The increased application of multiphase flow in different industrial fields encouraged researchers to model the behaviors of multiphase flow in various ducts. Gasified (aerated) fluids, having 2-phases, are commonly used in drilling operations, especially for achieving underbalanced conditions. Although flow of two-phase fluids is studied in detail for pipes, not much is known for annular geometries. In this study, extensive experiments have been conducted at Middle East Technical University (METU) Multiphase Flow Loop using air-water mixtures with various in-situ flow velocities of 0-120 ft/s and 0-10 ft/s respectively for wellbore inclinations of 75°, 60°, 45° and 12.5°without inner pipe rotation. From the comparisons among data for total pressure losses,it is observed that in highly-inclined sections, by increasing the gas velocity in wellbore, the total pressure losses increase. For mid-range inclinations and nearly vertical sections, by increasing gas velocity, the total pressure losses decrease significantly, because the major part of total pressure gradient is the gravitational component. Based on experimental observations, a mechanistic model has been developed for determining the total pressure losses and volumetric distribution of each phase within the wellbore for a particular drilling condition. It has been concluded that the proposed model is reasonably accurate for estimating the frictional pressure losses when compared with the measured values. In this paper, the experimental observations and the performance of the new mechanistic model have been presented and discussed in detail. Copyright 2012, Society of Petroleum Engineers.