long-lived asset’s physical condition, the introduction of competing technologies, legal challenges, a change in industry conditions or a reduction in cash flows associated with the use of the long-lived asset. If these or other factors exist that indicate the carrying amount of the asset may not be recoverable, we determine whether an impairment has occurred through the use of an undiscounted cash flow analysis. The undiscounted cash flow analysis consists of estimating the future cash flows that are directly associated with and expected to arise from the use and eventual disposition of the asset over its remaining useful life. These cash flows are inherently subjective and require significant estimates based upon historical experience and future expectations such as budgets and internal projections. If the undiscounted cash flows do not exceed the carrying value of the long-lived asset, an impairment has occurred, and we recognize a loss for the difference between the carrying amount and the estimated fair value of the asset. The fair value of the asset is measured using market prices, or in the absence of market prices, is based on an estimate of discounted cash flows. Cash flows are generally discounted at an interest rate commensurate with our weighted average cost of capital for a similar asset.

      We are self-insured up to certain levels for general liability, vehicle liability, group medical and for workers’ compensation claims for certain of our employees. The amounts in excess of the self-insured levels are fully insured, up to a limit. Liabilities associated with these risks are estimated by considering historical claims experience, industry demographics and other actuarial assumptions obtained from internal or third-party sources. Although we believe adequate reserves have been provided for expected liabilities arising from our self-insured obligations, projections of future losses are inherently uncertain, and it is reasonably possible our estimates of these liabilities will change over the near term as circumstances develop. A 5.0% increase in

our expected annual loss estimates would result in an increase of approximately $0.6 million in our 2005 insurance expense.

      Effective January 1, 2003, we adopted Statement of Financial Accounting Standards (“SFAS”) No. 123, Accounting for Stock Based Compensation, as amended. We elected the prospective method of adoption, and under this method, the fair value of employee stock-based compensation expense granted during 2003 is measured at the grant date based on the fair value of the award and is recognized as an expense over the service period, which is usually the vesting period. The fair value of each option grant is estimated using the Black-Scholes option pricing model. Key assumptions in the Black-Scholes option pricing model, some of which are based on subjective expectations, are subject to change. A change in one or more of these assumptions would impact the expense associated with future grants. These key assumptions include the volatility of our common shares, the risk-free interest rate and the expected life of the options.

      We used the following weighted average assumptions in the Black-Scholes option pricing model for determining the fair value of our 2004 and 2005 stock option grants:

      We calculated the expected volatility by measuring the volatility of our historical stock price for a period equal to the expected life of the option and ending at the time the option was granted. We determined the risk-free interest rate based upon the interest rate on a U.S. Treasury Bill with a term equal to the expected life of the option at the time the option was granted. In estimating the expected lives of our stock options, we have relied primarily on our actual experience with our previous stock option grants. The expected life is less than the term of the option as option holders, in our experience, exercise or forfeit the options during the term of the option.

      We are not required to recalculate the fair value of our stock option grants estimated using the Black-Scholes option pricing model after the initial calculation under the related option terms as modified. However, a 100 basis point increase in our expected volatility and risk-free interest rate at the grant date would have had the following impact on our compensation expense for the year ended December 31, 2005:

      We account for our defined benefit pension and other postretirement benefit obligations and costs in accordance with SFAS No. 87, Employers’ Accounting for Pensions, SFAS No. 88, Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits and SFAS No. 106, Employers’ Accounting for Postretirement Benefits Other than Pensions. These statements require that the amounts recognized in the financial statements be determined on an actuarial basis.

      Two of the more critical assumptions 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. Discount rates are based on the yields of government bonds or high quality corporate bonds in the respective country or economic market. The expected long-term rates of return on plan assets are based on a combination of historical experience and anticipated future returns in each of the asset categories. As we have both domestic and international plans, the assumptions, though the same in nature, are based on varying factors specific to each particular country or economic environment. Changes in any of the assumptions used could impact our projected benefit obligations and benefit costs as well as other pension and postretirement benefit calculations.

      Due to the significance of the discount rates and expected long-term rates of return, the following sensitivity analysis demonstrates the effect that a 50 basis point change in those assumptions will have on annual pension expense:

      We provide for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes. This standard takes into account the differences between the financial statement treatment and tax treatment of certain transactions. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates is recognized as income or expense in the period that includes the enactment date. Our effective tax rates for 2005, 2004 and 2003 were 25.4%, 21.5% and 25.9%, respectively.

      We operate in approximately 100 countries through various legal entities. As a result, we are subject to numerous domestic and foreign tax jurisdictions and tax agreements and treaties among the various taxing authorities. Our operations in these jurisdictions are taxed on various bases: income before taxes, deemed profits (which is generally determined using a percentage of revenues rather than profits) and withholding taxes based on revenue. The calculation of our tax liabilities involves consideration of uncertainties in the application and interpretation of complex tax regulations in a multitude of jurisdictions across our global operations. We recognize potential liabilities and record tax liabilities for anticipated tax audit issues in the U.S. and other tax jurisdictions based on our estimate of whether, and the extent to which, additional taxes will be due. The tax liabilities are reflected net of realized tax loss carryforwards. We adjust these reserves upon specific events; however, due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is different from our current estimate of the tax liabilities. If our estimate of tax liabilities proves to be less than the ultimate assessment, an additional charge to expense would result. If payment of these amounts ultimately proves to be less than the recorded amounts, the reversal of the liabilities would result in tax benefits being recognized in the period when the contingency has been resolved and the liabilities are no longer necessary. If the tax liabilities relate to tax uncertainties existing at the date of the acquisition of a business, the adjustment of such tax liabilities will result in an adjustment to the goodwill recorded at the date of acquisition. Changes in tax laws, regulations, agreements and treaties, foreign currency exchange restrictions or our level of operations or profitability in each taxing jurisdiction could have an impact upon the amount of income taxes that we provide during any given year.

      We record a valuation allowance to reduce the carrying value of our deferred tax assets when it is more likely than not that a portion or all of the deferred tax assets will expire before realization of the benefit or that future deductibility is not probable. The ultimate realization of the deferred tax assets depends on the ability to generate sufficient taxable income of the appropriate character and in the related jurisdiction in the future. In evaluating our ability to recover our deferred tax assets, we consider all reasonably available positive and negative evidence, including our past operating results, the existence of cumulative losses in the most recent years and our forecast of future taxable income. In estimating future taxable income, we develop assumptions, including the amount of future state, federal and international pretax operating income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment.

      We have identified various domestic and international tax planning strategies that we would implement, if necessary, to enable the realization of our deferred tax assets; however, when the likelihood of the realization of existing deferred tax assets changes, adjustments to the valuation allowance are charged to our income tax provision in the period in which the determination is made.

      As of December 31, 2005, our net deferred tax assets were $159.7 million excluding a related valuation allowance of $44.0 million. As of December 31, 2004, our net deferred tax assets were $127.4 million excluding a related valuation allowance of $27.8 million.

      For a more comprehensive list of our accounting policies, see “Item 8. Financial Statements and Supplementary Data — Notes to Consolidated Financial Statements — Note 1.”

New Accounting Pronouncements

      In November 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 151, Inventory Costs — an amendment of ARB 43, Chapter 4 (“SFAS No. 151”). SFAS No. 151 clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material. This statement requires abnormal amounts be recognized as current period charges in all circumstances. In addition, SFAS No. 151 requires the allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS No. 151 is effective for fiscal years beginning after June 15, 2005. We do not believe the implementation of SFAS No. 151 will have a material impact on our financial position, results of operations or cash flows.

      In December 2004, the FASB issued SFAS No. 123 (Revised 2004) Share-Based Payment (“SFAS No. 123R”). SFAS No. 123R addresses the accounting for all share-based payment awards, including shares issued under employee stock purchase plans, stock options, restricted stock and stock appreciation rights. Under the new standard, companies will no longer be able to account for share-based compensation transactions using the intrinsic value method in accordance with Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees”. Instead, companies will be required to account for such transactions using a fair-value method and recognize the expense in the consolidated statement of income. We expect to use the Black-Scholes option pricing model to determine the fair value of our share-based payment awards. We will use the modified-prospective transition method. Under this method, compensation cost is recognized for all awards granted, modified or settled after the adoption date as well as for any awards that were granted prior to the adoption date for which the requisite service has not yet been rendered. We adopted SFAS No. 123R on January 1, 2006.

      Effective January 1, 2003, we adopted SFAS No. 123 to expense the fair value of employee stock-based compensation for awards granted, modified or settled subsequent to December 31, 2002. Accordingly, the adoption of Statement 123(R)’s fair value method will not have a significant impact on our reported results of operations as essentially all grants are already reflected in our results.

      SFAS No. 123R also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. While we cannot estimate what those amounts will be in the future (because they depend on, among other things, when employees exercise stock options), the amount of operating cash flows recognized in prior periods for such tax benefits were $72.5 million, $28.0 million and $4.4 million in 2005, 2004 and 2003, respectively.

      New accounting pronouncements effective during 2005 did not have a material effect on our consolidated financial statements. For a more comprehensive discussion of new accounting pronouncements see “Item 8. Financial Statements and Supplementary Date — Notes to Consolidated Financial Statements — Note 1.”

      We are currently exposed to market risk from changes in foreign currency and changes in interest rates. From time to time, we may enter into derivative financial instrument transactions to manage or reduce our

market risk, but we do not enter into derivative transactions for speculative purposes. A discussion of our market risk exposure in financial instruments follows.

Foreign Currency Exchange Rates

      We operate in virtually every oil and natural gas exploration and production region in the world. In some parts of the world, such as the Middle East and Southeast Asia, the currency of our primary economic environment is the U.S. dollar. We use this as our functional currency. In other parts of the world, we conduct our business in currencies other than the U.S. dollar and the functional currency is the applicable local currency. In those countries in which we operate in the local currency, the effects of foreign currency fluctuations are largely mitigated because local expenses of such foreign operations are also generally denominated in the same currency.

      Assets and liabilities of which the functional currency is the local currency are translated using the exchange rates in effect at the balance sheet date, resulting in translation adjustments that are reflected as Accumulated Other Comprehensive Income in the shareholders’ equity section on our Consolidated Balance Sheets. Approximately 40.7% of our net assets are impacted by changes in foreign currencies in relation to the U.S. dollar. We recorded a $23.9 million adjustment to decrease our equity account for the year ended December 31, 2005 to reflect the net impact of the strengthening U.S. dollar against various foreign currencies.

      As of December 31, 2005, we have entered into several foreign currency forward contracts and one foreign currency option contract with notional amounts aggregating $88.9 million and total fair value of $88.8 million to hedge exposure to currency fluctuations in various foreign currencies, including the Canadian Dollar, the Euro, the Australian Dollar, the Norwegian Kroner, the Brazilian Real and the Thai Bhat. In addition, after the closing of the acquisition of Precision Energy Services and Precision Drilling International, the Company entered into a series of cross-currency swaps with notional amounts at execution totaling $588.9 million and total fair value of $572.0 million as of December 31, 2005. These derivative instruments were not designated as hedges and the changes in fair value of the contracts are recorded each period in current earnings.

Interest Rates

      We are subject to interest rate risk on our long-term fixed interest rate debt and variable-interest rate borrowings. Variable rate debt, where the interest rate fluctuates periodically, exposes us to short-term changes in market interest rates. Fixed rate debt, where the interest rate is fixed over the life of the instrument, exposes us to changes in market interest rates reflected in the fair value of the debt and to the risk that we may need to refinance maturing debt with new debt at a higher rate. All other things being equal, the fair value of our fixed rate debt will increase or decrease as interest rates change.

      The Company’s long-term borrowings that were outstanding at December 31, 2005 subject to interest rate risk consist of the following:

      We have various other long-term debt instruments of $16.4 million, but believe the impact of changes in interest rates in the near term will not be material to these instruments. Short-term borrowings of $741.5 million at December 31, 2005 and $11.1 million at December 31, 2004 approximate fair value.

      As it relates to our variable rate debt, if market interest rates average 1.0% more in 2006 than the rates as of December 31, 2005, interest expense for 2006 would increase by $7.4 million. This amount was determined

by calculating the effect of the hypothetical interest rate on our variable rate debt. This sensitivity analysis assumes there are no changes in the Company’s financial structure.

Interest Rate Swaps

      We manage our debt portfolio to achieve an overall desired position of fixed and floating rates and may employ interest rate swaps as a tool to achieve that goal. The major risks from interest rate derivatives include changes in the interest rates affecting the fair value of such instruments, potential increases in interest expense due to market increases in floating interest rates and the creditworthiness of the counterparties in such transactions. The counterparties to our interest rate swaps are creditworthy multinational commercial banks. We believe that the risk of counterparty nonperformance is immaterial.

      At different times during 2004, we entered into and terminated separate interest rate swap agreements on notional amounts of $200.0 million and $150.0 million of our 4.95% Senior Notes. We also, at different times, entered into and terminated separate interest rate swap agreements on notional amounts and $70.0 million and $170.0 million of our 6⁵/8% Senior Notes. Each of the agreements were terminated prior to entering into a new agreement. As a result of these terminations, we received cash proceeds, net of accrued interest, of approximately $12.8 million. The deferred gain is being amortized as a reduction of interest expense over the remaining life of the underlying debt securities. There were no interest rate swap agreements outstanding as of December 31, 2005.

      In the third and fourth quarter of 2003, we entered into interest rate swap agreements on an aggregate notional amount of $150.0 million of our 7¹/4% Senior Notes and $250.0 million of our 6⁵/8% Senior Notes. These agreements were outstanding as of December 31, 2003. The aggregate fair value of the swaps was an asset of $4.5 million as of December 31, 2003 and was based on quoted market prices for contracts with similar terms and maturity dates. In January 2004, we terminated these swap agreements and received $7.8 million in cash proceeds, net of accrued interest, as settlement. The deferred gain is being amortized as a reduction of interest expense over the remaining life of the underlying debt securities.

INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

      Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in the Securities Exchange Act of 1934 Rule 13a-15(f). The Company’s internal controls were designed to provide reasonable assurance as to the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.

      Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

      Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2005, excluding the acquired businesses of Precision Energy Services and Precision Drilling International from its assessment. These businesses were acquired on August 31, 2005 and represent approximately 33.1% of the Company’s total assets as of December 31, 2005 and approximately 10.4% and 8.2% of the Company’s total revenues and net income, respectively, for the year then ended. In making its assessment, management has utilized the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework. These acquired businesses will be included in management’s assessment of the effectiveness of the Company’s internal control over financial reporting in 2006.

      Based on this assessment, management concluded that as of December 31, 2005 the company’s internal control over financial reporting is effective.

      Our assessment of the effectiveness of the Company’s internal control over financial reporting has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report, which is included herein. This report appears on page 46.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The Board of Directors and Shareholders

Weatherford International Ltd. and Subsidiaries

      We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control over Financial Reporting, that Weatherford International Ltd. maintained effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Weatherford International Ltd.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the company’s internal control over financial reporting 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 effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

      A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

      Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

      As indicated in the accompanying Management’s Report on Internal Controls over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Precision Energy Services and Precision Drilling International which is included in the 2005 consolidated financial statements of Weatherford International Ltd. and constituted 33.1% of total assets as of December 31, 2005 and 10.4% and 8.2% of revenues and net income, respectively, for the year then ended. Our audit of internal control over financial reporting of Weatherford International Ltd. also did not include an evaluation of the internal control over financial reporting of Precision Energy Services and Precision Drilling International.

      In our opinion, management’s assessment that Weatherford International Ltd. maintained effective internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, Weatherford International Ltd. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on the COSO criteria.

      We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Weatherford International and Subsidiaries as of December 31, 2005 and 2004 and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2005, and our report dated March 8, 2006 expressed an unqualified opinion thereon.

Houston, Texas

March 8, 2006

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders

Weatherford International Ltd. and Subsidiaries

      We have audited the accompanying consolidated balance sheets of Weatherford International Ltd., and Subsidiaries as of December 31, 2005 and 2004, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2005. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule 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 includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

      In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Weatherford International Ltd. and Subsidiaries at December 31, 2005 and 2004, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

      As discussed in Note 1 to the consolidated financial statements, in 2003 the Company adopted Statement of Financial Accounting Standards No. 123,“Accounting for Stock-Based Compensation.”

      We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Weatherford International Ltd.’s internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 8, 2006 expressed an unqualified opinion thereon.

Houston, Texas

March 8, 2006

WEATHERFORD INTERNATIONAL LTD. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of these consolidated financial statements.

WEATHERFORD INTERNATIONAL LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME