WEATHERFORD INTERNATIONAL LTD - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the quarterly period ended September 30, 2002

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from ________ to ________

Commission file number 1-31339

WEATHERFORD INTERNATIONAL LTD.
-------------------------------
(Exact name of Registrant as specified in its Charter)

Bermuda 98-0371344
- -------------------------------------- -----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

c/o Corporate Managers (Barbados) Ltd.
First Floor, Trident House
Lower Broad Street
Bridgetown, Barbados None
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)

(246) 427-3174
--------------------------------------------------------
(Registrant's telephone number, include area code)

- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)

Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

Yes X No
-------------- ----------

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

Title of Class Outstanding at November 7, 2002
-------------- -------------------------------
Common Shares, par value $1.00 120,480,627

EXPLANATORY STATEMENT

Weatherford International Ltd., a Bermuda exempted company ("Weatherford
Limited"), is filing this Quarterly Report on Form 10-Q as successor to
Weatherford International, Inc., a Delaware corporation ("Weatherford
Delaware"). On June 26, 2002, Weatherford Limited became the parent holding
company of Weatherford Delaware as the result of a corporate reorganization
effected through the merger of a subsidiary with and into Weatherford Delaware.
Each share of Weatherford Delaware issued immediately prior to the effective
time of the merger automatically converted into the right to receive a common
share of Weatherford Limited. Thus, the stockholders of Weatherford Delaware
became the shareholders of Weatherford Limited which, together with its
subsidiaries, continues to be engaged in the same business that Weatherford
Delaware and its subsidiaries were engaged in before the merger. For periods
prior to June 26, 2002, please refer to the periodic and other reports filed
with the Securities and Exchange Commission by Weatherford Delaware (Commission
File No. 001-13086) prior to June 26, 2002.

1

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

WEATHERFORD INTERNATIONAL LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE)

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

2

WEATHERFORD INTERNATIONAL LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

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

3

WEATHERFORD INTERNATIONAL LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)

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

4

WEATHERFORD INTERNATIONAL LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
(IN THOUSANDS)

THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
--------------------------- -----------------------------
2002 2001 2002 2001
------------ ----------- ------------- ------------

Net Income (Loss)...................................... $ (121,642) $ 60,181 $ (37,571) $ 160,127
Other Comprehensive Income (Loss):
Foreign Currency Translation Adjustment........... (10,215) 1,156 1,070 (28,962)
------------ ----------- ------------- ------------
Comprehensive Income (Loss)............................ $ (131,857) $ 61,337 $ (36,501) $ 131,165
============ =========== ============= ============

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

5

WEATHERFORD INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. GENERAL

Effective June 26, 2002, Weatherford International Ltd. ("Weatherford
Limited"), a Bermuda exempted company, became the parent holding company of
Weatherford International, Inc. ("Weatherford Delaware") following a corporate
reorganization (See Note 2). The condensed consolidated financial statements of
Weatherford Limited and subsidiaries (the "Company") included herein are
unaudited; however, they include all adjustments of a normal recurring nature
which, in the opinion of management, are necessary to present fairly the
Company's Condensed Consolidated Balance Sheet at September 30, 2002, Condensed
Consolidated Statements of Operations and Condensed Consolidated Statements of
Comprehensive Income (Loss) for the three and nine months ended September 30,
2002 and 2001, and Condensed Consolidated Statements of Cash Flows for the nine
months ended September 30, 2002 and 2001. Although the Company believes that the
disclosures in these financial statements are adequate to make the interim
information presented not misleading, certain information relating to the
Company's organization and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States has been condensed or omitted in this Form 10-Q pursuant to
Securities and Exchange Commission rules and regulations. These financial
statements should be read in conjunction with the audited consolidated financial
statements for the year ended December 31, 2001 and the notes thereto included
in Weatherford International, Inc.'s Annual Report on Form 10-K. The results of
operations for the three and nine month periods ended September 30, 2002 are not
necessarily indicative of the results expected for the full year.

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management 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 reporting period. Actual results
could differ from those estimates.

Certain reclassifications of prior year balances have been made to conform
such amounts to corresponding current year classifications.

2. CORPORATE REORGANIZATION

Effective June 26, 2002, Weatherford Limited became the parent holding
company of Weatherford Delaware following a corporate reorganization.
Weatherford Delaware continues to exist as an indirect, wholly owned subsidiary
of Weatherford Limited. Weatherford Limited and its subsidiaries continue to
conduct the business previously conducted by Weatherford Delaware and its
subsidiaries. The reorganization has been accounted for as a reorganization of
entities under common control, and accordingly, it did not result in any changes
to the consolidated amounts of assets, liabilities or shareholders' equity. All
steps to affect the reorganization were completed by September 30, 2002.

Upon consummation of the merger, the shares of Weatherford Delaware common
stock automatically converted into the right to receive Weatherford Limited
common shares. The authorized share capital of Weatherford Limited consists of
(1) 500,000,000 common shares, $1.00 par value ("Common Shares") and (2)
10,000,000 undesignated preference shares, $1.00 par value. In the merger,
Common Shares were issued to holders of Weatherford Delaware common stock. None
of the preference shares have been issued.

In conjunction with the merger, Weatherford Limited fully and
unconditionally guaranteed the following obligations of Weatherford Delaware:
(1) the three-year multi-currency revolving credit facility, (2) the five-year
unsecured credit agreement, (3) the $200.0 million 7 1/4% Senior Notes due 2006
(the "7 1/4% Senior Notes"), (4) the $350.0 million 6 5/8% Senior Notes due
2011, (5) the Zero Coupon Convertible Senior Debentures due 2020 (the "Zero
Coupon Debentures") and (6) the 5% Convertible Subordinated Preferred Equivalent
Debentures due 2027 (the "Convertible Preferred Debentures"). In addition,
Weatherford Limited and Weatherford Delaware fully and unconditionally
guaranteed certain domestic subsidiaries' performance obligations relating to
the asset securitization (See Note 7), including their payment obligations.

6

WEATHERFORD INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

In connection with the reorganization, the Company incurred $4.5 million,
$3.0 million after taxes, in transaction-related expenses. The transaction
expenses relate to professional services and are reflected in Corporate General
and Administrative Expenses in the accompanying Condensed Consolidated
Statements of Operations for the nine months ended September 30, 2002.

3. NON-RECURRING CHARGE

During the three months ended September 30, 2002, the Company recorded
$232.5 million, $156.2 million net of taxes, in non-recurring charges relating
to a write-down in its investment in Universal Compression Holdings, Inc.
("Universal") and a rationalization of its businesses in light of industry
conditions.

The Company recorded a write-down of its investment in Universal by $217.1
million as it determined that the decline in the market value was other than
temporary. In connection with the reduction in the carrying value of this
investment, the Company recognized a tax benefit of $70.9 million, reducing the
deferred tax liability related to the difference between the book carrying value
and the tax basis of the investment.

The Company undertook initiatives to rationalize its business in light of
the lower activity levels primarily in the United States, and the continued
economic uncertainty. Initiatives approved during the third quarter included a
reduction in workforce and closure of two facilities. The charge recorded
related to these initiatives is summarized by division in the following table
and described in greater detail below:

Reversal of
Prior Year
Asset Non-recurring
Severance (1) Impairment (2) Charge (3) Total
--------------- ----------------- ---------------- ----------------
(in thousands)

Drilling & Intervention Services.. $ 1,853 $ 132 $ -- $ 1,985
Completion Systems................ 4,810 1,580 -- 6,390
Artificial Lift Systems........... 1,866 5,295 -- 7,161
Corporate......................... 48 4,592 (4,739) (99)
--------------- ----------------- ---------------- ----------------
Total............................. $ 8,577 $ 11,599 $ (4,739) $ 15,437
=============== ================= ================ ================

(1) In accordance with the Company's announced plan to terminate
employees, it recorded severance and related costs for 834
specifically identified employees. Terminations are company-wide and
are expected to be completed by the end of 2002. As of September 30,
2002, 87 employees had been terminated and $0.4 million of severance
had been paid.

(2) The asset impairment primarily relates to the write-down of equipment
and facilities which are held for sale as a result of the decline in
market conditions. These assets, having a carrying amount of $10.9
million, have been reclassified in Other Current Assets on the
accompanying Condensed Consolidated Balance Sheet as of September 30,
2002. The Company anticipates the assets to be sold by September 2003.

(3) In 2001, the Company recorded a non-recurring charge of $56.3 million
in connection with the merger of its Compression Services Division
with Universal of which $4.7 million of estimated transaction costs
were not incurred.

4. GOODWILL

In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other
Intangible Assets. SFAS No. 142 provides for the non-amortization of goodwill
and other intangible assets with indefinite lives and requires that such assets
be tested for impairment at least on an annual basis. The Company adopted SFAS
No. 142 effective January 1, 2002 and has applied the non-amortization
provision. During the second quarter of 2002, the Company completed the
transitional goodwill impairment test prescribed in SFAS No. 142 with respect to
existing goodwill at the date of adoption. The transitional goodwill impairment
test involved a comparison of the fair value of each of the Company's reporting
units, as defined under SFAS 142, with its carrying amount. As the carrying
amount of each reporting unit did not exceed its fair value, none of the
Company's goodwill was impaired.

7

WEATHERFORD INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

The following table provides net income and earnings per share information
had the non-amortization provision been in effect for the three and nine months
ended September 30, 2001:

THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2001 SEPTEMBER 30, 2001
---------------------- ---------------------
(in thousands, except per share amounts)

Reported net income................................ $ 60,181 $ 160,127
Goodwill amortization, net of taxes................ 10,162 27,239
---------------------- ---------------------
Adjusted net income................................ $ 70,343 $ 187,366
====================== =====================

Basic earnings per share:
Reported earnings per share...................... $ 0.52 $ 1.42
Goodwill amortization, net of taxes.............. 0.09 0.24
---------------------- ---------------------
Adjusted earnings per share...................... $ 0.61 $ 1.66
====================== =====================

Diluted earnings per share:
Reported earnings per share...................... $ 0.49 $ 1.32
Goodwill amortization, net of taxes.............. 0.07 0.21
---------------------- ---------------------
Adjusted earnings per share...................... $ 0.56 $ 1.53
====================== =====================

5. INTANGIBLE ASSETS

The Company amortizes identifiable intangible assets, excluding goodwill
and indefinite-lived intangibles, on a straight-line basis over the years
expected to be benefited, ranging from 3 to 20 years. The components of these
other intangible assets are as follows:

SEPTEMBER 30, 2002 DECEMBER 31, 2001
------------------------------------------- --------------------------------------------------
CARRYING ACCUMULATED CARRYING VALUE ACCUMULATED
VALUE AMORTIZATION NET AMORTIZATION NET
------------ -------------- ------------- --------------- -------------- --------------
(in thousands)

Patents.......... $ 72,802 $ (12,972) $ 59,830 $ 62,135 $ (9,623) $ 52,512
Licenses......... 187,496 (9,807) 177,689 33,209 (4,754) 28,455
Covenants not to
compete......... 19,970 (9,408) 10,562 18,961 (6,539) 12,422
Other............. 1,609 (518) 1,091 2,423 (697) 1,726
--------- --------- --------- ------------ ----------- -----------
$ 281,877 $ (32,705) $ 249,172 $ 116,728 $ (21,613) $ 95,115
========= ========= ========= ============ =========== ===========

Amortization expense was $4.8 million and $11.1 million for the three and
nine months ended September 30, 2002, respectively. Estimated amortization
expense for the carrying amount of intangible assets as of September 30, 2002 is
expected to be $5.0 million for the remainder of 2002, $19.4 million for 2003,
$18.3 million for 2004, $17.5 million for 2005 and $16.6 million for 2006.

The Company has trademarks associated with its 2001 acquisition of the
Johnson Screens division from Vivendi Environment, which are considered to have
indefinite lives as the Company has the ability and intent to renew
indefinitely. These trademarks are classified in Other Intangible Assets, Net on
the accompanying Condensed Consolidated Balance Sheets and had a carrying value
of $8.0 million at September 30, 2002 and $9.7 million at December 31, 2001. The
estimated fair market value of intangible assets obtained through acquisitions
consummated in the preceding twelve months are based on preliminary information
which is subject to change when final valuations are obtained.

8

WEATHERFORD INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

On March 1, 2002, the Company obtained a worldwide license to Shell
Technology Ventures' ("Shell") expandable technology. Expandable technology
refers to both slotted and solid expandables, related tools and accessories and
specialized expansion systems. Under the terms of the agreement, the Company
received a global license to Shell's existing and future expandable tubular
intellectual property and immediate access to the U.S. market for use of its
Completion Systems Division's Expandable Sand Screen (ESSTM) system for
consideration that included $65.0 million in cash, a $20.0 million promissory
note and $60.0 million of warrants to purchase Common Shares. The $20.0 million
promissory note is classified as Short-Term Borrowings and Current Portion of
Long-Term Debt on the accompanying Condensed Consolidated Balance Sheets. In
addition, the Company received a 50% reduction in the royalty rate it
historically paid on Shell licensed technology sales. This license is being
amortized over the life of the agreement, which is 17 years.

6. INVENTORIES

Inventories by category are as follows:

SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- --------------
(in thousands)

Raw materials, components and supplies................................. $ 149,736 $ 143,142
Work in process........................................................ 46,285 49,544
Finished goods......................................................... 343,323 312,300
------------- --------------
$ 539,344 $ 504,986
================ ==============

Work in process and finished goods inventories include the cost of
material, labor and plant overhead.

7. ASSET SECURITIZATION

In July 2001, Weatherford Delaware entered into a one-year agreement with a
financial institution to sell, on a continuous basis, an undivided interest in a
specific pool of domestic accounts receivable of Weatherford Delaware and its
subsidiaries. The one-year term was extended through November 2002, and
Weatherford Delaware is currently in the process of renewing this agreement.
Weatherford Delaware is permitted to securitize up to $150.0 million under this
agreement. If Weatherford Limited's or Weatherford Delaware's credit rating
falls below BBB- from Standard and Poor's or Baa3 from Moody's, the financial
institution has no further obligation to purchase the accounts receivable. In
connection with the reorganization, Weatherford Limited and Weatherford Delaware
fully and unconditionally guaranteed certain domestic subsidiaries' performance
obligations relating to the asset securitization, including their payment
obligations. Weatherford Delaware currently pays a program fee on participating
interests at a variable rate based on the financial institution's commercial
paper rate plus other fees. Program fees totaled $0.5 million and $1.8 million
for the three and nine months ended September 30, 2002, respectively and are
included in Interest Expense, Net on the accompanying Condensed Consolidated
Statements of Operations. Weatherford Delaware had received $85.7 million for
purchased interests as of September 30, 2002 and $140.8 million as of December
31, 2001.

9

WEATHERFORD INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

8. SHORT-TERM DEBT

SEPTEMBER 30, DECEMBER 31,
2002 2001
-------------- ----------------
(in thousands)

2001 Multi-currency revolving credit facility........................ $ 116,356 $ 90,896
1998 Revolving credit facility....................................... 150,000 50,048
Note payable......................................................... 20,000 --
Short-term bank loans................................................ 57,307 22,528
-------------- ----------------
Total short-term borrowings.......................................... 343,663 163,472
Current portion of long-term debt.................................... 27,083 26,757
-------------- ----------------
Short-Term Borrowings and Current Portion of Long-Term Debt.......... $ 370,746 $ 190,229
============== ================

In April 2001, Weatherford Delaware entered into a $250.0 million,
three-year multi-currency revolving credit facility, with commitment capacity of
up to $400.0 million. As of September 30, 2002, the Company had $133.6 million
available under this agreement.

Weatherford Delaware entered into a five-year unsecured credit agreement in
May 1998, which provides for borrowings of up to an aggregate of $250.0 million,
consisting of a $200.0 million U.S. credit facility and a $50.0 million Canadian
credit facility. As of September 30, 2002, the Company had $64.6 million
available under this facility due to amounts outstanding and $35.4 million being
used to secure outstanding letters of credit.

The Company also engages in unsecured short-term borrowings with various
institutions pursuant to uncommitted facilities. As of September 30, 2002, the
Company had $57.3 million in unsecured short-term borrowings outstanding under
these arrangements with interest rates ranging from 2.13% to 16.00%.

9. INTEREST RATE SWAPS

As of September 30, 2002, the Company had in effect two interest rate swap
agreements, entered into on November 15, 2001 and January 8, 2002, to reduce the
Company's exposure to changes in the fair value of the 7 1/4% Senior Notes and
to take advantage of interest rates available in the current economic
environment. Under these agreements, on May 15 and November 15 of each year
until maturity, the Company will receive interest at the fixed rate of 7 1/4%
and will pay floating rate based on 6-month LIBOR. The hedges are considered
perfectly effective against changes in the fair value of the debt due to changes
in the benchmark interest rate over its term. In accordance with SFAS No. 133,
the shortcut method applies and there is no need to periodically reassess the
effectiveness of the hedge during the term of the swaps. The swap agreements are
recorded at fair market value and classified in Other Assets or Other
Liabilities with the offset to Long-Term Debt on the accompanying Condensed
Consolidated Balance Sheets. The aggregate fair market value of the swaps was an
asset of $15.5 million as of September 30, 2002 (See Note 15).

10. EARNINGS (LOSS) PER SHARE

Basic earnings (loss) per share for all periods presented is computed by
dividing net income (loss) by the weighted average number of Common Shares
outstanding during the period. Diluted earnings per share is computed by
dividing net income, as adjusted for the assumed conversion of dilutive
debentures, by the weighted average number of Common Shares outstanding during
the period adjusted for the dilutive effect of the Company's outstanding stock
options, restricted stock and the incremental shares for the assumed conversion
of dilutive debentures. The effect of stock options, restricted stock and
assumed conversion of dilutive debentures is not included in the computations
for periods in which a loss occurs, because to do so would be anti-dilutive.

Diluted earnings per share for the three and nine months ended September
30, 2001 reflects the assumed conversion of the Zero Coupon Debentures, as the
conversion of these debentures in those periods would have been dilutive. Net
income for the diluted earnings per share calculations for those periods is
adjusted to add back the amortization of original issue discount, net of taxes,
related to the Zero Coupon Debentures.

10

WEATHERFORD INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

Diluted earnings per share for the three and nine months ended September
30, 2001 reflects the assumed conversion of the Convertible Preferred Debentures
in the quarterly periods in which the conversion would have been dilutive. Net
income for the diluted earnings per share calculations for those periods is
adjusted to add back the interest expense, net of taxes, related to the
Convertible Preferred Debentures.

The following reconciles net income (loss) to adjusted net income (loss),
adjusting for the impact of assumed conversion of dilutive debentures for those
periods in which the debentures are dilutive:

THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------ -------------------------
2002 2001 2002 2001
------------ ----------- ----------- ------------
(in thousands)

Net income (loss)....................................... $ (121,642) $ 60,181 $ (37,571) $ 160,127
Amortization of original issue discount, net of taxes... -- 2,539 -- 7,583
Interest expense, net of taxes.......................... -- 3,258 -- 6,516
------------ ----------- ----------- ----------
Adjusted net income (loss).............................. $ (121,642) $ 65,978 $ (37,571) $ 174,226
============ =========== =========== ==========

The following reconciles basic and diluted weighted average shares
outstanding:

THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
----------------------- -------------------------
2002 2001 2002 2001
----------- ----------- ----------- ------------
(in thousands)

Basic weighted average shares outstanding................ 120,193 115,068 119,796 113,093
Dilutive effect of outstanding stock options and
restricted stock..................................... -- 3,370 -- 4,605
Dilutive effect of the Zero Coupon Debentures............ -- 9,097 -- 9,097
Dilutive effect of the Convertible Preferred Debentures.. -- 7,546 -- 5,031
----------- ----------- ----------- ------------
Dilutive weighted average shares outstanding............. 120,193 135,081 119,796 131,826
=========== =========== =========== ============

11. SUPPLEMENTAL CASH FLOW INFORMATION

The following summarizes investing activities relating to acquisitions
integrated into the Company for the periods shown:

NINE MONTHS
ENDED SEPTEMBER 30,
-----------------------------------
2002 2001
-------------- ----------------
(in thousands)

Fair value of assets, net of cash acquired........................... $ 50,940 $ 213,950
Goodwill............................................................. 57,949 312,697
Total liabilities, including minority interest....................... (25,660) (105,168)
Common Shares issued................................................. -- (207,062)
-------------- ----------------
Cash consideration, net of cash acquired............................. $ 83,229 $ 214,417
============== ================

During the nine months ended September 30, 2002 and 2001, there were
non-cash operating activities of $13.2 million and $8.2 million, respectively,
relating to tax benefits received from the exercise of nonqualified stock
options. These benefits were recorded as a reduction of income taxes payable and
an increase to Capital in Excess of Par Value on the accompanying Condensed
Consolidated Balance Sheets.

During the nine months ended September 30, 2002, there were non-cash
investing activities of $8.6 million related to the receipt of 187,094 Common
Shares initially issued in the 2001 acquisition of Orwell plc. The shares were
received as a settlement of a purchase price adjustment.

11

WEATHERFORD INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

During the nine months ended September 30, 2002, there were
noncash-financing activities related to interest rate swaps of $18.6 million
(See Note 9).

12. SEGMENT INFORMATION

Business Segments

The Company is a diversified international energy service and manufacturing
company that provides a variety of services and equipment to the exploration,
production and transmission sectors of the oil and gas industry. The Company
operates in virtually every oil and gas exploration and production region in the
world. The Company divides its business segments into three separate groups as
defined by the chief operating decision maker: Drilling and Intervention
Services, Completion Systems and Artificial Lift Systems. The Company also
historically operated a Compression Services segment, which was merged into a
subsidiary of Universal on February 9, 2001 in exchange for 13.75 million shares
of Universal common stock. The amounts reported for this segment include results
through the date of the merger.

The Company's Drilling and Intervention Services segment provides a wide
range of oilfield products and services, including downhole drilling and
intervention services, proprietary drilling equipment and rentals, well
installation services, cementing products and underbalanced drilling services.

The Company's Completion Systems segment provides completion products and
systems including expandable systems, intelligent well systems, packers, liner
hangers, well screens, flow control and inflatable packers.

The Company's Artificial Lift Systems segment designs, manufactures, sells
and services a complete line of artificial lift equipment, including progressing
cavity pumps, reciprocating rod lift systems, gas lift systems, electrical
submersible pumps, hydraulic lift systems and other lift systems. This segment
also offers well optimization, remote monitoring and control services and
non-oil and gas screens.

The Company's Compression Services segment historically packaged, rented
and sold parts and provided services for gas compressor units over a broad
horsepower range.

12

WEATHERFORD INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

Financial information by industry segment for each of the three and nine
months ended September 30, 2002 and 2001 is summarized below. The accounting
policies of the segments are the same as those of the Company.

THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
---------------------------- ----------------------------
2002 2001 2002 2001
------------ ------------- ------------ -------------
(in thousands)

Revenues from unaffiliated customers:
Drilling and Intervention Services...... $ 319,872 $ 363,293 $ 942,610 $ 986,197
Completion Systems...................... 88,335 86,838 285,451 247,807
Artificial Lift Systems................. 176,723 158,490 518,984 446,836
Compression Services.................... -- -- -- 26,939
------------ ------------- ------------- -------------
$ 584,930 $ 608,621 $ 1,747,045 $ 1,707,779
============ ============= ============= =============

EBITDA (a):
Drilling and Intervention Services...... $ 92,592 $ 127,824 $ 290,025 $ 345,294
Completion Systems...................... 8,353 15,588 37,119 40,875
Artificial Lift Systems................. 28,392 29,480 85,510 79,504
Compression Services.................... -- -- -- 3,587
Corporate (b)........................... (3,654) (1,274) (13,277) (10,147)
------------ ------------- ------------- -------------
$ 125,683 $ 171,618 $ 399,377 $ 459,113
============ ============= ============= =============
Depreciation and amortization:
Drilling and Intervention Services...... $ 39,117 $ 38,064 $ 114,666 $ 100,491
Completion Systems...................... 9,430 8,368 24,330 22,314
Artificial Lift Systems................. 5,659 7,263 17,282 21,061
Compression Services.................... -- -- -- 4,184
Corporate (b)........................... 772 1,763 2,040 4,795
------------ ------------- ------------- -------------
$ 54,978 $ 55,458 $ 158,318 $ 152,845
============ ============= ============= =============
Operating income (loss) (c):
Drilling and Intervention Services...... $ 53,475 $ 89,760 $ 175,359 $ 244,803
Completion Systems...................... (1,077) 7,220 12,789 18,561
Artificial Lift Systems................. 22,733 22,217 68,228 58,443
Compression Services.................... -- -- -- (597)
Corporate (b).......................... . (4,426) (3,037) (15,317) (14,942)
------------ ------------- ------------- -------------
$ 70,705 $ 116,160 $ 241,059 $ 306,268
============ ============= ============= =============

(a) The Company evaluates performance and allocates resources based on
EBITDA, which is calculated as operating income adding back
depreciation and amortization and non-recurring charges (see Note 3).
Calculations of EBITDA should not be viewed as a substitute to
calculations under accounting principles generally accepted in the
United States, in particular cash flows from operations, operating
income (loss) and net income (loss). In addition, EBITDA calculations
by one company may not be comparable to those of another company.

(b) Includes Equity in Earnings of Unconsolidated Affiliates.

(c) Excludes Non-recurring Charge (see Note 3).

13

WEATHERFORD INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

As of September 30, 2002, total assets were $2,065.5 million for Drilling
and Intervention Services, $1,011.5 million for Completion Systems, $895.8
million for Artificial Lift Systems and $427.4 million for Corporate. Total
assets as of December 31, 2001, were $1,975.8 million for Drilling and
Intervention Services, $864.5 million for Completion Systems, $920.5 million for
Artificial Lift Systems and $535.6 million for Corporate.

Net goodwill as of September 30, 2002 was $645.8 million for Drilling and
Intervention Services, $434.1 million for Completion Systems and $367.1 million
for Artificial Lift Systems. As of December 31, 2001, net goodwill was $593.0
million for Drilling and Intervention Services, $421.8 million for Completion
Systems and $368.5 million for Artificial Lift Systems. Amounts included in
goodwill related to acquisitions completed during the preceding twelve months
are based on preliminary information and are subject to change when final
information is obtained.

14

WEATHERFORD INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

13. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS

As part of the June 26, 2002 reorganization, Weatherford Limited ("Parent")
guaranteed, on a full and unconditional basis, certain indebtedness of its
indirect wholly owned subsidiary, Weatherford Delaware ("Issuer") (See Note 2).
The following unaudited condensed consolidating financial information for Parent
and Issuer and all other subsidiaries has been provided.

CONDENSED CONSOLIDATING BALANCE SHEET
SEPTEMBER 30, 2002
(UNAUDITED)
(IN THOUSANDS)

OTHER
PARENT ISSUER SUBSIDIARIES ELIMINATIONS CONSOLIDATION
-------------- ------------- -------------- ---------------- -------------

ASSETS
Current Assets:
Cash and Cash Equivalents ............... $ -- $ 57,073 $ 12 $ -- $ 57,085
Intercompany Receivables ................ 33,436 9,234 -- (42,670) --
Other Current Assets .................... -- 1,205,072 -- -- 1,205,072
----------- ----------- ----------- ----------- -----------
33,436 1,271,379 12 (42,670) 1,262,157
----------- ----------- ----------- ----------- -----------

Equity Investments in Unconsolidated
Affiliates .............................. 272,190 10,511 -- -- 282,701
Intercompany Investments in Affiliates ..... 700,346 12 2,800,668 (3,501,026) --
Shares Held in Parent ...................... -- 266,329 -- (266,329) --
Intercompany Notes Receivable .............. 1,400,000 299,063 -- (1,699,063) --

Other Assets ............................... -- 2,855,334 -- -- 2,855,334
----------- ----------- ----------- ----------- -----------
$ 2,405,972 $ 4,702,628 $ 2,800,680 $(5,509,088) $ 4,400,192
=========== =========== =========== =========== ===========

LIABILITIES AND SHAREHOLDERS' EQUITY

Current Liabilities:

Short-Term Borrowings and Current
Portion of Long-Term Debt .............. $ -- $ 370,746 $ -- $ -- $ 370,746

Accounts Payable and Other Current
Liabilities ............................ 1,892 508,810 (11,646) -- 499,056
Intercompany Payables ................... 9,234 -- 33,436 (42,670) --
----------- ----------- ----------- ----------- -----------
11,126 879,556 21,790 (42,670) 869,802
----------- ----------- ----------- ----------- -----------

Long-Term Debt ............................. -- 1,522,761 -- -- 1,522,761
Intercompany Notes Payable ................. 299,063 -- 1,400,000 (1,699,063) --
Other Long-Term Liabilities ................ -- 117,164 -- -- 117,164
Shareholders' Equity ....................... 2,095,783 2,183,147 1,378,890 (3,767,355) 1,890,465
----------- ----------- ----------- ----------- -----------
$ 2,405,972 $ 4,702,628 $ 2,800,680 $(5,509,088) $ 4,400,192
=========== =========== =========== =========== ===========

15

WEATHERFORD INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

13. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (CONTINUED)

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2002
(UNAUDITED)
(IN THOUSANDS)

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2002
(UNAUDITED)
(IN THOUSANDS)

OTHER
PARENT ISSUER SUBSIDIARIES ELIMINATIONS CONSOLIDATION
-------------- ------------- -------------- ---------------- --------------

Revenues.................................... $ -- $ 1,747,045 $ -- $ -- $ 1,747,045
Costs and Expenses.......................... -- (1,524,626) -- -- (1,524,626)
Equity in Earnings of Unconsolidated
Affiliates................................ 3,723 14,917 -- -- 18,640
Non-recurring Charge........................ (30,596) (15,437) -- (186,460) (232,493)
Loss on Sale to Parent...................... -- (186,460) -- 186,460 --
------------ ----------- ------------ ---------- ------------

Operating Income (Loss)..................... (26,873) 35,439 -- -- 8,566
------------ ----------- ------------ ---------- ------------
Other Income (Expense):
Interest Expense, Net.................... -- (61,401) -- -- (61,401)
Intercompany Charges, Net................ 22,131 11,305 (33,436) -- --
Other, Net............................... -- (2,891) -- -- (2,891)
------------ ----------- ------------ ---------- -----------
Loss Before Income Taxes.................... (4,742) (17,548) (33,436) -- (55,726)
(Provision) Benefit for Income Taxes........ (1,892) 8,401 11,646 -- 18,155
------------ ----------- ------------ ---------- -----------
Net Loss.................................... $ (6,634) $ (9,147) $ (21,790) $ -- $ (37,571)
============ =========== ============ ========== ===========

16

WEATHERFORD INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

13. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (CONTINUED)

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2002
(UNAUDITED)
(IN THOUSANDS)

OTHER
PARENT ISSUER SUBSIDIARIES ELIMINATIONS CONSOLIDATION
------------ ------------- --------------- --------------- ----------------

Cash Flows from Operating Activities:
Net Loss................................. $ (6,634) $ (9,147) $ (21,790) $ -- $ (37,571)
Adjustments to Reconcile Net Loss to
Net Cash
Provided by Operating Activities:
Equity in Earnings of Unconsolidated
Affiliates............................ (3,723) (14,917) -- -- (18,640)
Non-recurring Charge................... 30,596 15,050 -- 186,460 232,106
Loss on Sale to Parent................. -- 186,460 -- (186,460) --
Charges from Parent or Subsidiary...... (22,131) (11,305) 33,436 -- --
Deferred Income Tax Benefit............ -- (74,627) -- -- (74,627)
Other Adjustments...................... 1,892 73,215 (11,646) -- 63,461
------------ ----------- ------------ ---------- ----------
Net Cash Provided by Operating
Activities.......................... -- 164,729 -- -- 164,729
------------ ----------- ------------ ---------- ----------

Cash Flows from Investing Activities:
Acquisition of Businesses, Net of Cash
Acquired................................ -- (83,229) -- -- (83,229)
Capital Expenditures for Property, Plant
and Equipment........................ -- (196,031) -- -- (196,031)
Acquisition of License................... -- (65,000) -- -- (65,000)
Proceeds from Sales of Assets............ -- 28,508 -- -- 28,508
Capital Contribution to Subsidiary....... (12) (12) -- 24 --
------------ ----------- ------------ ---------- ----------
Net Cash Provided (Used) by Investing
Activities......................... (12) (315,764) -- 24 (315,752)
------------ ----------- ------------ ---------- ----------

Cash Flows from Financing Activities:
Borrowings on Short-Term Debt, Net....... -- 159,169 -- -- 159,169
Repayments of Long-Term Debt, Net........ -- (7,884) -- -- (7,884)
Repayments on Asset Securitization....... -- (55,055) -- -- (55,055)
Proceeds from Exercise of Stock Options.. 1,607 23,946 -- -- 25,553
Funds Received on Behalf of Parent....... (1,607) 1,607 -- -- --
Acquisition of Treasury Stock............ -- (1,994) -- -- (1,994)
Proceeds from Capital Contribution....... 12 -- 12 (24) --
Other.................................... -- (909) -- -- (909)
------------ ----------- ------------ ---------- ----------
Net Cash Provided (Used) by Financing
Activities......................... 12 118,880 12 (24) 118,880
------------ ----------- ------------ ---------- ----------

Effect of Exchange Rates on Cash and Cash
Equivalents............................... -- 396 -- -- 396
Net Increase (Decrease) in Cash and Cash
Equivalents................................ -- (31,759) 12 -- (31,747)
Cash and Cash Equivalents at Beginning of
Period..................................... -- 88,832 -- -- 88,832
------------ ----------- ------------ ---------- ----------
Cash and Cash Equivalents at End of Period.. $ -- $ 57,073 $ 12 $ -- $ 57,085
============ =========== ============ ========== ==========

17

WEATHERFORD INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

14. NEW ACCOUNTING PRONOUNCEMENTS

Effective January 1, 2002, the Company adopted SFAS No. 144, Accounting for
the Impairment or Disposal of Long-lived Assets. SFAS No. 144 provides updated
guidance concerning the recognition and measurement of an impairment loss for
certain types of long-lived assets and modifies the accounting and reporting of
discontinued operations. The adoption of SFAS No. 144 did not have an impact on
the consolidated financial statements of the Company.

In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections.
SFAS No. 145, which is effective for fiscal years beginning after May 15, 2002,
provides guidance for income statement classification of gains and losses on
extinguishment of debt and accounting for certain lease modifications that have
economic effects that are similar to sale-leaseback transactions. The Company
does not believe that the adoption of this statement will have a material impact
on the consolidated financial statements of the Company.

In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. SFAS No. 146 requires companies to recognize
costs associated with restructurings, discontinued operations, plant closings,
or other exit or disposal activities, when incurred as opposed to when the
entity commits to an exit plan under Emerging Issues Task Force No. 94-3,
Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring). The
provisions of this statement are effective for exit or disposal activities that
are initiated after December 31, 2002. The Company plans to adopt the standard
as of the effective date and will implement its provisions on a prospective
basis.

15. SUBSEQUENT EVENT

In October 2002, the Company terminated both swap agreements and received
$13.9 million in cash as settlement. The cash received was recorded against the
fair market value of the agreements subsequent to September 30, 2002, and the
resulting gain will be amortized over the remaining life of the 7 1/4% Senior
Notes as an adjustment to interest expense.

18

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

GENERAL

Effective June 26, 2002, Weatherford International Ltd., a Bermuda exempted
company, became the parent holding company of Weatherford International, Inc.
following a corporate reorganization. The reorganization has been accounted for
as a reorganization of entities under common control and accordingly, it did not
result in any changes to our consolidated amounts of assets, liabilities or
shareholders' equity.

Our business is conducted through three principal operating divisions: (1)
Drilling and Intervention Services, (2) Completion Systems and (3) Artificial
Lift Systems. In addition to these operations, we historically operated a
Compression Services Division. On February 9, 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, or approximately 45% of Universal's outstanding common stock.

The following is a discussion of our results of operations for the three
and nine months ended September 30, 2002 and 2001. This discussion should be
read in conjunction with our financial statements that are included with this
report and Weatherford International, Inc.'s financial statements and related
Management's Discussion and Analysis of Financial Condition and Results of
Operations for the year ended December 31, 2001 included in Weatherford
International, Inc.'s Annual Report on Form 10-K.

This discussion of our results and financial condition 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 that we consider reasonable. For information about these
assumptions, you should refer to the section entitled "Forward-Looking
Statements."

We acquire numerous companies every year and focus on integration efforts
to realize the benefits each acquisition provides. We are therefore unable to
provide certain information regarding our results excluding the impact of
acquisitions due to the integration of these acquisitions into our operations.
Comparative three months and nine months revenue trends excluding acquisitions
only exclude those acquisitions for which revenue information has been
separately maintained.

MARKET TRENDS AND OUTLOOK

Our businesses serve the oil and gas industry. All of our businesses are
affected by changes in the worldwide demand and price of oil and natural gas.
Certain of our products and services, such as our well installation services and
well completion services, are dependent on the level of exploration and
development activity and particularly on the completion phase of the well
lifecycle. Other products and services, such as our artificial lift systems, are
dependent on production activity. We currently estimate that around two-thirds
of our operations are reliant on drilling activity, with the remainder focused
on production and reservoir enhancement activity.

The following chart sets forth certain statistics that are reflective of
historical market conditions:

(1) Price per barrel of West Texas Intermediate crude oil as of September
30 and December 31 - Source: Applied Reasoning, Inc.

(2) Price per MM/BTU as of September 30 and December 31 - Source: Oil
World

(3) Average rig count for the applicable month - Source: Baker Hughes Rig
Count

The oil and gas industry has been subject to extreme volatility in the last
few years. During 2000, the supply and demand imbalances caused the increase in
the price of oil and gas. In turn, we experienced steady improvements

19

in the demand for our products and services which continued through the first
seven months of 2001. The markets outside North America are less volatile than
the U.S. and Canada due to the significant investment and complexity surrounding
international projects. Drilling decisions relating to such projects tend to be
evaluated and monitored with a longer-term perspective in regard to oil and
natural gas pricing as most contracts span two to three years.

In the U.S., rig activity began to decline rapidly in the third quarter of
2001. The U.S. rig count peaked at 1,293 rigs in July 2001 and declined to a low
of 738 rigs in April 2002. Since June 2002, we have seen the rig count remain
relatively constant at a monthly average of approximately 850 rigs. Despite
higher than average commodity prices for oil and natural gas, U.S. drilling
activity levels have remained relatively low. These low activity levels reflect
customer uncertainty about the recovery of the economy and demand for energy
and, therefore, the sustainability of commodity prices. In the near term we
expect activity to strengthen marginally until our customers feel confident as
to the prognosis for industrial production, energy demand and commodity prices.

International rig activity remained relatively constant throughout 2001
averaging 745 rigs for the year. In 2002, activity declined slightly as
increases in Africa, Middle East and Far East were more than offset by declines
in Europe and Latin America. In the third quarter of 2002, the international rig
count averaged 732, three percent below the prior year third quarter and two
percent higher than the preceding quarter. Our customers' international spending
and demand for our products is expected to remain steady during the remainder of
2002. However, in 2003 we expect international demand to increase, with demand
for our products and services to exceed the expected industry-wide increase in
international market activity as we leverage our technology offerings and expand
our market share.

In general, we expect the markets and our business strategies to affect our
businesses as follows:

DRILLING AND INTERVENTION SERVICES AND COMPLETION SYSTEMS. These divisions
are expected to see slight improvements in the fourth quarter as compared to the
third quarter in the Eastern Hemisphere markets, with the exception of the
United Kingdom, where we anticipate depressed activity through the fourth
quarter. We expect our Western Hemisphere operations to remain flat with current
levels throughout the remainder of 2002 and only show marginal improvements
during the first half of 2003.

ARTIFICIAL LIFT SYSTEMS. We expect slight improvements in our Artificial
Lift Systems Division's North American results, supported by higher demand in
Canada. We anticipate this division to continue to see revenue improvements in
the Eastern Hemisphere markets on a year-on-year basis as we leverage our global
footprint. We anticipate the Latin American markets will remain depressed
throughout the remainder of this year and into 2003.

Overall, the level of market improvements for our businesses in late 2002
and early 2003 will continue to be heavily dependent on the timing and strength
of the recovery in the North American markets, our gains in market share outside
North America and the acceptance of our new technologies. The speed and extent
of any recovery in the North American markets is difficult to predict in light
of continued economic uncertainty. In addition, 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 (Organization of Petroleum Exporting Countries) and weather
conditions. The extreme volatility of our markets makes predictions regarding
future results difficult.

20

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our discussion and analysis of our financial condition and results of
operations are based upon our condensed consolidated financial statements. We
prepare these financial statements in conformity with accounting principles
generally accepted in the United States. 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 that we believe to be reasonable under the circumstances. On an
on-going basis, we evaluate our estimates, including those related to bad debts,
inventory, investments, intangible assets and goodwill, income taxes and
contingent liabilities. Actual results may differ from these estimates under
different assumptions or conditions. The accounting policies that we believe are
the most critical to our reporting of results of operations and financial
position are as follows:

Accounts Receivable

We perform ongoing credit evaluations of our customers and adjust credit
limits based upon payment history and the customer's current credit worthiness
as determined by our review of their current credit information. We continuously
monitor collections and payments from our customers and maintain a provision for
estimated uncollectible accounts based upon our historical experience and any
specific customer collection issues that we have identified. While such credit
losses have historically been within our expectations and the provisions
established, we cannot give any assurances that we will continue to experience
the same credit loss rates that we have in the past. The cyclical nature of our
industry may affect our customers' operating performance and cash flows, which
could impact our ability to collect on these obligations. In addition, many of
our customers are located in certain international areas that are inherently
subject to risks of economic, political and civil instabilities which may impact
our ability to collect these accounts receivable.

Equity Investments

Our equity investments in unconsolidated subsidiaries primarily include our
investment in Universal. We review our equity investments for impairment and
record an adjustment when we believe the decline in fair value is other than
temporary. The fair value of the asset is measured using quoted market prices
or, in the absence of quoted market prices, fair value is based on an estimate
of discounted cash flows. In determining whether the decline is other than
temporary we consider the cyclicality of the industry in which the investment
operates, its historical performance, its performance in relation to its peers
and the current economic environment. During the third quarter of 2002, we
determined that the decline in fair value of Universal was other than temporary.
We recorded a write-down in our investment of $217.1 million, $146.2 million net
of taxes. We will continue to monitor the fair value of our investments for
impairment and would record an adjustment if we believe the decline is other
than temporary.

Goodwill and Other Intangible Assets

We adopted Statement of Financial Accounting Standard ("SFAS") No. 142,
Goodwill and Other Intangible Assets, as of January 1, 2002. As a result, we no
longer amortize goodwill and indefinite-lived intangible assets but continue to
amortize other acquisition-related intangibles. We have completed the
transitional goodwill impairment test as of January 1, 2002 and determined that
no impairment exists. We will perform a similar review of goodwill valuation
annually, or earlier if indicators of potential impairment exist. If for any
reason the fair value of our goodwill or that of any of our reporting units
declines below the carrying value in the future, we may incur charges for the
impairment of goodwill.

Income Taxes

We provide for income taxes in accordance with SFAS No. 109, Accounting for
Income Taxes. This standard takes into account the differences between 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. Our deferred tax calculation requires us to make
certain estimates about our future operations. Changes in state, federal and
foreign tax laws, as well as changes in our financial condition or the carrying
value of existing assets and liabilities, could affect these estimates. The
effect of a change in tax rates is recognized as income or expense in the period
that includes the enactment date.

21

Valuation Allowance for Deferred Tax Assets

We record a valuation allowance to reduce our deferred tax assets when it
is more likely than not that some 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 in
the future.

Revenue Recognition

Revenues from product sales are recognized when all of the following
criteria have been met: a) evidence of an agreement exists, b) delivery to and
acceptance by the customer has occurred, c) the price to the customer is fixed
and determinable and d) collectibility is reasonably assured. Revenues from
rental and service agreements are recognized as earned, over the rental period
and when services have been rendered. The associated costs and expenses are
recognized as incurred.

RESULTS OF OPERATIONS

THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 2001

The following charts contain selected financial data comparing our results
for the three months ended September 30, 2002 and September 30, 2001:

(a) EBITDA is calculated by taking operating income and adding back
depreciation and amortization and non-recurring charges. We have included
an EBITDA calculation because when we look at the performance of our
businesses, we give consideration to their EBITDA. Calculations of EBITDA
should not be viewed as a substitute to calculations under accounting
principles generally accepted in the United States, in particular cash
flows from operations, operating income and net income. In addition,
EBITDA calculations by one company may not be comparable to those of
another company.
(b) Excludes the impact of non-recurring charge of $232.5 million, $156.2
million net of taxes, related to the write-down in our investment in
Universal and a rationalization of our businesses in light of industry
conditions.

22

SALES BY GEOGRAPHIC REGION

THREE MONTHS ENDED
SEPTEMBER 30,
----------- -- ------------
2002 2001
----------- ------------

REGION:

U.S.............................................. 33% 41%
Canada........................................... 14 14
Latin America.................................... 9 11
Europe and West Africa........................... 19 16
Middle East and North Africa..................... 12 9
Asia Pacific..................................... 13 9
----------- ------------
Total........................................ 100% 100%
=========== ============

A discussion of our results for the three months ended September 30, 2002
as compared to the three months ended September 30, 2001 follows:

o Third quarter 2002 consolidated revenues declined 3.9%, or decreased
11.7% excluding the impact of incremental revenues from our current year
and 2001 non-technology acquisitions, over the third quarter 2001.
Revenues in the Eastern Hemisphere improved 25.4%, or 13.3% excluding
these acquisitions, outperforming an increase of 4.1% in the quarterly
average rig count. The improvements in the Eastern Hemisphere are
primarily attributable to the strong performance in the Middle East and
North Africa region. North American revenues declined 17.8%, or 23.6%
excluding the impact of incremental revenues from our 2001 acquisitions,
compared to a quarterly average rig count reduction of 29.4%. Latin
American revenues declined 24.7%, or 29.9% excluding these acquisitions.
Revenues from our technology products, including underbalanced services,
expandables, intelligent well and drilling with casing increased $15.0
million.
o Our gross profit as a percentage of revenues decreased from 37.1% in the
third quarter of 2001 to 31.2% in the third quarter of 2002. Our lower
margins reflect a shift in product and geographic mix, as well as pricing
pressures and lower volumes in a depressed U.S. market. We were also
negatively impacted in the United Kingdom, where margins declined due to
a deterioration in activity in this region caused by E&P tax disputes
between the United Kingdom government and the North Sea operators.
o Research and development expenses increased 52.3% reflecting our
continued focus on the development of step-changing technologies,
primarily intelligent well and expandables.
o Selling, general and administrative expenses attributable to segments
decreased as a percentage of revenues from 15.4% in the third quarter of
2001 to 15.0% in the third quarter of 2002. This decline is primarily
attributable to the non-amortization of goodwill in 2002, partially
offset by an increase in the amortization of other intangibles and lower
revenue base. Goodwill amortization attributable to segments for the
third quarter of 2001 was $9.8 million.
o Equity in earnings in unconsolidated affiliates decreased $1.5 million in
the third quarter of 2002 compared to the same period last year. The
decrease is primarily attributable to a decline in Universal's operating
results partially offset by the non-amortization of goodwill related to
our equity investment in Universal.
o Our effective tax rate for the third quarter of 2002, excluding the
impact of the non-recurring charge and related taxes, was 30.0% as
compared to 36.5% for the third quarter of 2001. The difference primarily
reflects the impact of the non-amortization of goodwill on earnings
before tax in 2002 and benefits related to our corporate reorganization.

SEGMENT RESULTS

DRILLING AND INTERVENTION SERVICES

Our Drilling and Intervention Services Division's revenues in the third
quarter of 2002 declined 12.0% compared to the same quarter of 2001. This
decline is primarily due to lower volume and pricing in North America and lower
volumes in the Latin American markets, partially mitigated by strong performance
in the Middle East and North Africa and Asia Pacific regions.

23

The following chart sets forth data regarding the results of our Drilling
and Intervention Services Division for the third quarters of 2002 and 2001:

THREE MONTHS ENDED
SEPTEMBER 30,
-------------------------------
2002 2001
------------- --------------
(in thousands, except
per percentages)

Revenues.............................................................. $319,872 $363,293
Gross Profit %........................................................ 29.8% 38.2%
Research and Development.............................................. $ 7,255 $ 6,310
Selling, General and Administrative................................... 34,638 42,797
Operating Income...................................................... 53,475(a) 89,760
EBITDA................................................................ 92,592(a) 127,824

(a) Excludes $2.0 million of non-recurring charge related to severance and
asset impairment.

A discussion of the results of our Drilling and Intervention Services
Division for the third quarter of 2002 compared to the third quarter of 2001
follows:

o Our North American revenues for the third quarter of 2002 declined 30.7%,
or 32.0% excluding the impact of incremental revenues from our current
year and late 2001 acquisitions, over the third quarter of 2001. This is
comparable with the 29.4% decrease in the quarterly average North
American rig count.
o Our international revenues increased 7.6%, or excluding incremental
revenues from our current year and late 2001 acquisitions 3.7%, from the
third quarter of 2001 despite a decline in Latin American revenues of
approximately 33.0%. Revenues in the Eastern Hemisphere improved 16.8%,
or 12.9% excluding the impact of these acquisitions, compared to a
quarterly average rig count increase of 4.1%. This increase is primarily
due to the increases in the Middle East and North Africa region of 28.7%
and Asia Pacific region of 25.0%.
o Gross profit as a percentage of revenues decreased 22.0% from the third
quarter of 2001 to the third quarter of 2002. The lower margin primarily
reflects the impact of shifts in product and geographic mix. This
division was also the most severely impacted by the deterioration in the
United Kingdom, where margins were negatively impacted by the lower
activity levels.
o Selling, general and administrative expenses decreased as a percentage of
revenues from 11.8% in the third quarter of 2001 to 10.8% in the third
quarter of 2002. The decrease reflects the non-amortization of goodwill
in 2002. Goodwill amortization for the third quarter of 2001 was $4.5
million.

COMPLETION SYSTEMS

Our Completion Systems Division's revenues were marginally higher in the
third quarter of 2002 compared to the same quarter last year. The lower industry
activity was offset by more than $7 million of revenues from non-technology
acquisitions and from increased sales of technology-related products of
approximately $5 million.

The following chart sets forth data regarding the results of our Completion
Systems Division for the third quarters of 2002 and 2001:

THREE MONTHS ENDED
SEPTEMBER 30,
------------------------------
2002 2001
------------- -------------
(in thousands, except
percentages)

Revenues.............................................................. $ 88,335 $ 86,838
Gross Profit %........................................................ 30.5% 34.3%
Research and Development.............................................. $ 10,444 $ 5,448
Selling, General and Administrative................................... 17,535 17,092
Operating Income (Loss)............................................... (1,077)(a) 7,220
EBITDA................................................................ 8,353 (a) 15,588

(a) Excludes $6.4 million of non-recurring charge related to severance and
asset impairment.

24

A discussion of the results of our Completion Systems Division for the
third quarter of 2002 compared to the third quarter of 2001 follows:

o Our international revenues for the third quarter of 2002 increased 14.8%,
but remained flat excluding the impact of incremental revenues from our
late 2001 non-technology acquisitions, compared to the same quarter of
last year. Geographically, the Middle East and North Africa region showed
the strongest organic growth with revenues improving 38.6%. Revenues in
North America decreased 12.7%, or 14.8% excluding the impact of these
acquisitions, in the third quarter of 2002 compared to the same period
last year primarily due to the quarterly average rig count decline of
29.4%. The third quarter of 2002 was negatively impacted by the
re-engineering adjustment for one size of expandable sand screen. The
product was off the market for the whole third quarter of 2002, but has
since been reintroduced into the market. This affected both the sales of
the expandables and the associated pull-through sales of its core
completion products.
o Research and development expenses nearly doubled in the third quarter of
2002 compared to the third quarter of 2001. The development of
technology-related products including expandables and optical sensing
systems continues to be a high priority for this division.
o Selling, general and administrative expenses as a percentage of revenues
increased from 19.7% in the third quarter of 2001 to 19.9% in the same
period of 2002. The impact of the non-amortization of goodwill in 2002,
which was $2.8 million in 2001, was fully offset by an increase in
intangible amortization.

ARTIFICIAL LIFT SYSTEMS

Our Artificial Lift Systems Division's revenues increased 11.5% in the
third quarter of 2002 as compared to the third quarter of 2001. Acquisitions
contributed more than $30 million to this division's top line in the third
quarter of 2002. Approximately half of the revenues from these acquisitions were
in North America.

The following chart sets forth data regarding the results of our Artificial
Lift Systems Division for the third quarters of 2002 and 2001:

(a) Excludes $7.2 million of non-recurring charge related to severance and
asset impairment.

A discussion of the results of our Artificial Lift Systems Division as
reflected above for the third quarter of 2002 compared to the third quarter of
2001 follows:

o Excluding the impact of incremental revenues from our late 2001
acquisitions, revenues in the third quarter of this year for this
division's Eastern Hemisphere operations increased 29.0% from the
comparable quarter of last year. All regions within the Eastern
Hemisphere experienced gains. North American revenues increased 2.0%, or
decreased 12.6% excluding incremental revenues from these acquisitions.
The decline in North America was primarily related to lower activity
where the North American oil rig count declined approximately 29.0%. This
division's Latin America revenues declined 31.7% in the third quarter of
2002 compared to the same quarter last year, with almost no impact from
late 2001 acquisitions.
o Gross profit as a percentage of revenues decreased from 36.1% in the
third quarter of 2001 to 33.9% in the same quarter this year due to a
change in the product mix.
o Selling, general and administrative expenses decreased as a percentage of
revenues from 21.4% for the three months ended September 30, 2001 to
20.0% for the same period this year. The decrease is due to the
non-amortization of goodwill which was $2.5 million in the third quarter
of 2001.

25

NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 2001

The following charts contain selected financial data comparing our results
for the nine months ended September 30, 2002 and September 30, 2001:

COMPARATIVE FINANCIAL DATA NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------------------
2002 2001
------------------ ---------------
(in thousands, except percentages
and per share data)

Revenues............................................................ $ 1,747,045 $1,707,779
Gross Profit %...................................................... 32.7% 36.6%
Research and Development............................................ $ 55,147 $ 35,139
Selling, General and Administrative Attributable to Segments........ 259,921 268,944
Corporate General and Administrative................................ 33,957(a) 29,650
Operating Income.................................................... 241,059(a) 306,268
Net Income.......................................................... 118,640(a)(b) 160,127
Net Income, Excluding Goodwill Amortization Net of Taxes............ 118,640(a)(b) 187,366
EBITDA.............................................................. 399,377(a)(b) 459,113
Net Income per Diluted Share ....................................... 0.94(a)(b) 1.32
Net Income per Diluted Share, Excluding Goodwill
Amortization, Net of Taxes...................................... 0.94(a)(b) 1.53
Cash Provided by Operating Activities............................... 164,729 102,499

(a) Includes $4.5 million of transaction costs related to our reorganization.
The net after-tax impact of these charges was $3.0 million.
(b) Excludes the impact of non-recurring charge of $232.5 million, $156.2
million net of taxes, related to the write-down in our investment in
Universal and a rationalization of our businesses in light of industry
conditions.

SALES BY GEOGRAPHIC REGION

NINE MONTHS ENDED
SEPTEMBER 30,
----------- -- -----------
2002 2001
----------- -----------

REGION:

U.S................................................................... 33% 42%
Canada................................................................. 14 15
Latin America.......................................................... 9 11
Europe and West Africa................................................. 19 14
Middle East and North Africa........................................... 12 8
Asia Pacific........................................................... 13 10
----------- -----------
Total.............................................................. 100% 100%
=========== ===========

A discussion of our consolidated results for the nine months ended
September 30, 2002 compared to the nine months ended September 30, 2001 follows:

o Consolidated revenues for the first nine months of 2002, excluding our
historical compression results and our incremental revenues from our
current year and 2001 non-technology acquisitions, declined approximately
5% over the same period of 2001. On the same basis, revenues in North
America decreased more than $200 million, while international revenues
increased approximately $109 million.
o Gross profit as a percentage of revenues decreased from 36.6% for the
first nine months of 2001 to 32.7% in the same period of 2002. The
decline is primarily attributable to lower volumes and pricing pressures
in a depressed U.S. market and a shift in our product and geographic mix.
o Research and development expenses increased 56.9% primarily due to costs
incurred to develop our technology-related product lines.
o Selling, general and administrative expenses attributable to segments
decreased as a percentage of revenues from 15.7% for the first nine
months of 2001 to 14.9% in the same period this year. The decline is
primarily

26

related to the non-amortization of goodwill in 2002 partially offset by
an increase in intangible amortization in 2002. Goodwill amortization
attributable to the segments for the nine months ended September 30, 2001
was $26.5 million.
o Our equity in earnings in unconsolidated affiliates for the first nine
months of 2002 was $3.9 million higher than the comparable period last
year. The increase is primarily attributable to the non-amortization of
goodwill related to our investment in Universal and the full period of
equity income related to this investment, acquired in February 2001.
o Interest expense, net for the nine months ended September 30, 2002
increased $9.5 million from the same period last year primarily due to
the interest associated with our $350 million 6 5/8% Senior Notes issued
in November 2001, partially offset by the benefit generated by our
interest rate swaps on our $200 million 7 1/4% Senior Notes.
o Our effective tax rate for the nine months ended September 30, 2002,
excluding the impact of the non-recurring charge was 32.9%, compared to
36.6% for the same period of 2001, primarily due to the impact of
non-amortization of goodwill on earnings before tax in 2002 and the
benefits of our corporate reorganization.

SEGMENT RESULTS

DRILLING AND INTERVENTION SERVICES

The following chart sets forth data regarding the results of our Drilling
and Intervention Services Division for the nine months ended September 30, 2002
and 2001:

(a) Excludes $2.0 million of non-recurring charge related to severance and
asset impairment.

A discussion of the results of our Drilling and Intervention Services
Division for the nine months ended September 30, 2002 compared to the nine
months ended September 30, 2001 follows:

o Our North American revenues for the first nine months of 2002 declined by
25.9%, or 27.7% excluding the incremental revenues from our current year
and 2001 acquisitions. The nine-month average North American rig count
declined 31.1%. Our international revenues increased 20.8%, or 14.8%
excluding incremental revenue from these acquisitions, compared to a
relatively flat average international rig count.
o Gross profit as a percentage of revenues declined 17.3% in the first nine
months of 2002 from the same period last year. The decline in margins
primarily reflects the impact of pricing pressures and lower volumes felt
in the U.S. market as well as a change in product and geographic mix.
This division was also impacted by the deterioration in the United
Kingdom related to E&P tax disputes between the United Kingdom government
and North Sea operators.
o Selling, general and administrative expenses as a percentage of revenues
declined from 11.6% in the first nine months of 2001 to 11.0% in the
comparable period of 2002. The decline is primarily related to the
non-amortization of goodwill partially offset by costs associated with
the expansion of our underbalanced services infrastructure. Goodwill
amortization for this period in 2001 was $10.9 million.

27

COMPLETION SYSTEMS

The following chart sets forth data regarding the results of our Completion
Systems Division for the nine months ended September 30, 2002 and 2001:

(a) Excludes $6.4 million of non-recurring charge related to severance and
asset impairment.

A discussion of the results of our Completion Systems Division for the nine
months ended September 30, 2002 compared to the nine months ended September 30,
2001 follows:

o Our North American revenues decreased 3.3%, or 15.6% excluding
incremental revenues associated with our 2001 non-technology
acquisitions. Our international revenues increased 30.7%, or 16.3%
excluding incremental revenues from these acquisitions. Our 2001
non-technology acquisitions contributed more than $33 million in
incremental revenues in the first nine months of 2002. Technology
revenues increased $18.8 million.
o Research and development expenses more than doubled in the first nine
months of 2002 from the same period of 2001. This increase primarily
relates to this division's focus on the development of new
technology-related product lines, specifically expandables and optical
sensing.
o Selling, general and administrative expenses decreased as a percentage of
revenues from 20.3% in the first nine months of 2001 to 18.0% in the same
period this year primarily due to the non-amortization of goodwill in
2002 partially offset by an increase in the intangible amortization.
Goodwill amortization for this period of 2001 was $7.7 million.

ARTIFICIAL LIFT SYSTEMS

The following chart sets forth data regarding the results of our Artificial
Lift Systems Division for nine months ended September 30, 2002 and 2001.

(a) Excludes $7.2 million of non-recurring charge related to severance and
asset impairment.

28

A discussion of the results of our Artificial Lift Systems Division as
reflected above for the nine months ended September 30, 2002 compared to the
nine months ended September 30, 2001 follows:

o North American revenues increased 4.3%, or decreased 11.4% excluding
incremental revenues from our 2001 acquisitions. International revenues
increased 41.7%, or 13.7% excluding these acquisitions. Our 2001
acquisitions contributed more than $87 million of incremental revenues in
the first nine months of 2002.
o Gross profit as a percentage of revenues decreased from 36.1% in the
first nine months of 2001 to 34.5% in the same period this year. This
decline was primarily related to a change in product mix.
o Selling, general and administrative expenses decreased as a percentage of
revenue from 22.3% in the first nine months of 2001 to 20.3% in the
comparable period in 2002. The decrease was primarily attributable to
increased revenues and the non-amortization of goodwill. Goodwill
amortization for the second half of 2001 was $7.1 million.

COMPRESSION SERVICES

On February 9, 2001, we completed the merger of essentially all of our
Compression Services Division into a subsidiary of Universal in exchange for
13.75 million shares of Universal common stock. During 2001, up to the merger
date, the Compression Services Division contributed $26.9 million of revenues,
$3.6 million of EBITDA and an operating loss of $0.6 million to our consolidated
results. Subsequent to the merger date we began recording equity in earnings of
unconsolidated affiliates based on our portion of Universal's net income.

NON-RECURRING CHARGE

During the three months ended September 30, 2002, we recorded $232.5
million, $156.2 million net of taxes, in non-recurring charges relating to a
write-down in our investment in Universal and a rationalization of our
businesses in light of industry conditions.

We recorded a write-down in our investment in Universal by $217.1 million
as we determined that the decline in the market value was other than temporary.
In connection with the reduction in the carrying value of this investment, we
recognized a tax benefit of $70.9 million, reducing the deferred tax liability
related to the difference between the book carrying value and the tax basis of
the investment.

We undertook initiatives to rationalize our business in light of the lower
activity levels primarily in the United States, and the continued economic
uncertainty. Initiatives approved during the third quarter included a reduction
in workforce and closure of two facilities. The charge recorded related to these
initiatives is summarized by division in the following table and described in
greater detail below: