UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

---------------------

FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004

COMMISSION FILE NUMBER: 000-49887

---------------------

NABORS INDUSTRIES LTD.

INCORPORATED IN BERMUDA
2nd FL. INTERNATIONAL TRADING CENTRE
WARRENS
PO BOX 905E
ST. MICHAEL, BARBADOS
(246) 421-9471

98-0363970
(I.R.S. Employer Identification No.)

---------------------

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 by check mark whether the registrant is an accelerated filer (as
defined by Rule 12b-2 of the Exchange Act).

Yes X No ___

The number of common shares, par value $.001 per share, outstanding as of
July 30, 2004 was 148,761,507. In addition, our subsidiary, Nabors Exchangeco
(Canada) Inc., has 271,381 exchangeable shares outstanding as of July 30, 2004
that are exchangeable for Nabors common shares on a one-for-one basis, and have
essentially identical rights as Nabors Industries Ltd. common shares, including
but not limited to voting rights and the right to receive dividends, if any.

NABORS INDUSTRIES LTD. AND SUBSIDIARIES

INDEX

<Table>
<Caption>
PAGE NO.
--------

PART I FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

Consolidated Balance Sheets as of June 30, 2004 and December
31, 2003.................................................... 2

Consolidated Statements of Income for the Three Months and
Six Months Ended June 30, 2004 and 2003..................... 3

Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 2004 and 2003................................ 4

Consolidated Statements of Changes in Shareholders' Equity
for the Six Months Ended June 30, 2004 and 2003............. 5

Notes to Consolidated Financial Statements.................. 7

Report of Independent Registered Public Accounting Firm..... 25

Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 26

Item 3. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 38

Item 4. Controls and Procedures..................................... 38

PART II OTHER INFORMATION

Item 1. Legal Proceedings........................................... 40

Item 4. Submission of Matters to a Vote of Security Holders......... 40

Item 6. Exhibits and Reports on Form 8-K............................ 41

Signatures ............................................................ 42
</Table>

PART I FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

NABORS INDUSTRIES LTD. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(UNAUDITED)

<Table>
<Caption>
JUNE 30, DECEMBER 31,
2004 2003
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) ---------- ------------

ASSETS
Current assets:
Cash and cash equivalents................................. $ 362,587 $ 579,737
Marketable securities..................................... 425,028 339,936
Accounts receivable, net.................................. 411,034 410,487
Inventory................................................. 21,631 23,289
Deferred income taxes..................................... 32,423 36,442
Other current assets...................................... 126,000 125,756
---------- ----------
Total current assets................................... 1,378,703 1,515,647
Marketable securities....................................... 432,152 612,417
Property, plant and equipment, net.......................... 3,117,872 2,990,792
Goodwill, net............................................... 311,343 315,627
Other long-term assets...................................... 210,598 168,209
---------- ----------
Total assets........................................... $5,450,668 $5,602,692
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt......................... $ 4,147 $ 299,385
Trade accounts payable.................................... 155,863 128,840
Accrued liabilities....................................... 155,355 160,745
Income taxes payable...................................... 4,282 9,403
---------- ----------
Total current liabilities.............................. 319,647 598,373
Long-term debt.............................................. 1,989,568 1,985,553
Other long-term liabilities................................. 142,861 155,667
Deferred income taxes....................................... 354,490 372,824
---------- ----------
Total liabilities......................................... 2,806,566 3,112,417
---------- ----------
Commitments and contingencies (Note 5)
Shareholders' equity:
Common shares, par value $.001 per share:
Authorized common shares 400,000; issued and
outstanding 148,651 and 146,656, respectively......... 149 147
Capital in excess of par value............................ 1,328,825 1,270,362
Accumulated other comprehensive income.................... 76,880 99,583
Retained earnings......................................... 1,238,248 1,120,183
---------- ----------
Total shareholders' equity............................. 2,644,102 2,490,275
---------- ----------
Total liabilities and shareholders' equity............. $5,450,668 $5,602,692
---------- ----------
</Table>

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

NABORS INDUSTRIES LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)

<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- ---------------------
2004 2003 2004 2003
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) -------- -------- ---------- --------

Revenues and other income:
Operating revenues............................. $530,715 $432,552 $1,123,696 $882,389
Earnings from unconsolidated affiliates........ 1,153 1,359 4,975 7,262
Interest and dividend income................... 7,879 6,998 14,384 14,691
Other income, net.............................. 6,907 23 11,326 47
-------- -------- ---------- --------
Total revenues and other income............. 546,654 440,932 1,154,381 904,389
-------- -------- ---------- --------
Costs and other deductions:
Direct costs................................... 368,941 298,791 758,981 603,351
General and administrative expenses............ 45,441 40,483 91,040 81,728
Depreciation and amortization.................. 60,843 55,882 121,331 109,460
Depletion...................................... 9,977 770 25,587 1,118
Interest expense............................... 11,387 18,644 27,246 38,714
-------- -------- ---------- --------
Total costs and other deductions............ 496,589 414,570 1,024,185 834,371
-------- -------- ---------- --------
Income before income taxes....................... 50,065 26,362 130,196 70,018
-------- -------- ---------- --------
Income tax expense (benefit):
Current........................................ 6,391 3,226 10,596 7,286
Deferred....................................... (2,674) (5,883) 1,535 (14,344)
-------- -------- ---------- --------
Total income tax expense (benefit).......... 3,717 (2,657) 12,131 (7,058)
-------- -------- ---------- --------
Net income....................................... $ 46,348 $ 29,019 $ 118,065 $ 77,076
-------- -------- ---------- --------
Earnings per share:
Basic.......................................... $ .31 $ .20 $ .80 $ .53
Diluted........................................ $ .30 $ .19 $ .76 $ .50
Weighted average number of common shares
outstanding:
Basic.......................................... 148,866 146,382 148,425 146,045
-------- -------- ---------- --------
Diluted........................................ 155,234 153,359 163,417 160,487
-------- -------- ---------- --------
</Table>

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

NABORS INDUSTRIES LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

<Table>
<Caption>
SIX MONTHS ENDED
JUNE 30,
--------------------
2004 2003
(IN THOUSANDS) -------- ---------

Cash flows from operating activities:
Net income.................................................. $118,065 $ 77,076
Adjustments to net income:
Depreciation and amortization............................. 121,331 109,460
Depletion................................................. 25,587 1,118
Deferred income tax expense (benefit)..................... 1,535 (14,344)
Deferred financing costs amortization..................... 2,620 2,720
Pension liability amortization............................ 428 --
Discount amortization on long-term debt................... 10,065 15,569
Amortization of loss on cash flow hedges.................. 76 75
Losses (gains) on long-term assets, net................... 241 (3,277)
Gains on marketable and non-marketable securities, net.... (6,500) (2,627)
(Gains) losses on derivative instruments.................. (3,087) 3,701
Sales of marketable securities, trading................... -- 4,484
Foreign currency transaction losses (gains)............... 106 (351)
Loss on early extinguishment of debt...................... -- 908
Equity in earnings from unconsolidated affiliates, net of
dividends.............................................. (3,975) (1,762)
Increase (decrease) from changes in:
Accounts receivable....................................... (8,117) (22,088)
Inventory................................................. 1,554 (709)
Other current assets...................................... (4,983) (4,562)
Other long-term assets.................................... (1,426) (15,836)
Trade accounts payable and accrued liabilities............ 16,669 3,721
Income taxes payable...................................... (5,986) (6,562)
Other long-term liabilities............................... (8,672) (945)
-------- ---------
Net cash provided by operating activities................... 255,531 145,769
-------- ---------
Cash flows from investing activities:
Purchases of marketable securities, available-for-sale.... (373,118) (492,947)
Sales and maturities of marketable securities,
available-for-sale..................................... 465,676 697,923
Purchases of non-marketable securities, net............... (52,880) (20,001)
Sales of non-marketable securities........................ 22,773 --
Capital expenditures...................................... (289,327) (156,086)
Proceeds from sales of assets and insurance claims........ 2,588 8,996
-------- ---------
Net cash (used for) provided by investing activities........ (224,288) 37,885
-------- ---------
Cash flows from financing activities:
Increase (decrease) in cash overdrafts.................... 5,417 (2,386)
(Increase) decrease in restricted cash.................... (68) 1,232
Proceeds from issuance of long-term debt.................. -- 700,000
Reduction of long-term debt............................... (298,117) (541,021)
Debt issuance costs....................................... -- (10,841)
Proceeds from issuance of common shares................... 42,628 23,430
-------- ---------
Net cash (used for) provided by financing activities........ (250,140) 170,414
-------- ---------
Effect of exchange rate changes on cash and cash
equivalents............................................... 1,747 4,379
-------- ---------
Net (decrease) increase in cash and cash equivalents........ (217,150) 358,447
Cash and cash equivalents, beginning of period.............. 579,737 414,051
-------- ---------
Cash and cash equivalents, end of period.................... $362,587 $ 772,498
-------- ---------
</Table>

The accompanying notes are an integral part of these consolidated financial
statements.
4

NABORS INDUSTRIES LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY
(UNAUDITED)
<Table>
<Caption>
ACCUMULATED OTHER
COMPREHENSIVE INCOME (LOSS)
COMMON ------------------------------------------------------
SHARES UNREALIZED MINIMUM UNREALIZED
--------------- CAPITAL IN GAINS (LOSSES) PENSION LOSS ON CUMULATIVE
PAR EXCESS OF ON MARKETABLE LIABILITY CASH FLOW TRANSLATION RETAINED
SHARES VALUE PAR VALUE SECURITIES ADJUSTMENT HEDGES ADJUSTMENT EARNINGS
------- ----- ---------- -------------- ---------- ---------- ----------- ----------

(IN THOUSANDS)
Balances, December 31, 2003.... 146,656 $147 $1,270,362 $ 4,969 $(2,815) $(1,294) $ 98,723 $1,120,183
------- ---- ---------- ------- ------- ------- -------- ----------
Comprehensive income (loss):
Net income................... 118,065
Translation adjustment....... (19,123)
Unrealized losses on
marketable securities, net
of income tax benefit of
$927....................... (1,578)
Less: reclassification
adjustment for gains
included in net income,
net of income taxes of
$1,379................. (2,348)
Pension liability
amortization, net of income
taxes of $158.............. 270
Amortization of loss on cash
flow hedges................ 76
------- ---- ---------- ------- ------- ------- -------- ----------
Total comprehensive
income (loss).......... -- -- -- (3,926) 270 76 (19,123) 118,065
------- ---- ---------- ------- ------- ------- -------- ----------
Issuance of common shares for
stock options exercised...... 1,906 2 42,626
Nabors Exchangeco shares
exchanged.................... 89
Tax effect of stock option
deductions................... 15,837
------- ---- ---------- ------- ------- ------- -------- ----------
Subtotal................. 1,995 2 58,463 -- -- -- -- --
------- ---- ---------- ------- ------- ------- -------- ----------
Balances, June 30, 2004........ 148,651 $149 $1,328,825 $ 1,043 $(2,545) $(1,218) $ 79,600 $1,238,248
------- ---- ---------- ------- ------- ------- -------- ----------

TOTAL
SHAREHOLDERS'
EQUITY
-------------

(IN THOUSANDS)
Balances, December 31, 2003.... $2,490,275
----------
Comprehensive income (loss):
Net income................... 118,065
Translation adjustment....... (19,123)
Unrealized losses on
marketable securities, net
of income tax benefit of
$927....................... (1,578)
Less: reclassification
adjustment for gains
included in net income,
net of income taxes of
$1,379................. (2,348)
Pension liability
amortization, net of income
taxes of $158.............. 270
Amortization of loss on cash
flow hedges................ 76
----------
Total comprehensive
income (loss).......... 95,362
----------
Issuance of common shares for
stock options exercised...... 42,628
Nabors Exchangeco shares
exchanged.................... --
Tax effect of stock option
deductions................... 15,837
----------
Subtotal................. 58,465
----------
Balances, June 30, 2004........ $2,644,102
----------
</Table>

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

NABORS INDUSTRIES LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY (CONTINUED)
(UNAUDITED)
<Table>
<Caption>
ACCUMULATED OTHER
COMPREHENSIVE INCOME (LOSS)
------------------------------------------------------
COMMON SHARES UNREALIZED MINIMUM UNREALIZED
--------------- CAPITAL IN GAINS (LOSSES) PENSION LOSS ON CUMULATIVE
PAR EXCESS OF ON MARKETABLE LIABILITY CASH FLOW TRANSLATION RETAINED
SHARES VALUE PAR VALUE SECURITIES ADJUSTMENT HEDGES ADJUSTMENT EARNINGS
(IN THOUSANDS) ------- ----- ---------- -------------- ---------- ---------- ----------- ----------

Balances, December 31, 2002... 144,965 $145 $1,233,598 $5,646 $(2,205) $(1,444) $(5,240) $ 927,955
------- ---- ---------- ------ ------- ------- ------- ----------
Comprehensive income (loss):
Net income.................. 77,076
Translation adjustment...... 80,546
Unrealized gains on
marketable securities, net
of income taxes of
$1,021.................... 1,738
Less: reclassification
adjustment for gains
included in net income,
net of income taxes of
$889.................... (1,514)
Amortization of loss on cash
flow hedges............... 75
------- ---- ---------- ------ ------- ------- ------- ----------
Total comprehensive
income (loss)......... -- -- -- 224 -- 75 80,546 77,076
------- ---- ---------- ------ ------- ------- ------- ----------
Issuance of common shares for
stock options exercised..... 1,087 2 17,428
Issuance of common shares in
connection with the New
Prospect warrants
exercised................... 200 6,000
Issuance of common shares in
connection with the Enserco
warrants exercised.......... 48
Nabors Exchangeco shares
exchanged................... 152
Tax effect of stock option
deductions.................. 9,691
------- ---- ---------- ------ ------- ------- ------- ----------
Subtotal................ 1,487 2 33,119 -- -- -- -- --
------- ---- ---------- ------ ------- ------- ------- ----------
Balances, June 30, 2003....... 146,452 $147 $1,266,717 $5,870 $(2,205) $(1,369) $75,306 $1,005,031
------- ---- ---------- ------ ------- ------- ------- ----------

TOTAL
SHAREHOLDERS'
EQUITY
(IN THOUSANDS) -------------

Balances, December 31, 2002... $2,158,455
----------
Comprehensive income (loss):
Net income.................. 77,076
Translation adjustment...... 80,546
Unrealized gains on
marketable securities, net
of income taxes of
$1,021.................... 1,738
Less: reclassification
adjustment for gains
included in net income,
net of income taxes of
$889.................... (1,514)
Amortization of loss on cash
flow hedges............... 75
----------
Total comprehensive
income (loss)......... 157,921
----------
Issuance of common shares for
stock options exercised..... 17,430
Issuance of common shares in
connection with the New
Prospect warrants
exercised................... 6,000
Issuance of common shares in
connection with the Enserco
warrants exercised.......... --
Nabors Exchangeco shares
exchanged................... --
Tax effect of stock option
deductions.................. 9,691
----------
Subtotal................ 33,121
----------
Balances, June 30, 2003....... $2,349,497
----------
</Table>

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

NABORS INDUSTRIES LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 NATURE OF OPERATIONS

Nabors is the largest land drilling contractor in the world, with almost
600 land drilling rigs. We conduct oil, gas and geothermal land drilling
operations in the U.S. Lower 48 states, Alaska, Canada, South and Central
America, the Middle East, the Far East and Africa. Nabors also is one of the
largest land well-servicing and workover contractors in the United States and
Canada. We own approximately 750 land workover and well-servicing rigs in the
United States, primarily in the southwestern and western United States, and
approximately 200 land workover and well-servicing rigs in Canada. Nabors is a
leading provider of offshore platform workover and drilling rigs, and owns 45
platform rigs, 19 jack-up units, and three barge rigs in the United States and
multiple international markets. These rigs provide well-servicing, workover and
drilling services. We have a 50% ownership interest in a joint venture in Saudi
Arabia, which owns 17 rigs.

To further supplement and complement our primary business, we offer a wide
range of ancillary well-site services, including engineering, transportation,
construction, maintenance, well logging, directional drilling, rig
instrumentation, data collection and other support services, in selected
domestic and international markets. Our land transportation and hauling fleet
includes approximately 240 rig and oilfield equipment hauling tractor-trailers
and a number of cranes, loaders and light-duty vehicles. We maintain
approximately 300 fluid hauling trucks, approximately 800 fluid storage tanks,
ten saltwater disposal wells and other auxiliary equipment used in drilling,
workover and well-servicing operations in the United States. In addition, we
time charter a fleet of 31 marine transportation and supply vessels, which
provide transportation of drilling materials, supplies and crews for offshore
operations primarily in the Gulf of Mexico. We manufacture and lease or sell top
drives for a broad range of drilling applications, directional drilling systems,
rig instrumentation and data collection equipment and rig reporting software. We
have also made selective investments in oil and gas exploration, development and
production activities.

The majority of our business is conducted through our various Contract
Drilling operating segments, which include our drilling, workover and
well-servicing operations, on land and offshore. Our operating segments engaged
in marine transportation and supply services, drilling technology and top drive
manufacturing, directional drilling, rig instrumentation and software, and
construction and logistics operations are aggregated in a category labeled Other
Operating Segments for segment reporting purposes. Our limited oil and gas
exploration, development and production operations are included in a category
labeled Oil and Gas for segment reporting purposes.

As used in this Report, "we," "us," "our" and "Nabors" means Nabors
Industries Ltd. and, where the context requires, includes our subsidiaries.

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

INTERIM FINANCIAL INFORMATION

The unaudited consolidated financial statements of Nabors are prepared in
conformity with accounting principles generally accepted in the United States of
America (GAAP). Pursuant to the rules and regulations of the U.S. Securities and
Exchange Commission, certain information and footnote disclosures normally
included in annual financial statements prepared in accordance with GAAP have
been omitted. Therefore, these financial statements should be read along with
our Annual Report on Form 10-K for the year ended December 31, 2003. In our
management's opinion, the consolidated financial statements contain all
adjustments necessary to present fairly our financial position as of June 30,
2004, and the results of our operations for each of the three-month and
six-month periods ended June 30, 2004 and 2003, and our cash flows for each of
the six-month periods ended June 30, 2004 and 2003, in accordance

with GAAP. Interim results for the three and six months ended June 30, 2004 may
not be indicative of results that will be realized for the full year ending
December 31, 2004.

Our independent registered public accounting firm has performed a review
of, and issued a report on, these consolidated interim financial statements in
accordance with standards established by the Public Company Accounting Oversight
Board. Pursuant to Rule 436(c) under the Securities Act of 1933, this report
should not be considered a part of any registration statement prepared or
certified within the meanings of Sections 7 and 11 of the Securities Act.

PRINCIPLES OF CONSOLIDATION

Our consolidated financial statements include the accounts of Nabors, all
majority-owned subsidiaries, and all non-majority owned subsidiaries required to
be consolidated under Financial Accounting Standards Board (FASB) Interpretation
No. 46R. All significant intercompany accounts and transactions are eliminated
in consolidation.

Investments in entities where we have the ability to exert significant
influence, but where we do not control their operating and financial policies,
are accounted for using the equity method. Our share of the net income of these
entities is recorded as Earnings from unconsolidated affiliates in our
consolidated statements of income, and our investment in these entities is
carried as a single amount in our consolidated balance sheets. Investments in
net assets of unconsolidated affiliates accounted for using the equity method
totaled $66.2 million and $58.1 million as of June 30, 2004 and December 31,
2003, respectively, and are included in other long-term assets in our
consolidated balance sheets.

RECLASSIFICATIONS

Certain reclassifications have been made to prior periods to conform to the
current period presentation, with no effect on our consolidated financial
position, results of operations or cash flows.

STOCK-BASED COMPENSATION

We account for stock-based compensation using the intrinsic value method
prescribed by Accounting Principles Board (APB) Opinion No. 25, "Accounting for
Stock Issued to Employees." Accordingly, compensation expense for stock options
is measured as the excess, if any, of the quoted market price of Nabors common
shares at the date of grant over the amount an employee must pay to acquire the
common shares. We grant options at prices equal to the market price of our
shares on the date of grant and therefore do not record compensation expense
related to these grants. Statement of Financial Accounting Standards (SFAS) No.
148, "Accounting for Stock-Based Compensation -- an Amendment to FAS 123,"
requires companies that continue to account for stock-based compensation in
accordance with APB 25 to disclose certain information using a tabular
presentation. The table presented below illustrates the effect on our net income
and earnings per share as if we had applied the fair value recognition
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," to our
stock-based employee compensation. Under the provisions of SFAS 123,
compensation cost for stock-based compensation is determined based on fair
values as of the dates of grant estimated using an option pricing

model such as the Black-Scholes option-pricing model (which we use in our
calculations), and compensation cost is amortized over the applicable option
vesting period.

<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- ------------------
2004 2003 2004 2003
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) -------- -------- -------- -------

Net income, as reported............................... $46,348 $29,019 $118,065 $77,076
Deduct: Total stock-based employee compensation
expense determined under the fair value method for
all awards, net of related tax effects.............. (6,415) (3,708) (10,252) (6,583)
------- ------- -------- -------
Pro forma net income-basic............................ 39,933 25,311 107,813 70,493
Add: Interest expense on assumed conversion of our
zero coupon convertible/exchangeable senior
debentures/notes, net of tax (see Note 6)........... -- -- 6,180 3,639
------- ------- -------- -------
Adjusted pro forma net income-diluted................. $39,933 $25,311 $113,993 $74,132
------- ------- -------- -------
Earnings per share:
Basic-as reported................................... $ .31 $ .20 $ .80 $ .53
Basic-pro forma..................................... $ .27 $ .17 $ .73 $ .48
Diluted-as reported................................. $ .30 $ .19 $ .76 $ .50
Diluted-pro forma................................... $ .26 $ .17 $ .70 $ .46
</Table>

RECENT ACCOUNTING PRONOUNCEMENT

In January 2003 the FASB issued Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities," which addresses the consolidation
of variable interest entities (VIEs) by business enterprises that are the
primary beneficiaries. A VIE is an entity that does not have sufficient equity
investment at risk to permit it to finance its activities without additional
subordinated financial support, or whose equity investors lack the
characteristics of a controlling financial interest. The primary beneficiary of
a VIE is the enterprise that has the majority of the risks or rewards associated
with the VIE. In December 2003 the FASB issued a revision to FIN 46 (FIN 46R) to
clarify some of the provisions of FIN 46, and to exempt certain entities from
its requirements. Application of FIN 46R is required in financial statements of
public entities that have interests in structures that are commonly referred to
as special-purpose entities for periods ending after December 15, 2003.
Application for all other types of VIEs is required in financial statements for
periods ending after March 15, 2004. Our adoption of FIN 46R on March 31, 2004
did not have a material effect on our financial position, results of operations
or cash flows as of and for the three and six months ended June 30, 2004.

NOTE 3 LONG-TERM DEBT

On April 15, 2004, we made a payment of $305.3 million upon maturity of our
6.8% senior notes, representing principal of $295.3 million and accrued interest
of $10.0 million. These senior notes were included in our consolidated balance
sheet as current portion of long-term debt as of December 31, 2003.

NOTE 4 INCOME TAXES

Our effective income tax (benefit) rate was 7.4% and 9.3% during the three
and six months ended June 30, 2004, respectively, compared to (10%) for the
three and six months ended June 30, 2003. The change from an income tax benefit
in the 2003 periods to an income tax expense in the 2004 periods resulted from a
higher proportion of our income being generated in the U.S. for the three and
six months ended June 30, 2004 compared to the prior year periods. Income
generated in the U.S. is generally taxed at a higher rate than in international
jurisdictions in which we operate. Our tax rate for the three and six months
ended June 30, 2004 and 2003 was decreased by tax savings realized as a result
of our corporate reorganization effective June 24, 2002. It is possible that the
tax savings recorded as a result of the corporate reorganization may not be
realized, depending on the final disposition of various proposed changes to
existing tax laws (including tax treaties), and any responsive action taken by
Nabors.

NOTE 5 COMMITMENTS AND CONTINGENCIES

CONTINGENCIES

Recent Legislation, Coast Guard Regulations and Actions. Our Sea Mar
division time charters supply vessels to offshore operators, primarily in U.S.
waters. The vessels which operate in U.S. coastwise trade are owned by one of
our financing company subsidiaries, but are operated and managed by a U.S.
citizen-controlled company pursuant to long-term bareboat charters. Our Sea Mar
division time charters the vessels from this U.S. operating company in
connection with our own offshore activities in the Gulf of Mexico and in support
of other offshore operators.

Recent legislation passed by the U.S. Congress would cause arrangements
like that utilized by Sea Mar to no longer qualify vessels for employment in the
U.S. coastwise trade. The legislation would eliminate Sea Mar's ability to
continue to utilize this arrangement effective August 2007. Accordingly, we
would be required to restructure the arrangement, redeploy the vessels outside
the United States, or sell the vessels by such date.

On February 4, 2004, the United States Coast Guard adopted final
regulations which could cause arrangements like that utilized by Sea Mar to no
longer qualify vessels for employment in the U.S. coastwise trade. The Coast
Guard also has proposed regulations which would end the grandfathering
provisions contained in the final regulations on February 4, 2007.

Additionally, on February 4, 2004, the United States Coast Guard notified
us that it is considering an appeal of the United States Coast Guard's original
issuance in June 2002 of the coastwise trade endorsements for the vessels
bareboat chartered to the U.S. citizen qualified company. The coastwise trade
endorsements on the documents of the vessels issued by the United States Coast
Guard authorize the vessels to engage in the U.S. coastwise trade. If the appeal
is decided against us, we could lose the ability to market the vessels for use
in U.S. coastwise trade.

As of June 30, 2004, the net assets of our Sea Mar division totaled
approximately $162.5 million. During the three and six months ended June 30,
2004, our Sea Mar division had a loss before income taxes totaling $3,000 and
$341,000, respectively.

LITIGATION

Nabors and its subsidiaries are defendants or otherwise involved in a
number of lawsuits in the ordinary course of their business. In the opinion of
management, our ultimate liability with respect to these pending lawsuits is not
expected to have a significant or material adverse effect on our consolidated
financial position, results of operations or cash flows.

GUARANTEES

We enter into various agreements providing financial or performance
assurance to third parties. Certain of these agreements serve as guarantees,
including standby letters of credit issued on behalf of insurance carriers in
conjunction with our workers' compensation insurance program and guarantees of
residual value in certain of our operating lease agreements. We have also
guaranteed payment of contingent consideration in conjunction with an
acquisition in 2002 which is based on future operating results of that business.
In addition, we have provided indemnifications to certain third parties which
serve as guarantees. These guarantees include indemnification provided by Nabors
to our stock transfer agent and our insurance carriers. We are not able to
estimate the potential future maximum payments that might be due under our
indemnification guarantees.

Management believes the likelihood that we would be required to perform or
otherwise incur any material losses associated with any of these guarantees is
remote. The following table summarizes the total maximum amount of financial and
performance guarantees issued by Nabors:

<Table>
<Caption>
MAXIMUM AMOUNT
-------------------------------------------------
REMAINDER
(IN THOUSANDS) OF 2004 2005 2006 THEREAFTER TOTAL
- -------------- --------- ------- ---- ---------- -------

Financial standby letters of credit........... $1,065 $33,120 $ -- $ -- $34,185
Guarantee of residual value in lease
agreements.................................. 194 684 65 -- 943
Contingent consideration in acquisition....... 714 1,429 357 -- 2,500
------ ------- ---- ----- -------
Total......................................... $1,973 $35,233 $422 $ -- $37,628
------ ------- ---- ----- -------
</Table>

NOTE 6 EARNINGS PER SHARE

A reconciliation of the numerators and denominators of the basic and
diluted earnings per share computations is as follows:

<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2004 2003 2004 2003
- ---------------------------------------- -------- -------- -------- --------

Net income (numerator):
Net income - basic............................... $ 46,348 $ 29,019 $118,065 $ 77,076
Add interest expense on assumed conversion of our
zero coupon convertible/exchangeable senior
debentures/ notes, net of tax:
$825 million due 2020(1)...................... -- -- -- 3,639
$1.381 billion due 2021(2).................... -- -- 6,180 --
$700 million due 2023(3)...................... -- -- -- --
-------- -------- -------- --------
Adjusted net income - diluted.................... $ 46,348 $ 29,019 $124,245 $ 80,715
-------- -------- -------- --------
Earnings per share:
Basic............................................ $ .31 $ .20 $ .80 $ .53
Diluted.......................................... $ .30 $ .19 $ .76 $ .50
Shares (denominator):
Weighted average number of shares outstanding-
basic(4)...................................... 148,866 146,382 148,425 146,045
Net effect of dilutive stock options and warrants
based on the treasury stock method............ 6,368 6,977 6,501 6,783
Assumed conversion of our zero coupon
convertible/ exchangeable senior
debentures/notes:
$825 million due 2020(1)...................... -- -- -- 7,659
$1.381 billion due 2021(2).................... -- -- 8,491 --
$700 million due 2023(3)...................... -- -- -- --
-------- -------- -------- --------
Weighted average number of shares
outstanding-diluted........................... 155,234 153,359 163,417 160,487
-------- -------- -------- --------
</Table>

- ---------------

(1) Diluted earnings per share for the six months ended June 30, 2003 reflects
the assumed conversion of our $825 million zero coupon convertible senior
debentures, as the conversion in that period would have been dilutive. For
the three months ended June 30, 2003, the weighted-average number of shares
outstanding-diluted excludes 7.2 million potentially dilutive shares
issuable upon the conversion of our $825 million zero coupon convertible
senior debentures because the inclusion of such shares would have been
anti-dilutive, given the level of net income for that quarter. We redeemed
for cash the remaining outstanding principal amount of our $825 million zero
coupon convertible senior debentures on June 20, 2003 and therefore these
debentures did not impact the calculation of diluted earnings per share for
the three and six months ended June 30, 2004.

(2) Diluted earnings per share for the six months ended June 30, 2004 reflects
the assumed conversion of our $1.381 billion zero coupon convertible senior
debentures, as the conversion in that period would have been dilutive. For
the three months ended June 30, 2004 and 2003 and the six months ended June
30, 2003, the weighted-average number of shares outstanding-diluted excludes
8.5 million potentially dilutive shares issuable upon the conversion of our
$1.381 billion zero coupon convertible senior debentures because the
inclusion of such shares would have been anti-dilutive, given the level of
net income for those periods. Net income for the three months ended June 30,
2004 and 2003 and the six months ended June 30, 2003 excludes the related
add-back of interest expense, net of tax, of $3.1 million, $3.0 million and
$6.0 million, respectively, for these debentures. These shares would

have been dilutive and therefore included in the calculation of the
weighted-average number of shares outstanding-diluted had diluted earnings
per share been at or above $.37, $.36 and $.71 for the three months ended
June 30, 2004 and 2003 and six months ended June 30, 2003, respectively.

(3) Diluted earnings per share for the three and six months ended June 30, 2004
and 2003 excludes approximately 10.0 million potentially dilutive shares
initially issuable upon the exchange of our $700 million zero coupon
exchangeable senior notes. Such shares are contingently exchangeable under
certain circumstances and would only be included in the calculation of the
weighted-average number of shares outstanding-diluted if any of those
criteria were met. Such criteria were not met during the three and six
months ended June 30, 2004 and 2003. Based on the initial exchange price per
share, these notes would be exchangeable for our common shares if the
closing sale price per share of Nabors' common shares for at least 20
trading days during the period of 30 consecutive trading days ending on the
last trading day of the previous calendar quarter is greater than or equal
to $84.12 for calendar quarters ending on or before June 30, 2008, and
$77.11 for calendar quarters thereafter.

(4) Includes the following weighted-average number of common shares of Nabors
and weighted-average number of exchangeable shares of Nabors Exchangeco,
respectively: 148.6 million and .3 million shares for the three months ended
June 30, 2004; 145.9 million and .5 million shares for the three months
ended June 30, 2003; 148.1 million and .3 million shares for the six months
ended June 30, 2004; and 145.5 million and .5 million shares for the six
months ended June 30, 2003. The exchangeable shares of Nabors Exchangeco are
exchangeable for Nabors common shares on a one-for-one basis, and have
essentially identical rights as Nabors Industries Ltd. common shares,
including but not limited to voting rights and the right to receive
dividends, if any.

For all periods presented, the computation of diluted earnings per share
excludes outstanding stock options and warrants with exercise prices greater
than the average market price of Nabors' common shares, because the inclusion of
such options and warrants would be anti-dilutive. The number of options and
warrants that were excluded from diluted earnings per share that would
potentially dilute earnings per share in the future were 8,917,857 and 8,237,941
shares during the three and six months ended June 30, 2004, respectively, and
7,396,473 and 7,837,364 shares during the three and six months ended June 30,
2003, respectively.

The holders of our $1.381 billion zero coupon convertible senior debentures
and our $700 million zero coupon senior exchangeable notes have the right to
require us to repurchase the debentures/notes at various dates commencing
February 5, 2006 and June 15, 2008, respectively. We may pay the repurchase
price for these securities with either cash or shares or a combination thereof.
We do not presently anticipate using shares to satisfy any such future purchase
obligations.

NOTE 7 SEGMENT INFORMATION

The following tables set forth certain financial information with respect
to our reportable segments:

<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- ---------------------
2004 2003 2004 2003
(IN THOUSANDS) -------- -------- ---------- --------

Operating revenues and Earnings from
unconsolidated affiliates:
Contract Drilling:(1)
U.S. Lower 48 Land Drilling................. $172,049 $114,118 $ 325,417 $204,207
U.S. Land Well-servicing.................... 88,162 81,504 167,641 158,164
U.S. Offshore............................... 31,556 24,680 62,877 46,394
Alaska...................................... 19,701 30,446 49,038 66,414
Canada...................................... 61,905 49,836 200,671 150,624
International............................... 107,185 96,599 210,172 183,790
-------- -------- ---------- --------
Subtotal Contract Drilling(2)............. 480,558 397,183 1,015,816 809,593
Oil and Gas(3)................................. 14,173 2,487 35,299 4,086
Other Operating Segments(4)(5)................. 52,740 46,572 108,678 101,761
Other reconciling items(6)..................... (15,603) (12,331) (31,122) (25,789)
-------- -------- ---------- --------
Total..................................... $531,868 $433,911 $1,128,671 $889,651
-------- -------- ---------- --------
Adjusted income (loss) derived from operating
activities:(7)
Contract Drilling:
U.S. Lower 48 Land Drilling................. $ 12,971 $ 3,858 $ 21,539 $ (79)
U.S. Land Well-servicing.................... 14,394 13,307 24,127 22,952
U.S. Offshore............................... 4,796 530 9,613 (3,440)
Alaska...................................... 3,756 10,361 10,966 25,688
Canada...................................... 2,851 (1,631) 46,123 24,389
International............................... 18,753 19,994 37,344 36,730
-------- -------- ---------- --------
Subtotal Contract Drilling................ 57,521 46,419 149,712 106,240
Oil and Gas.................................... 896 1,642 5,402 2,661
Other Operating Segments....................... (2,106) (450) (2,537) 5,187
-------- -------- ---------- --------
Total segment adjusted income derived from
operating activities...................... 56,311 47,611 152,577 114,088
Other reconciling items(8)....................... (9,645) (9,626) (20,845) (20,094)
Interest expense................................. (11,387) (18,644) (27,246) (38,714)
Interest and dividend income..................... 7,879 6,998 14,384 14,691
Other income, net................................ 6,907 23 11,326 47
-------- -------- ---------- --------
Income before income taxes....................... $ 50,065 $ 26,362 $ 130,196 $ 70,018
-------- -------- ---------- --------
</Table>

<Table>
<Caption>
MARCH 31, DECEMBER 31,
2004 2003
---------- ------------

(IN THOUSANDS)
Total assets:
Contract Drilling:
U.S. Lower 48 Land Drilling............................ $1,050,216 $ 987,903
U.S. Land Well-servicing............................... 272,845 246,312
U.S. Offshore.......................................... 414,637 386,196
Alaska................................................. 207,908 218,222
Canada................................................. 777,372 767,400
International.......................................... 1,046,041 1,001,058
---------- ----------
Subtotal Contract Drilling(9)........................ 3,769,019 3,607,091
Oil and Gas............................................... 81,080 67,898
Other Operating Segments(10).............................. 316,896 337,622
Other reconciling items(8)................................ 1,283,673 1,590,081
---------- ----------
Total assets......................................... $5,450,668 $5,602,692
---------- ----------
</Table>

- ---------------

(1) These segments include our drilling, workover and well-servicing
operations, on land and offshore.

(2) Includes Earnings from unconsolidated affiliates, accounted for by the
equity method, of $1.1 million and $1.0 million for the three months ended
June 30, 2004 and 2003, respectively, and $2.2 million and $1.9 million for
the six months ended June 30, 2004 and 2003, respectively.

(3) Represents our oil and gas exploration, development and production
operations.

(4) Includes our marine transportation and supply services, drilling technology
and top drive manufacturing, directional drilling, rig instrumentation and
software, and construction and logistics operations.

(5) Includes Earnings from unconsolidated affiliates, accounted for by the
equity method, of $.1 million and $.4 million for the three months ended
June 30, 2004 and 2003, respectively, and $2.8 million and $5.4 million for
the six months ended June 30, 2004 and 2003, respectively.

(6) Represents the elimination of inter-segment transactions.

(7) Adjusted income (loss) derived from operating activities is computed by:
subtracting direct costs, general and administrative expenses, depreciation
and amortization, and depletion expense from Operating revenues and then
adding Earnings from unconsolidated affiliates. Such amounts should not be
used as a substitute to those amounts reported under GAAP. However,
management evaluates the performance of our business units and the
consolidated company based on several criteria, including adjusted income
(loss) derived from operating activities, because it believes that this
financial measure is an accurate reflection of the ongoing profitability of
our company. A reconciliation of this non-GAAP measure to income before
income taxes, which is a GAAP measure, is provided within the table above.

(8) Represents the elimination of inter-segment transactions and unallocated
corporate expenses and assets.

(9) Includes $32.9 million and $26.5 million of investments in unconsolidated
affiliates accounted for by the equity method as of June 30, 2004 and
December 31, 2003, respectively.

(10) Includes $33.3 million and $31.6 million of investments in unconsolidated
affiliates accounted for by the equity method as of June 30, 2004 and
December 31, 2003, respectively.

NOTE 8 CONDENSED CONSOLIDATING FINANCIAL INFORMATION

Nabors has fully and unconditionally guaranteed all of the issued public
debt securities of Nabors Industries, Inc. (Nabors Delaware), and Nabors and
Nabors Delaware have fully and unconditionally guaranteed the $225 million
4.875% senior notes due 2009 issued by Nabors Holdings 1, ULC, our indirect
subsidiary.

The following condensed consolidating financial information is included so
that separate financial statements of Nabors Delaware and Nabors Holdings are
not required to be filed with the U.S. Securities and Exchange Commission. The
condensed consolidating financial statements present investments in both
consolidated and unconsolidated affiliates using the equity method of
accounting.

The following condensed consolidating financial information presents:
condensed consolidating balance sheets as of June 30, 2004 and December 31,
2003, statements of income for the three and six months ended June 30, 2004 and
2003, and statements of cash flows for the six months ended June 30, 2004 and
2003 of (a) Nabors, parent/guarantor, (b) Nabors Delaware, issuer of public debt
securities guaranteed by Nabors and guarantor of the $225 million 4.875% senior
notes issued by Nabors Holdings, (c) Nabors Holdings, issuer of the $225 million
4.875% senior notes, (d) the non-guarantor subsidiaries, (e) consolidating
adjustments necessary to consolidate Nabors and its subsidiaries and (f) Nabors
on a consolidated basis.

CONDENSED CONSOLIDATING BALANCE SHEETS

<Table>
<Caption>
JUNE 30, 2004
--------------------------------------------------------------------------------
NABORS OTHER
NABORS DELAWARE NABORS SUBSIDIARIES
(PARENT/ (ISSUER/ HOLDINGS (NON- CONSOLIDATING CONSOLIDATED
GUARANTOR) GUARANTOR) (ISSUER) GUARANTORS) ADJUSTMENTS TOTAL
(IN THOUSANDS) ---------- ---------- -------- ------------ ------------- ------------

ASSETS
Current assets:
Cash and cash equivalents... $ 169,118 $ -- $ 18 $ 193,451 $ -- $ 362,587
Marketable securities....... 385,412 -- -- 39,616 -- 425,028
Accounts receivable, net.... -- -- -- 411,034 -- 411,034
Inventory................... -- -- -- 21,631 -- 21,631
Other current assets........ 5,253 4,559 -- 148,611 -- 158,423
---------- ---------- -------- ---------- ----------- ----------
Total current assets...... 559,783 4,559 18 814,343 -- 1,378,703
Marketable securities......... 386,858 -- -- 45,294 -- 432,152
Property, plant and equipment,
net......................... -- -- -- 3,117,872 -- 3,117,872
Goodwill, net................. -- -- -- 311,343 -- 311,343
Intercompany receivables...... 1,340,391 826,836 -- 522 (2,167,749) --
Investments in affiliates..... 358,414 1,946,579 247,626 1,030,062 (3,516,506) 66,175
Other long-term assets........ -- 17,104 1,064 126,255 -- 144,423
---------- ---------- -------- ---------- ----------- ----------
Total assets.............. $2,645,446 $2,795,078 $248,708 $5,445,691 $(5,684,255) $5,450,668
---------- ---------- -------- ---------- ----------- ----------

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term
debt...................... $ -- $ 1,500 $ -- $ 2,647 $ -- $ 4,147
Trade accounts payable...... -- 23 -- 155,840 -- 155,863
Accrued liabilities......... 521 6,363 4,102 144,369 -- 155,355
Income taxes payable........ 744 -- 374 3,164 -- 4,282
---------- ---------- -------- ---------- ----------- ----------
Total current
liabilities............. 1,265 7,886 4,476 306,020 -- 319,647
Long-term debt................ -- 1,765,936 223,632 -- -- 1,989,568
Other long-term liabilities... -- 1,858 -- 141,003 -- 142,861
Deferred income taxes......... 79 48,788 82 305,541 -- 354,490
Intercompany payable.......... -- -- 1,101 2,166,648 (2,167,749) --
---------- ---------- -------- ---------- ----------- ----------
Total liabilities......... 1,344 1,824,468 229,291 2,919,212 (2,167,749) 2,806,566
---------- ---------- -------- ---------- ----------- ----------
Shareholders' equity.......... 2,644,102 970,610 19,417 2,526,479 (3,516,506) 2,644,102
---------- ---------- -------- ---------- ----------- ----------
Total liabilities and
shareholders' equity.... $2,645,446 $2,795,078 $248,708 $5,445,691 $(5,684,255) $5,450,668
---------- ---------- -------- ---------- ----------- ----------
</Table>

<Table>
<Caption>
DECEMBER 31, 2003
--------------------------------------------------------------------------------
NABORS OTHER
NABORS DELAWARE NABORS SUBSIDIARIES
(PARENT/ (ISSUER/ HOLDINGS (NON- CONSOLIDATING CONSOLIDATED
GUARANTOR) GUARANTOR) (ISSUER) GUARANTORS) ADJUSTMENTS TOTAL
(IN THOUSANDS) ---------- ---------- -------- ------------ ------------- ------------

ASSETS
Current assets:
Cash and cash equivalents... $ 403,693 $ 1 $ 17 $ 176,026 $ -- $ 579,737
Marketable securities....... 285,353 -- -- 54,583 -- 339,936
Accounts receivable, net.... -- -- -- 410,487 -- 410,487
Inventory................... -- -- -- 23,289 -- 23,289
Other current assets........ 6,806 4,229 -- 151,163 -- 162,198
---------- ---------- -------- ---------- ----------- ----------
Total current assets...... 695,852 4,230 17 815,548 -- 1,515,647
Marketable securities......... 571,327 -- -- 41,090 -- 612,417
Property, plant and equipment,
net......................... -- -- -- 2,990,792 -- 2,990,792
Goodwill, net................. -- -- -- 315,627 -- 315,627
Intercompany receivables...... 1,057,260 1,085,944 202 -- (2,143,406) --
Investments in affiliates..... 170,089 2,065,230 236,829 1,095,882 (3,509,930) 58,100
Other long-term assets........ -- 20,359 966 88,784 -- 110,109
---------- ---------- -------- ---------- ----------- ----------
Total assets.............. $2,494,528 $3,175,763 $238,014 $5,347,723 $(5,653,336) $5,602,692
---------- ---------- -------- ---------- ----------- ----------

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term
debt...................... $ -- $ 295,267 $ -- $ 4,118 $ -- $ 299,385
Trade accounts payable...... 1 23 -- 128,816 -- 128,840
Accrued liabilities......... 960 10,766 3,901 145,118 -- 160,745
Income taxes payable........ 1,164 (190) (111) 8,540 -- 9,403
---------- ---------- -------- ---------- ----------- ----------
Total current
liabilities............. 2,125 305,866 3,790 286,592 -- 598,373
Long-term debt................ -- 1,762,054 223,499 -- -- 1,985,553
Other long-term liabilities... -- 3,738 -- 151,929 -- 155,667
Deferred income taxes......... 79 61,623 82 311,040 -- 372,824
Intercompany payable.......... 2,049 -- -- 2,141,357 (2,143,406) --
---------- ---------- -------- ---------- ----------- ----------
Total liabilities......... 4,253 2,133,281 227,371 2,890,918 (2,143,406) 3,112,417
---------- ---------- -------- ---------- ----------- ----------
Shareholders' equity.......... 2,490,275 1,042,482 10,643 2,456,805 (3,509,930) 2,490,275
---------- ---------- -------- ---------- ----------- ----------
Total liabilities and
shareholders' equity.... $2,494,528 $3,175,763 $238,014 $5,347,723 $(5,653,336) $5,602,692
---------- ---------- -------- ---------- ----------- ----------
</Table>

CONDENSED CONSOLIDATING STATEMENTS OF INCOME

<Table>
<Caption>
THREE MONTHS ENDED JUNE 30, 2004
--------------------------------------------------------------------------------
NABORS OTHER
NABORS DELAWARE NABORS SUBSIDIARIES
(PARENT/ (ISSUER/ HOLDINGS (NON- CONSOLIDATING CONSOLIDATED
GUARANTOR) GUARANTOR) (ISSUER) GUARANTORS) ADJUSTMENTS TOTAL
(IN THOUSANDS) ---------- ---------- -------- ------------ ------------- ------------

Revenues and other income:
Operating revenues...... $ -- $ -- $ -- $530,715 $ -- $530,715
------- ------- ------ -------- -------- --------
Earnings from
unconsolidated
affiliates........... -- -- -- 1,153 -- 1,153
Earnings from
consolidated
affiliates........... 18,329 7,434 3,639 12,969 (42,371) --
Interest and dividend
income............... 3,651 -- -- 4,228 -- 7,879
Intercompany interest
income............... 27,292 17,812 -- 522 (45,626) --
Other income, net....... 752 5,625 -- 1,836 (1,306) 6,907
------- ------- ------ -------- -------- --------
Total revenues
and other
income........ 50,024 30,871 3,639 551,423 (89,303) 546,654
------- ------- ------ -------- -------- --------
Costs and other
deductions:
Direct costs............ -- -- -- 368,941 -- 368,941
General and
administrative
expenses............. 1,888 56 -- 44,803 (1,306) 45,441
Depreciation and
amortization......... -- 150 -- 60,693 -- 60,843
Depletion............... -- -- -- 9,977 -- 9,977
Interest expense........ -- 8,950 2,860 (423) -- 11,387
Intercompany interest
expense.............. -- 522 -- 45,104 (45,626) --
------- ------- ------ -------- -------- --------
Total costs and
other
deductions.... 1,888 9,678 2,860 529,095 (46,932) 496,589
------- ------- ------ -------- -------- --------
Income before income
taxes................... 48,136 21,193 779 22,328 (42,371) 50,065
------- ------- ------ -------- -------- --------
Income tax expense
(benefit)............... 1,788 5,091 273 (3,435) -- 3,717
------- ------- ------ -------- -------- --------
Net income................ $46,348 $16,102 $ 506 $ 25,763 $(42,371) $ 46,348
------- ------- ------ -------- -------- --------
</Table>

<Table>
<Caption>
THREE MONTHS ENDED JUNE 30, 2003
--------------------------------------------------------------------------------
NABORS OTHER
NABORS DELAWARE NABORS SUBSIDIARIES
(PARENT/ (ISSUER/ HOLDINGS (NON- CONSOLIDATING CONSOLIDATED
GUARANTOR) GUARANTOR) (ISSUER) GUARANTORS) ADJUSTMENTS TOTAL
(IN THOUSANDS) ---------- ---------- -------- ------------ ------------- ------------

Revenues and other income:
Operating revenues...... $ -- $ -- $ -- $432,552 $ -- $432,552
Earnings from
unconsolidated
affiliates........... -- -- -- 1,359 -- 1,359
Earnings (losses) from
consolidated
affiliates........... (7,220) 25,602 2,807 17,688 (38,877) --
Interest income......... 295 2 -- 6,701 -- 6,998
Intercompany interest
income............... 55,248 14,673 -- -- (69,921) --
Other income (expense),
net.................. (8,547) (2,618) -- 11,188 -- 23
------- ------- ------- -------- --------- --------
Total revenues
and other
income........ 39,776 37,659 2,807 469,488 (108,798) 440,932
------- ------- ------- -------- --------- --------
Costs and other
deductions:
Direct costs............ -- -- -- 298,791 -- 298,791
General and
administrative
expenses............. 1,079 19 -- 39,385 -- 40,483
Depreciation and
amortization......... -- -- -- 55,882 -- 55,882
Depletion............... -- -- -- 770 -- 770
Interest expense........ -- 15,965 2,860 (181) -- 18,644
Intercompany interest
expense.............. -- -- -- 69,921 (69,921) --
------- ------- ------- -------- --------- --------
Total costs and
other
deductions.... 1,079 15,984 2,860 464,568 (69,921) 414,570
------- ------- ------- -------- --------- --------
Income (loss) before
income taxes............ 38,697 21,675 (53) 4,920 (38,877) 26,362
------- ------- ------- -------- --------- --------
Income tax expense
(benefit)............... 9,678 (1,453) 2,580 (13,462) -- (2,657)
------- ------- ------- -------- --------- --------
Net income (loss)......... $29,019 $23,128 $(2,633) $ 18,382 $ (38,877) $ 29,019
------- ------- ------- -------- --------- --------
</Table>

<Table>
<Caption>
SIX MONTHS ENDED JUNE 30, 2004
--------------------------------------------------------------------------------
NABORS OTHER
NABORS DELAWARE NABORS SUBSIDIARIES
(PARENT/ (ISSUER/ HOLDINGS (NON- CONSOLIDATING CONSOLIDATED
GUARANTOR) GUARANTOR) (ISSUER) GUARANTORS) ADJUSTMENTS TOTAL
(IN THOUSANDS) ---------- ---------- -------- ------------ ------------- ------------

Revenues and other
income:
Operating revenues..... $ -- $ -- $ -- $1,123,696 $ -- $1,123,696
Earnings from
unconsolidated
affiliates.......... -- -- -- 4,975 -- 4,975
Earnings from
consolidated
affiliates.......... 60,694 65,741 10,799 67,622 (204,856) --
Interest and dividend
income.............. 8,909 1 -- 5,474 -- 14,384
Intercompany interest
income.............. 53,741 34,720 -- 522 (88,983) --
Other income, net...... 829 3,089 -- 8,798 (1,390) 11,326
-------- -------- ------- ---------- --------- ----------
Total revenues and
other income... 124,173 103,551 10,799 1,211,087 (295,229) 1,154,381
-------- -------- ------- ---------- --------- ----------
Costs and other
deductions:
Direct costs........... -- -- -- 758,981 -- 758,981
General and
administrative
expenses............ 2,446 79 16 89,889 (1,390) 91,040
Depreciation and
amortization........ -- 150 -- 121,181 -- 121,331
Depletion.............. -- -- -- 25,587 -- 25,587
Interest expense....... -- 22,156 5,720 (630) -- 27,246
Intercompany interest
expense............. -- 522 -- 88,461 (88,983) --
-------- -------- ------- ---------- --------- ----------
Total costs and
other
deductions..... 2,446 22,907 5,736 1,083,469 (90,373) 1,024,185
-------- -------- ------- ---------- --------- ----------
Income before income
taxes.................. 121,727 80,644 5,063 127,618 (204,856) 130,196
-------- -------- ------- ---------- --------- ----------
Income tax expense....... 3,662 5,514 1,772 1,183 -- 12,131
-------- -------- ------- ---------- --------- ----------
Net income............... $118,065 $ 75,130 $ 3,291 $ 126,435 $(204,856) $ 118,065
-------- -------- ------- ---------- --------- ----------
</Table>

<Table>
<Caption>
SIX MONTHS ENDED JUNE 30, 2003
--------------------------------------------------------------------------------
NABORS OTHER
NABORS DELAWARE NABORS SUBSIDIARIES
(PARENT/ (ISSUER/ HOLDINGS (NON- CONSOLIDATING CONSOLIDATED
GUARANTOR) GUARANTOR) (ISSUER) GUARANTORS) ADJUSTMENTS TOTAL
(IN THOUSANDS) ---------- ---------- -------- ------------ ------------- ------------

Revenues and other income:
Operating revenues......... $ -- $ -- $ -- $882,389 $ -- $882,389
Earnings from
unconsolidated
affiliates.............. -- -- -- 7,262 -- 7,262
Earnings (losses) from
consolidated
affiliates.............. (13,937) 53,089 9,650 41,195 (89,997) --
Interest income............ 502 17 11 14,161 -- 14,691
Intercompany interest
income.................. 106,037 28,452 -- -- (134,489) --
Other income (expense),
net..................... (3,555) (3,701) 15 7,288 -- 47
-------- ------- ------ -------- --------- --------
Total revenues and
other income..... 89,047 77,857 9,676 952,295 (224,486) 904,389
-------- ------- ------ -------- --------- --------
Costs and other deductions:
Direct costs............... -- -- -- 603,351 -- 603,351
General and administrative
expenses................ 1,740 (153) 17 80,124 -- 81,728
Depreciation and
amortization............ -- -- -- 109,460 -- 109,460
Depletion.................. -- -- -- 1,118 -- 1,118
Interest expense........... -- 32,351 5,728 635 -- 38,714
Intercompany interest
expense................. -- -- -- 134,489 (134,489) --
-------- ------- ------ -------- --------- --------
Total costs and
other
deductions....... 1,740 32,198 5,745 929,177 (134,489) 834,371
-------- ------- ------ -------- --------- --------
Income before income taxes... 87,307 45,659 3,931 23,118 (89,997) 70,018
-------- ------- ------ -------- --------- --------
Income tax expense
(benefit).................. 10,231 (2,749) 1,494 (16,034) -- (7,058)
-------- ------- ------ -------- --------- --------
Net income................... $ 77,076 $48,408 $2,437 $ 39,152 $ (89,997) $ 77,076
-------- ------- ------ -------- --------- --------
</Table>

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

Net cash (used for)
provided by operating
activities............. $(201,860) $294,844 $(5,483) $352,876 $(184,846) $255,531
--------- -------- ------- -------- --------- --------
Cash flows from investing
activities:
Purchases of marketable
securities,
available-for-
sale................ (331,215) -- -- (41,903) -- (373,118)
Sales and maturities of
marketable
securities,
available-for-sale... 432,559 -- -- 33,117 -- 465,676
Purchases of non-
marketable
securities, net..... -- -- -- (52,880) -- (52,880)
Sales of non-marketable
securities.......... -- -- -- 22,773 -- 22,773
Cash paid for
investments in
consolidated
affiliates.......... (178,012) (20,000) -- (125,484) 323,496 --
Capital expenditures... -- -- -- (289,327) -- (289,327)
Proceeds from sales of
assets and insurance
claims.............. -- -- -- 2,588 -- 2,588
--------- -------- ------- -------- --------- --------
Net cash used for
investing activities... (76,668) (20,000) -- (451,116) 323,496 (224,288)
--------- -------- ------- -------- --------- --------
Cash flows from financing
activities:
Increase in cash
overdrafts.......... -- -- -- 5,417 -- 5,417
Increase in restricted
cash................ -- -- -- (68) -- (68)
Reduction of long-term
debt................ -- (296,775) -- (1,342) -- (298,117)
Proceeds from issuance
of common shares.... 42,628 -- -- -- -- 42,628
Retirement of
intercompany loan... 1,325 -- -- (1,325) -- --
Proceeds from parent
contributions....... -- 120,000 5,484 198,012 (323,496) --
Cash dividends paid.... -- (98,070) -- (86,776) 184,846 --
--------- -------- ------- -------- --------- --------
Net cash provided by
(used for) financing
activities............. 43,953 (274,845) 5,484 113,918 (138,650) (250,140)
--------- -------- ------- -------- --------- --------
Effect of exchange rate
changes on cash and
cash equivalents....... -- -- -- 1,747 -- 1,747
--------- -------- ------- -------- --------- --------
Net (decrease) increase
in cash and cash
equivalents............ (234,575) (1) 1 17,425 -- (217,150)
Cash and cash
equivalents, beginning
of period.............. 403,693 1 17 176,026 -- 579,737
--------- -------- ------- -------- --------- --------
Cash and cash
equivalents, end of
period................. $ 169,118 $ -- $ 18 $193,451 $ -- $362,587
--------- -------- ------- -------- --------- --------
</Table>

Net cash provided by (used
for) operating
activities.............. $ 94,524 $601,484 $(5,303) $162,395 $(707,331) $145,769
-------- -------- ------- -------- --------- --------
Cash flows from investing
activities:
Purchases of marketable
securities,
available-for-
sale................. (40,323) -- -- (452,624) -- (492,947)
Sales and maturities of
marketable
securities,
available-for-sale... 28,710 -- -- 669,213 -- 697,923
Purchases of non-
marketable
securities, net...... -- -- -- (20,001) -- (20,001)
Cash paid for
investments in
consolidated
affiliates........... -- (694,771) -- -- 694,771 --
Capital expenditures.... -- -- -- (156,086) -- (156,086)
Proceeds from sales of
assets and insurance
claims............... -- -- -- 8,996 -- 8,996
-------- -------- ------- -------- --------- --------
Net cash (used for)
provided by investing
activities.............. (11,613) (694,771) -- 49,498 694,771 37,885
-------- -------- ------- -------- --------- --------
Cash flows from financing
activities:
Decrease in cash
overdrafts........... -- -- -- (2,386) -- (2,386)
Decrease in restricted
cash................. -- -- -- 1,232 -- 1,232
Proceeds from issuance
of long-term debt.... -- 700,000 -- -- -- 700,000
Reduction of long-term
debt................. -- (494,903) -- (46,118) -- (541,021)
Debt issuance costs..... -- (10,682) (159) -- -- (10,841)
Proceeds from issuance
of common shares..... 23,430 -- -- -- -- 23,430
Proceeds from parent
contributions........ -- -- 5,271 689,500 (694,771) --
Cash dividends paid..... -- (101,165) -- (606,166) 707,331 --
-------- -------- ------- -------- --------- --------
Net cash provided by
financing activities.... 23,430 93,250 5,112 36,062 12,560 170,414
-------- -------- ------- -------- --------- --------
Effect of exchange rate
changes on cash and cash
equivalents............. -- -- -- 4,379 -- 4,379
-------- -------- ------- -------- --------- --------
Net increase (decrease) in
cash and cash
equivalents............. 106,341 (37) (191) 252,334 -- 358,447
Cash and cash equivalents,
beginning of period..... 40,127 38 207 373,679 -- 414,051
-------- -------- ------- -------- --------- --------
Cash and cash equivalents,
end of period........... $146,468 $ 1 $ 16 $626,013 $ -- $772,498
-------- -------- ------- -------- --------- --------
</Table>

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders
of Nabors Industries Ltd.:

We have reviewed the accompanying consolidated balance sheet of Nabors
Industries Ltd. and its subsidiaries as of June 30, 2004, and the related
consolidated statements of income for each of the three-month and six-month
periods ended June 30, 2004 and 2003, and the consolidated statements of cash
flows and of changes in shareholders' equity for each of the six-month periods
ended June 30, 2004 and 2003. This interim financial information is the
responsibility of the Company's management.

We conducted our review in accordance with standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that
should be made to the accompanying consolidated interim financial information
for it to be in conformity with accounting principles generally accepted in the
United States of America.

We previously audited in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated balance
sheet as of December 31, 2003, and the related consolidated statements of
income, of cash flows, and of changes in shareholders' equity for the year then
ended (not presented herein), and in our report dated March 5, 2004, we
expressed an unqualified opinion on those consolidated financial statements. In
our opinion, the accompanying consolidated balance sheet information as of
December 31, 2003, is fairly stated in all material respects in relation to the
consolidated balance sheet from which it has been derived.

/s/ PRICEWATERHOUSECOOPERS LLP

Houston, Texas
August 4, 2004

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

FORWARD-LOOKING STATEMENTS

This discussion includes various forward-looking statements about our
markets, demand for our products and services and our future results.
Statements, such as these, that are not historical facts are "forward-looking
statements" within the meaning of the safe harbor provisions of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Act of 1934. These
forward-looking statements are based upon our analysis of currently available
competitive, financial and economic data and our operating plans. They are
inherently uncertain and investors should recognize that events and actual
results could turn out to be significantly different from our expectations. By
way of illustration, when used in this document, words such as "anticipate,"
"believe," "expect," "plan," "intend," "estimate," "project," "will," "should,"
"could," "may," "predict" and similar expressions are intended to identify
forward-looking statements.

You should consider the following key factors when evaluating these
forward-looking statements:

- fluctuations in worldwide prices of and demand for natural gas and oil;

- fluctuations in levels of natural gas and oil exploration and development
activities;

- fluctuations in the demand for our services;

- the existence of competitors, technological changes and developments in
the oilfield services industry;

- the existence of operating risks inherent in the oilfield services
industry;

- the existence of regulatory and legislative uncertainties;

- the possibility of political instability, war or acts of terrorism in any
of the countries in which we do business; and

- general economic conditions.

Our businesses depend, to a large degree, on the level of spending by oil
and gas companies for exploration, development and production activities.
Therefore, a sustained increase or decrease in the price of natural gas or oil,
which could have a material impact on exploration, development and production
activities, could also materially affect our financial position, results of
operations and cash flows.

The above description of risks and uncertainties is by no means
all-inclusive, but is designed to highlight what we believe are important
factors to consider. For a more detailed description of risk factors, please
refer to our Annual Report on Form 10-K for the year ended December 31, 2003
filed with the U.S. Securities and Exchange Commission under Part 1, Item I,
"Risk Factors."

RESULTS OF OPERATIONS

A discussion of our results of operations for the three and six months
ended June 30, 2004 and 2003 is included below. This discussion should be read
in conjunction with our accompanying consolidated financial statements and notes
thereto and our Annual Report on Form 10-K for the year ended December 31, 2003.

As used in this Report, "we," "us," "our" and "Nabors" means Nabors
Industries Ltd. and, where the context requires, includes our subsidiaries.

The following table sets forth certain information with respect to our
reportable segments and rig activity:

<Table>
<Caption>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------------------- ----------------------------------------
INCREASE INCREASE
(DECREASE) (DECREASE)
2004 2003 --------------- 2004 2003 ----------------
(IN THOUSANDS, EXCEPT PERCENTAGES) -------- -------- ---------- --------

Reportable segments:
Operating revenues and Earnings
from unconsolidated affiliates:
Contract Drilling: (1)
U.S. Lower 48 Land Drilling.... $172,049 $114,118 $57,931 51% $ 325,417 $204,207 $121,210 59%
U.S. Land Well-servicing....... 88,162 81,504 6,658 8% 167,641 158,164 9,477 6%
U.S. Offshore.................. 31,556 24,680 6,876 28% 62,877 46,394 16,483 36%
Alaska......................... 19,701 30,446 (10,745) (35%) 49,038 66,414 (17,376) (26%)
Canada......................... 61,905 49,836 12,069 24% 200,671 150,624 50,047 33%
International.................. 107,185 96,599 10,586 11% 210,172 183,790 26,382 14%
-------- -------- ------- ---------- -------- --------
Subtotal Contract Drilling
(2).......................... 480,558 397,183 83,375 21% 1,015,816 809,593 206,223 25%
Oil and Gas (3).................. 14,173 2,487 11,686 470% 35,299 4,086 31,213 764%
Other Operating Segments
(4)(5)......................... 52,740 46,572 6,168 13% 108,678 101,761 6,917 7%
Other reconciling items (6)...... (15,603) (12,331) (3,272) (27%) (31,122) (25,789) (5,333) (21%)
-------- -------- ------- ---------- -------- --------
Total.......................... $531,868 $433,911 $97,957 23% $1,128,671 $889,651 $239,020 27%
-------- -------- ------- ---------- -------- --------
Adjusted income (loss) derived from
operating activities: (7)
Contract Drilling:
U.S. Lower 48 Land Drilling.... $ 12,971 $ 3,858 $ 9,113 236% $ 21,539 $ (79) $ 21,618 N/M(8)
U.S. Land Well-servicing....... 14,394 13,307 1,087 8% 24,127 22,952 1,175 5%
U.S. Offshore.................. 4,796 530 4,266 805% 9,613 (3,440) 13,053 379%
Alaska......................... 3,756 10,361 (6,605) (64%) 10,966 25,688 (14,722) (57%)
Canada......................... 2,851 (1,631) 4,482 275% 46,123 24,389 21,734 89%
International.................. 18,753 19,994 (1,241) (6%) 37,344 36,730 614 2%
-------- -------- ------- ---------- -------- --------
Subtotal Contract Drilling..... 57,521 46,419 11,102 24% 149,712 106,240 43,472 41%
Oil and Gas...................... 896 1,642 (746) (45%) 5,402 2,661 2,741 103%
Other Operating Segments......... (2,106) (450) (1,656) (368%) (2,537) 5,187 (7,724) (149%)
Other reconciling items (9)...... (9,645) (9,626) (19) --% (20,845) (20,094) (751) (4%)
-------- -------- ------- ---------- -------- --------
Total.......................... 46,666 37,985 8,681 23% 131,732 93,994 37,738 40%
Interest expense................... (11,387) (18,644) 7,257 39% (27,246) (38,714) 11,468 30%
Interest and dividend income....... 7,879 6,998 881 13% 14,384 14,691 (307) (2%)
Other income, net.................. 6,907 23 6,884 N/M(8) 11,326 47 11,279 N/M(8)
-------- -------- ------- ---------- -------- --------
Income before income taxes......... $ 50,065 $ 26,362 $23,703 90% $ 130,196 $ 70,018 $ 60,178 86%
-------- -------- ------- ---------- -------- --------
Rig activity:
Rig years: (10)
U.S. Lower 48 Land Drilling...... 193.4 136.8 56.6 41% 184.4 123.0 61.4 50%
U.S. Offshore.................... 15.5 15.0 .5 3% 14.6 14.2 .4 3%
Alaska........................... 6.7 9.1 (2.4) (26%) 7.2 8.9 (1.7) (19%)
Canada........................... 25.8 23.4 2.4 10% 44.5 41.0 3.5 9%
International (11)............... 65.6 59.8 5.8 10% 65.3 58.4 6.9 12%
-------- -------- ------- ---------- -------- --------
Total rig years................ 307.0 244.1 62.9 26% 316.0 245.5 70.5 29%
-------- -------- ------- ---------- -------- --------
Rig hours: (12)
U.S. Land Well-servicing......... 287,350 281,810 5,540 2% 562,498 555,323 7,175 1%
Canada Well-servicing............ 67,873 46,458 21,415 46% 185,469 139,160 46,309 33%
-------- -------- ------- ---------- -------- --------
Total rig hours................ 355,223 328,268 26,955 8% 747,967 694,483 53,484 8%
-------- -------- ------- ---------- -------- --------
</Table>

- ---------------

(1) These segments include our drilling, workover and well-servicing
operations, on land and offshore.

(3) Represents our oil and gas exploration, development and production
operations.

(6) Represents the elimination of inter-segment transactions.

(7) Adjusted income (loss) derived from operating activities is computed by:
subtracting direct costs, general and administrative expenses, depreciation
and amortization, and depletion expense from Operating revenues and then
adding Earnings from unconsolidated affiliates. Such amounts should not be
used as a substitute to those amounts reported under accounting principles
generally accepted in the United States of America (GAAP). However,
management evaluates the performance of our business units and the
consolidated company based on several criteria, including adjusted income
(loss) derived from operating activities, because it believes that this
financial measure is an accurate reflection of the ongoing profitability of
our company. A reconciliation of this non-GAAP measure to income before
income taxes, which is a GAAP measure, is provided within the table set
forth immediately following the heading Results of Operations above.

(8) The percentage is so large that it is not meaningful.

(9) Represents the elimination of inter-segment transactions and unallocated
corporate expenses.

(10) Excludes well-servicing rigs, which are measured in rig hours. Rig years
represents a measure of the number of equivalent rigs operating during a
given period. For example, one rig operating 182.5 days during a 365-day
period represents 0.5 rig years.

(11) International rig years include our equivalent percentage ownership of rigs
owned by unconsolidated affiliates which totaled 4.0 years during the three
months ended June 30, 2004 and 2003, and 8.0 years during the six months
ended June 30, 2004 and 2003.

(12) Rig hours represents the number of hours that our well-servicing rig fleet
operated during the period.

THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2004 COMPARED TO THREE MONTHS AND SIX
MONTHS ENDED JUNE 30, 2003

Operating revenues and Earnings from unconsolidated affiliates for the
three months ended June 30, 2004 totaled $531.9 million, representing an
increase of $98.0 million, or 23%, compared to the prior year quarter. Adjusted
income derived from operating activities and net income for the three months
ended June 30, 2004 totaled $46.7 million and $46.3 million ($.30 per diluted
share), respectively, representing increases of 23% and 60% compared to the
prior year quarter. Operating revenues and Earnings from unconsolidated
affiliates for the six months ended June 30, 2004 totaled $1.1 billion,
representing an increase of $239.0 million, or 27%, compared to the prior year
period. Adjusted income derived from operating activities and net income for the
six months ended June 30, 2004 totaled $131.7 million and $118.1 million ($.76
per diluted share), respectively, representing increases of 40% and 53% compared
to the prior year period.

The increase in our operating results during the three and six months ended
June 30, 2004 primarily resulted from higher revenues realized by our U.S. Lower
48 Land Drilling and Canadian operations. Revenues increased for these business
units as a result of higher activity levels and average dayrates in the first
six months of 2004 compared to the prior year period. This increase in activity
reflects an increase in demand for our services in these markets during 2003 and
2004, which resulted from continuing higher price levels for natural gas during
2003 and 2004.

Natural gas prices are the primary driver of our U.S. Lower 48 Land
Drilling, Canadian and U.S. Offshore (Gulf of Mexico) operations, while oil
prices are the primary driver of our Alaskan, International and U.S. Land
Well-servicing operations. The Henry Hub natural gas spot price (per Bloomberg)
averaged $5.42 per million cubic feet (mcf) during the period from July 1, 2003
through June 30, 2004, up from a $4.87 per mcf average during the period from
July 1, 2002 through June 30, 2003. West Texas intermediate spot oil prices (per
Bloomberg) averaged $33.72 per barrel during the period from July 1, 2003
through June 30, 2004, up from a $29.86 per barrel average during the period
from July 1, 2002 through June 30, 2003.

Our operating results for 2004 are expected to increase from levels
realized during 2003 given our current expectations of commodity prices and the
related impact on drilling and well-servicing activity during 2004. We expect
this improvement in activity across a majority of our business units, including
our U.S. Lower 48 Land Drilling, Canadian, U.S. Offshore, International and U.S.
Land Well-servicing operations. In addition to this expected increase in overall
activity, our U.S. Offshore operations are expected to improve as a result of
incremental revenues from three new platform rigs for deepwater development
projects, one of which commenced operations in the first quarter of 2004, and
two of which commenced operations late in the second quarter of 2004. We expect
results from our operations in Alaska to be reduced overall during 2004 compared
to 2003, as three significant long-term contracts were completed late in 2003
and have not yet been renewed or replaced. Our operating results for the third
quarter of 2004 are expected to increase from levels realized during the second
quarter of 2004 primarily as a result of continued improvement in our U.S. Lower
48 Land Drilling operations and a recovery from the seasonal decline in activity
for our Canadian operations experienced during the second quarter.

Contract Drilling. Our Contract Drilling operating segments contain one or
more of the following operations: drilling, workover and well-servicing, on land
and offshore. Operating revenues and Earnings from unconsolidated affiliates for
our Contract Drilling operating segments totaled $480.6 million and adjusted
income derived from operating activities totaled $57.5 million during the three
months ended June 30, 2004, representing increases of 21% and 24%, respectively,
compared to the prior year quarter. Operating revenues and Earnings from
unconsolidated affiliates for these operating segments totaled $1.0 billion and
adjusted income derived from operating activities totaled $149.7 million during
the six months ended June 30, 2004, representing increases of 25% and 41%,
respectively, compared to the prior year period. Rig years (excluding
well-servicing rigs) increased to 307.0 years and 316.0 years during the three
and six months ended June 30, 2004, respectively, from 244.1 years and 245.5
years during the three

and six months ended June 30, 2003, respectively, as a result of increased
capital spending by our customers, which resulted from the improvement in
commodity prices discussed above.

U.S. Lower 48 Land Drilling Operating revenues and adjusted income derived
from operating activities totaled $172.0 million and $13.0 million,
respectively, during the three months ended June 30, 2004, representing
increases of 51% and 236%, respectively, compared to the prior year quarter.
Operating revenues totaled $325.4 million during the six months ended June 30,
2004, representing an increase of 59% compared to the prior year period, while
adjusted income derived from operating activities totaled $21.5 million during
the six months ended June 30, 2004 compared to an adjusted loss derived from
operating activities totaling $.1 million during the prior year period. The
increase in operating results during the 2004 periods resulted from increased
drilling activity, which was driven by higher natural gas prices and is
reflected in the increase in rig years to 193.4 years and 184.4 years during the
three and six months ended June 30, 2004, respectively, compared to 136.8 years
and 123.0 years during the three and six months ended June 30, 2003,
respectively, and higher average dayrates compared to the prior year periods.

U.S. Land Well-servicing Operating revenues and adjusted income derived
from operating activities totaled $88.2 million and $14.4 million, respectively,
during the three months ended June 30, 2004, representing increases of 8%
compared to the prior year quarter. Operating revenues and adjusted income
derived from operating activities totaled $167.6 million and $24.1 million,
respectively, during the six months ended June 30, 2004, representing increases
of 6% and 5%, respectively, compared to the prior year period. The increase in
operating results during the 2004 periods primarily resulted from an increase in
average dayrates compared to the prior year periods and slightly higher
well-servicing hours, which totaled 287,350 hours and 562,498 hours during the
three and six months ended June 30, 2004, respectively, compared to 281,810
hours and 555,323 hours during the three and six months ended June 30, 2003,
respectively.

U.S. Offshore Operating revenues totaled $31.6 million during the three
months ended June 30, 2004, representing an increase of 28% compared to the
prior year quarter, while adjusted income derived from operating activities
totaled $4.8 million during the three months ended June 30, 2004 compared to $.5
million during the prior year quarter. Operating revenues totaled $62.9 million
during the six months ended June 30, 2004, representing an increase of 36%
compared to the prior year period, while adjusted income derived from operating
activities totaled $9.6 million during the six months ended June 30, 2004
compared to an adjusted loss derived from operating activities totaling $3.4
million during the prior year period. The increase in operating results during
the 2004 periods primarily resulted from higher average dayrates for most rigs
and slightly higher rig years compared to the prior year periods. The increase
in average dayrates was most significant for our platform drilling and workover
rigs for which there was also a substantial increase in operating days compared
to the prior year periods, and for our jack-up drilling and workover rigs. Rig
years for our U.S. Offshore operations totaled 15.5 years and 14.6 years for the
three and six months ended June 30, 2004, respectively, compared to 15.0 years
and 14.2 years during the three and six months ended June 30, 2003,
respectively.

Alaskan Operating revenues and adjusted income derived from operating
activities totaled $19.7 million and $3.8 million, respectively, during the
three months ended June 30, 2004, representing decreases of 35% and 64%,
respectively, compared to the prior year quarter. These decreases primarily
resulted from lower drilling activity, which is reflected in the decrease in rig
years to 6.7 years during the three months ended June 30, 2004 from 9.1 years
during the prior year quarter. Operating revenues and adjusted income derived
from operating activities totaled $49.0 million and $11.0 million, respectively,
during the six months ended June 30, 2004, representing decreases of 26% and
57%, respectively, compared to the prior year period. These decreases primarily
resulted from an incremental $5.7 million of Operating revenues recorded in the
first quarter of 2003, representing business interruption insurance proceeds
related to the damage incurred on one of our land drilling rigs in 2001, and
lower drilling activity. The decrease in drilling activity is reflected in the
decrease in rig years to 7.2 years during the six months ended June 30, 2004
from 8.9 years during the prior year period.

Canadian Operating revenues and adjusted income derived from operating
activities totaled $61.9 million and $2.9 million, respectively, during the
three months ended June 30, 2004, representing increases of 24% and 275%,
respectively, compared to the prior year quarter. Operating revenues and
adjusted income derived from operating activities totaled $200.7 million and
$46.1 million, respectively, during the six months ended June 30, 2004,
representing increases of 33% and 89%, respectively, compared to the prior year
period. The increase in operating results during the 2004 periods reflect an
increase in drilling and well-servicing revenues resulting from an overall
increase in drilling and well-servicing activity, which was driven by increased
commodity prices, and an increase in average dayrates compared to the prior year
periods. Rig years in Canada increased to 25.8 years and 44.5 years during the
three and six months ended June 30, 2004, respectively, from 23.4 years and 41.0
years during the three and six months ended June 30, 2003, respectively.
Well-servicing hours increased to 67,873 hours and 185,469 hours during the
three and six months ended June 30, 2004, respectively, from 46,458 hours and
139,160 hours during the three and six months ended June 30, 2003, respectively.

International Operating revenues and Earnings from unconsolidated
affiliates totaled $107.2 million and $210.2 million for the three and six
months ended June 30, 2004, respectively, representing increases of 11% and 14%,
respectively, compared to the prior year periods. These increases primarily
resulted from an increase in operations in Mexico and from the addition of
operations in India and Indonesia, which began in the last half of 2003.
International rig years increased to 65.6 years and 65.3 years during the three
and six months ended June 30, 2004, respectively, from 59.8 years and 58.4 years
during the three and six months ended June 30, 2003, respectively. Adjusted
income derived from operating activities totaled $18.8 million and $37.3 million
for the three and six months ended June 30, 2004, respectively, representing a
decrease of 6% and an increase of 2%, respectively, compared to the prior year
periods. Operating results for the three and six months ended June 30, 2004 were
reduced by a number of specific items that occurred during the second quarter of
2004 including 25 days of downtime on a jack-up rig operating in the Arabian
Gulf, higher rig moving expenses in Mexico, start-up deferrals in Colombia, and
the mobilization costs of rigs transferred from Kenya and Trinidad to Dubai and
the U.S. Gulf of Mexico, respectively, where these rigs are not yet under
contract. On June 22, 2004, we acquired two jack-up accommodation units and one
self-propelled jack-up work platform for a total purchase price of approximately
$58 million that are currently operating offshore Saudi Arabia under contracts
that will continue through at least October 2004, with customer options to
extend through March 2005.

Oil and Gas. This operating segment represents our oil and gas
exploration, development and production operations. Oil and Gas Operating
revenues increased to $14.2 million during the three months ended June 30, 2004
from $2.5 million during the prior year quarter, and increased to $35.3 million
during the six months ended June 30, 2004 from $4.1 million during the prior
year period. Adjusted income derived from operating activities decreased to $.9
million during the three months ended June 30, 2004 from $1.6 million during the
prior year quarter, and increased to $5.4 million during the six months ended
June 30, 2004 from $2.7 million during the prior year period. Operating revenues
for the three and six months ended June 30, 2004 and adjusted income derived
from operating activities for the six months ended June 30, 2004 increased as a
result of the agreements executed with El Paso Corporation in the fourth quarter
of 2003, while adjusted income derived from operating activities for the three
months ended June 30, 2004 decreased as a result of $2.4 million in expense
recognized during the quarter as a result of a dry hole offshore in the Gulf of
Mexico.

On May 25, 2004, we entered into an agreement with Ecopetrol S.A. under
which we will contribute between 30% and 50% of an estimated $45 million total
cost to drill exploration wells in five prospects in Colombia and the same
percentage share of costs of any additional exploration and developmental wells
in those prospects and four optional prospects in Colombia in exchange for a 25%
to 45% interest in production from the wells. On June 14, 2004, we also entered
into an agreement with Solana Petroleum Exploration Colombia Limited under which
Solana is obligated to pay 96% of our costs through the casing point on the
exploration wells in Colombia, and 75% of our other costs under the Ecopetrol
agreement, in exchange for 75% of our interest in production from those wells.
The net effect of these two agreements is that we will pay 2% of all costs to
casing point on the exploratory wells and approximately 12.5% of all

other costs, in exchange for an overall interest of 11.25% in each of the
prospects. Those numbers are reduced proportionately on two of the firm
prospects that have a lower cost-interest ratio than the other firm and optional
prospects.

Other Operating Segments. These operations include our marine
transportation and supply services, drilling technology and top drive
manufacturing, directional drilling, rig instrumentation and software, and
construction and logistics operations. Operating revenues and Earnings from
unconsolidated affiliates for our Other Operating Segments totaled $52.7 million
during the three months ended June 30, 2004 representing an increase of 13%
compared to the prior year quarter, and totaled $108.7 million during the six
months ended June 30, 2004 representing an increase of 7% compared to the prior
year period. These increases primarily resulted from increased sales of top
drives, and directional drilling and rig instrumentation systems, partially
offset by lower average dayrates and vessel utilization for our marine
transportation and supply services operations compared to the prior year
quarter. Adjusted loss derived from operating activities totaled $2.1 million
during the three months ended June 30, 2004 compared to $.5 million during the
prior year quarter, and totaled $2.5 million during the six months ended June
30, 2004 compared to adjusted income derived from operating activities totaling
$5.2 million during the prior year period. These decreases primarily resulted
from decreased margins from our marine transportation and supply services, which
was driven by lower average dayrates compared to the prior year periods.

Other Financial Information. General and administrative expenses totaled
$45.4 million during the three months ended June 30, 2004, representing an
increase of $5.0 million, or 12%, compared to the prior year quarter, and
totaled $91.0 million during the six months ended June 30, 2004, representing an
increase of $9.3 million, or 11%, compared to the prior year period. These
increases resulted from increased activity in a number of our operating segments
including our U.S. Lower 48 Land Drilling, U.S. Land Well-servicing, Canadian
and International operations. As a percentage of operating revenues, general and
administrative expenses decreased (8.6% vs. 9.4%) during the three months ended
June 30, 2004 compared to the prior year quarter, and decreased (8.1% vs. 9.3%)
during the six months ended June 30, 2004 compared to the prior year period, as
these expenses were spread over a larger revenue base.

Depreciation and amortization expense totaled $60.8 million during the
three months ended June 30, 2004, representing an increase of $5.0 million, or
9%, compared to the prior year quarter, and totaled $121.3 million during the
six months ended June 30, 2004, representing an increase of $11.9 million, or
11%, compared to the prior year period. These increases primarily resulted from
an increase in average rig years for our U.S. Lower 48 Land Drilling, Canadian
land drilling and International operations compared to the prior year periods,
and depreciation on capital expenditures made during the last half of 2003 and
the first half of 2004.

Depletion expense totaled $10.0 million during the three months ended June
30, 2004 compared to $.8 million during the prior year quarter, and totaled
$25.6 million during the six months ended June 30, 2004 compared to $1.1 million
during the prior year period. These increases resulted from depletion on oil and
gas properties added through our agreements with El Paso Corporation in the
fourth quarter of 2003.

Interest expense totaled $11.4 million during the three months ended June
30, 2004, representing a decrease of $7.3 million, or 39%, compared to the prior
year quarter, and totaled $27.2 million during the six months ended June 30,
2004, representing a decrease of $11.5 million, or 30%, compared to the prior
year period. These decreases resulted from the payment upon maturity of our 6.8%
senior notes in April 2004 and the redemption of our $825 million zero coupon
convertible senior debentures in June 2003. In June 2003 we issued $700 million
in zero coupon senior exchangeable notes; the proceeds of which were used to
redeem our $825 million senior debentures. The $700 million notes will not
accrue interest unless we become obligated to pay contingent interest, while our
$825 million senior debentures had an effective interest rate of 2.5%. The
amount of contingent interest payable per note in respect to any six-month
period will equal 0.185% of the principal amount of a note commencing on or
after June 15, 2008 only if certain conditions are met.

Interest and dividend income totaled $7.9 million during the three months
ended June 30, 2004, representing an increase of $.9 million, or 13%, compared
to the prior year quarter, and totaled
33

$14.4 million during the six months ended June 30, 2004, representing a decrease
of $.3 million, or 2%, compared to the prior year period. The increase during
the three months ended June 30, 2004 reflects income totaling approximately $2.9
million from our investment in an overseas fund. This increase was partially
offset by lower average cash and marketable securities balances (primarily
resulting from the payment of our 6.8% senior notes in April 2004) and lower
average yields on our investments resulting from an overall declining interest
rate environment, which resulted in the decrease in interest and dividend income
for the six months ended June 30, 2004 compared to the prior year period.

Other income totaled $6.9 million during the three months ended June 30,
2004 compared to $23,000 in the prior year quarter, and totaled $11.3 million
during the six months ended June 30, 2004 compared to $47,000 in the prior year
period. Other income for the three months ended June 30, 2004 includes
mark-to-market gains recorded on our range cap and floor derivative instrument
of approximately $5.6 million and net gains on marketable securities of
approximately $.8 million, while other income for the three months ended June
30, 2003 includes net gains on marketable securities of $3.1 million and gains
on long-term assets of $.8 million, partially offset by mark-to-market losses of
$2.6 million recorded on our range cap and floor derivative instrument. Other
income for the six months ended June 30, 2004 includes mark-to-market gains
recorded on our range cap and floor derivative instrument of $3.1 million and
net gains on marketable and non-marketable securities of $6.5 million, while
other income for the six months ended June 30, 2003 includes net gains on
marketable securities of $2.6 million and gains on long-term assets of $3.3
million (primarily resulting from the $1.9 million gain on a casualty insurance
settlement in our Alaskan operations), partially offset by mark-to-market losses
of $3.7 million recorded on our range cap and floor derivative instrument.

LIQUIDITY AND CAPITAL RESOURCES

CASH FLOWS

Our cash flows primarily depend on the level of spending by our primary
customers, oil and gas companies, for exploration, development and production
activities. Sustained increases or decreases in the price of natural gas or oil
could have a material impact on these activities, and could also materially
affect our cash flows. Certain uses of cash, such as the level of non-sustaining
capital expenditures, purchases and sales of marketable securities, issuances of
debt and repurchases of our common shares are within our control and are
adjusted as necessary based on market conditions. The following is a discussion
of our cash flows for the six months ended June 30, 2004 and 2003.

Operating Activities. Net cash provided by operating activities totaled
$255.5 million during the six months ended June 30, 2004, compared to net cash
provided by operating activities totaling $145.8 million during the prior year
period. During the six months ended June 30, 2004 and 2003, net income was
increased for non-cash items such as depreciation and amortization, and
depletion, and was reduced for changes in our working capital and other balance
sheet accounts.

Investing Activities. Net cash used for investing activities totaled
$224.3 million during the six months ended June 30, 2004, compared to net cash
provided by investing activities totaling $37.9 million during the prior year
period. During the six months ended June 30, 2004, cash was used for capital
expenditures and was provided by for sales, net of purchases, of marketable and
non-marketable securities.

During the six months ended June 30, 2003, cash was provided by sales, net of
purchases, of marketable and non-marketable securities and was used for capital
expenditures.

Financing Activities. Net cash used for financing activities totaled
$250.1 million during the six months ended June 30, 2004, compared to net cash
provided by financing activities of $170.4 million during the prior year period.
During the six months ended June 30, 2004, cash was used for the reduction of
long-term debt of $298.1 million (including the payment upon maturity of our
6.8% senior notes in April 2004 totaling $295.3 million) and was provided by our
receipt of proceeds totaling $42.6 million from the exercise of options to
acquire our common shares by our employees. During the six months ended June 30,
2003, cash was provided by $689.5 million in net proceeds from our issuance of
$700 million zero coupon senior exchangeable notes due 2023 and our receipt of
proceeds totaling $17.4 million from the exercise of options to acquire our
common shares by our employees, and was used for the reduction of long-term debt
of $541.0 million.

FUTURE CASH REQUIREMENTS

As of June 30, 2004, we had long-term debt, including current maturities,
of $2.0 billion and cash and cash equivalents and investments in marketable
securities of $1.2 billion.

Our $1.381 billion zero coupon convertible senior debentures due 2021 can
be put to us on February 5, 2006, February 5, 2011 and February 5, 2016, for a
purchase price equal to the issue price plus accrued original issue discount to
the date of repurchase. The amount of the purchase price would total $826.8
million, $936.2 million and $1.1 billion if the debentures were put to us on
February 5, 2006, February 5, 2011 or February 5, 2016, respectively. Our $700
million zero coupon senior exchangeable notes due 2023 can be put to us on June
15, 2008, June 15, 2013 and June 15, 2018, for a purchase price equal to 100% of
the principal amount of the notes plus contingent interest and additional
amounts, if any. We may elect to pay all or a portion of the purchase price of
the debentures and the notes in common shares instead of cash, depending upon
our cash balances and cash requirements at that time. We do not presently
anticipate using common shares to satisfy any such future purchase obligations.
In accordance with the indentures with respect to the debentures and the notes,
we cannot redeem the $1.381 billion debentures before February 5, 2006 and the
$700 million notes before June 15, 2008. After those dates, we may redeem all or
a portion of the debentures and notes for cash at any time at their accreted
value.

As of June 30, 2004, we had outstanding capital expenditure purchase
commitments of approximately $49.9 million, primarily for rig-related enhancing
and sustaining capital expenditures. In addition, during the remainder of 2004
and during 2005, we estimate that we will contribute approximately $21.2 million
and $1.9 million, respectively, in conjunction with our agreements with El Paso
Corporation.

We have historically completed a number of acquisitions and will continue
to evaluate opportunities to acquire assets or businesses to enhance our
operations. Several of our previous acquisitions were funded through issuances
of our common shares. Future acquisitions may be paid for using existing cash or
issuance of debt or Nabors shares. Such capital expenditures and acquisitions
will depend on our view of market conditions and other factors.

See our discussion of guarantees issued by Nabors that could have a
potential impact on our financial position, results of operations or cash flows
in future periods included in Note 5 to our accompanying consolidated financial
statements.

FINANCIAL CONDITION AND SOURCES OF LIQUIDITY

Our primary sources of liquidity are cash and cash equivalents, marketable
securities and cash generated from operations. As of June 30, 2004, we had cash
and cash equivalents and investments in marketable securities of $1.2 billion
(including $432.2 million of long-term marketable securities) and working
capital of $1.1 billion. This compares to cash and cash equivalents and
investments in marketable securities of $1.5 billion (including $612.4 million
of long-term marketable securities) and working capital of $917.3 million as of
December 31, 2003.

Our funded debt to capital ratio was 0.43:1 as of June 30, 2004 and 0.48:1
as of December 31, 2003. Our net funded debt to capital ratio was 0.23:1 as of
June 30, 2004 and December 31, 2003. The funded debt to capital ratio is
calculated by dividing funded debt by funded debt plus capital. Funded debt is
defined as the sum of (1) short-term borrowings, (2) current portion of
long-term debt and (3) long-term debt. Capital is defined as shareholders'
equity. The net funded debt to capital ratio nets cash and cash equivalents and
marketable securities against funded debt. This ratio is calculated by dividing
net funded debt by net funded debt plus capital. Both of these ratios are a
method for calculating the amount of leverage a company has in relation to its
capital. Our interest coverage ratio was 9.5:1 as of June 30, 2004, compared to
6.8:1 as of December 31, 2003. The interest coverage ratio is computed by
calculating the sum of income before income taxes, interest expense, and
depreciation and amortization, and depletion expense and then dividing by
interest expense. This ratio is a method for calculating the amount of cash
flows available to cover interest expense.

We have three letter of credit facilities and a Canadian line of credit
facility with various banks as of June 30, 2004. Availability and borrowings
under our credit facilities as of June 30, 2004 are as follows:

<Table>
<Caption>
(IN THOUSANDS)

Credit available............................................ $110,309
Letters of credit outstanding............................... (57,371)
--------
Remaining availability...................................... $ 52,938
--------
</Table>

We have a shelf registration statement on file with the U.S. Securities and
Exchange Commission to allow us to offer, from time to time, up to $700 million
in debt securities, guarantees of debt securities, preferred shares, depository
shares, common shares, share purchase contracts, share purchase units and
warrants. We currently have not issued any securities registered under this
registration statement.

Our current cash and cash equivalents, investments in marketable securities
and projected cash flow generated from current operations are expected to more
than adequately finance our sustaining capital expenditures, our debt service
requirements, and all other expected cash requirements for the next twelve
months. See our discussion of the impact of changes in market conditions on our
derivative financial instruments discussed under Item 3. Quantitative and
Qualitative Disclosures About Market Risk below.

OTHER MATTERS

RECENT LEGISLATION, COAST GUARD REGULATIONS AND ACTIONS

Our Sea Mar division time charters supply vessels to offshore operators,
primarily in U.S. waters. The vessels which operate in U.S. coastwise trade are
owned by one of our financing company subsidiaries, but are operated and managed
by a U.S. citizen-controlled company pursuant to long-term bareboat charters.
Our Sea Mar division time charters the vessels from this U.S. operating company
in connection with our own offshore activities in the Gulf of Mexico and in
support of other offshore operators.

endorsements on the documents of the vessels issued by the United States Coast
Guard authorize the vessels to engage in the U.S. coastwise trade. If the appeal
is decided against us, we could lose the ability to market the vessels for use
in U.S. coastwise trade.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT

In January 2003 the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46 (FIN 46), "Consolidation of Variable Interest Entities,"
which addresses the consolidation of variable interest entities (VIEs) by
business enterprises that are the primary beneficiaries. A VIE is an entity that
does not have sufficient equity investment at risk to permit it to finance its
activities without additional subordinated financial support, or whose equity
investors lack the characteristics of a controlling financial interest. The
primary beneficiary of a VIE is the enterprise that has the majority of the
risks or rewards associated with the VIE. In December 2003 the FASB issued a
revision to FIN 46, Interpretation No. 46R (FIN 46R), to clarify some of the
provisions of FIN 46, and to exempt certain entities from its requirements.
Application of FIN 46R is required in financial statements of public entities
that have interests in structures that are commonly referred to as
special-purpose entities for periods ending after December 15, 2003. Application
for all other types of VIEs is required in financial statements for periods
ending after March 15, 2004. Our adoption of FIN 46R on March 31, 2004 did not
have a material effect on our financial position, results of operations or cash
flows as of and for the three and six months ended June 30, 2004.

RECENTLY PROPOSED ACCOUNTING PRONOUNCEMENTS

In July 2004 the Emerging Issues Task Force (EITF) issued a draft abstract
for EITF Issue No. 04-8, "The Effect of Contingently Convertible Debt on Diluted
Earnings per Share," which addresses the issue of when the dilutive effect of
contingently convertible debt instruments should be included in diluted earnings
per share computations. If the concepts described in the abstract become
generally accepted accounting principles, it is possible that we would be
required to treat certain convertible debt instruments as converted for purposes
of computing diluted earnings per share, regardless of whether any triggering
contingency has been met or is likely to be met. The abstract contains a
proposed effective date for periods ending after December 15, 2004, but would
require prior period earnings per share amounts presented for comparative
purposes to be restated to conform to the provisions of the new requirements.

In December 2003 the FASB issued an Exposure Draft, "Earnings per Share
-- an Amendment of FASB Statement No. 128," which would amend the computational
guidance of Statement of Financial Accounting Standards (SFAS) No. 128,
"Earnings per Share." The proposed statement would eliminate the provisions of
SFAS 128 which permit an entity to rebut the presumption that instruments with
the option of settling in either cash or shares will be settled in shares. This
new statement would be effective for periods beginning after December 15, 2004,
but would require prior period earnings per share amounts presented for
comparative purposes to be restated to conform to the provisions of the new
requirements.

If adopted, the EITF abstract and the Exposure Draft could result in a
material dilution of our earnings per share. Nabors is considering responsive
action to the proposed accounting pronouncements, which if successful could
mitigate some of the adverse consequences of these proposed accounting
pronouncements.

We currently account for stock-based compensation as prescribed by
Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued
to Employees," and because we grant options at prices equal to the market price
of our shares on the date of the grant we do not record compensation expense
related to these grants. On March 31, 2004, the FASB issued an Exposure Draft,
"Share-Based Payment," which, if enacted in its current form, would eliminate
our ability to account for stock-based compensation using APB 25 and instead
would require us to account for stock option awards using a fair-
37

value based method resulting in compensation expense for stock option awards.
The proposed statement would be effective for stock options granted or modified
in fiscal years beginning after December 15, 2004. Additionally, for stock
options granted or modified after December 15, 1994 that have not vested as of
the effective date of the proposed statement, compensation cost will be measured
and recorded based on the same estimates of fair value calculated as of the date
of grant as currently disclosed within the table required by SFAS No. 148,
"Accounting for Stock-Based Compensation -- an Amendment to FAS 123," presented
in Note 2 to our accompanying consolidated financial statements. If enacted in
its proposed form, the proposed statement may have a material adverse effect on
our results of operations in future periods.

CRITICAL ACCOUNTING POLICIES

We disclosed our critical accounting policies in our 2003 Annual Report on
Form 10-K. No significant changes have occurred to those policies.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We may be exposed to market risk through changes in interest rates and
foreign currency risk due to our operations in international markets as
discussed in our 2003 Annual Report on Form 10-K. Material changes in our
exposure to market risk from that disclosed in our 2003 Annual Report on Form
10-K are discussed below.

On October 21, 2002, we entered into an interest rate swap transaction with
a third-party financial institution to hedge our exposure to changes in the fair
value of $200 million of our fixed rate 5.375% senior notes due 2012, which has
been designated as a fair value hedge under SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." Additionally, on October 21,
2002, we purchased a LIBOR range cap and sold a LIBOR floor, in the form of a
cashless collar, with the same third-party financial institution with the
intention of mitigating and managing our exposure to changes in the three-month
U.S. dollar LIBOR rate. This transaction does not qualify for hedge accounting
treatment under SFAS 133 and any change in the cumulative fair value of this
transaction is reflected as a gain or loss in our consolidated statements of
income.

The fair value of our interest rate swap agreement recorded as a derivative
liability and included in other long-term liabilities totaled approximately $1.9
million as of June 30, 2004. The fair value of this agreement recorded as a
derivative asset and included in other long-term assets totaled approximately
$4.2 million as of December 31, 2003. The carrying value of our 5.375% senior
notes has been decreased by the same amount as of June 30, 2004 and increased by
the same amount as of December 31, 2003.

The fair value of our range cap and floor transaction recorded as a
derivative liability and included in other long-term liabilities totaled
approximately $3.7 million as of December 31, 2003. In June 2004 we unwound $100
million of the $200 million range cap and floor derivative instrument. The fair
value of our range cap and floor transaction recorded as a derivative asset and
included in other long-term assets totaled $.6 million as of June 30, 2004. We
recorded mark-to-market gains, included in other income, of approximately $5.6
million and $3.1 million for the three and six months ended June 30, 2004,
respectively, resulting from the change in cumulative fair value of this
derivative instrument during those periods.

ITEM 4. CONTROLS AND PROCEDURES

(a) Disclosure Controls and Procedures. We maintain a set of disclosure
controls and procedures that are designed to provide reasonable assurance that
information required to be disclosed in our reports filed under the Securities
and Exchange Act of 1934, as amended, is recorded, processed, summarized, and
reported within the time periods specified in the U.S. Securities and Exchange
Commission's rules and forms. We have investments in certain unconsolidated
entities that we do not control or manage. As we do not control or manage these
entities, our disclosure controls and procedures with respect to such entities
are necessarily more limited than those we maintain with respect to our
consolidated subsidiaries.

We evaluated the effectiveness of the design and operation of our
"disclosure controls and procedures" (as defined in Rule 13a-15(e) of the
Exchange Act) under the supervision and with the participation of management,
including our Chairman and Chief Executive Officer and Chief Financial Officer,
as of the end of this period covered by this report. Based on that evaluation,
our Chairman and Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures are effective in timely making known
to them material information relating to Nabors and its consolidated
subsidiaries required to be disclosed in our reports filed or submitted under
the Exchange Act.

(b) Internal Control Over Financial Reporting. There has been no change in
our internal control over financial reporting during the quarter ended June 30,
2004 that has materially affected, or is reasonably likely to materially affect,
our internal control over financial reporting.

PART II OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

At the 2004 Annual General Meeting of Shareholders of Nabors Industries
Ltd. held on June 1, 2004, 127,198,828 shares were present in person or by
proxy, constituting 85.47% of the outstanding shares of Nabors entitled to vote,
which includes both common shares and the preferred share voting on behalf of
holders of common shares of Nabors Exchangeco (Canada) Inc. The matters voted
upon at the annual meeting were:

Election of Directors: The shareholders elected two Class I directors to
the Board of Directors of Nabors Industries, Inc. to serve for a three-year
term, until 2007:

<Table>

James L. Payne
Votes cast in favor......................................... 122,601,325
Votes withheld.............................................. 4,597,503

Hans W. Schmidt
Votes cast in favor......................................... 124,040,566
Votes withheld.............................................. 3,158,262
</Table>

Class II Directors Anthony G. Petrello, Myron M. Sheinfeld, and Martin J.
Whitman continued in office with terms expiring in 2005. Class III Directors,
Eugene M. Isenberg and Jack Wexler continued in office with terms expiring in
2006.

Appointment of Independent Auditors: The shareholders appointed
PricewaterhouseCoopers LLP as independent auditors of Nabors, and authorized the
Audit Committee of the Board of Directors to set the auditors' remuneration:

<Table>

Appointment of PricewaterhouseCoopers as Independent
Auditors
Votes cast in favor......................................... 124,206,834
Votes cast against.......................................... 2,295,528
Votes abstaining............................................ 696,466
</Table>

Shareholder Proposal to Change Nabors' Jurisdiction of Incorporation from
Bermuda to Delaware: The shareholders rejected the shareholder proposal by the
following vote:

<Table>

Shareholder Proposal
Votes cast in favor......................................... 11,211,233
Votes cast against.......................................... 94,579,818
Votes abstaining............................................ 1,092,554
</Table>

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

<Table>

15 Awareness Letter of Independent Registered Public Accounting
Firm.
31.1 Certification of Chairman and Chief Executive Officer
pursuant to Rule 13a-14(a) of the Securities Exchange Act of
1934, as Adopted Pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002.
31.2 Certification of Vice President and Chief Financial Officer
pursuant to Rule 13a-14(a) of the Securities Exchange Act of
1934, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of Chairman and Chief Executive Officer, and
Vice President and Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
</Table>

(b) Reports on Form 8-K

- Report on Form 8-K furnished to the U.S. Securities and Exchange
Commission on April 27, 2004, with respect to Nabors' press release
announcing results for the first quarter ended March 31, 2004.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

NABORS INDUSTRIES LTD.

/s/ Anthony G. Petrello
--------------------------------------
Anthony G. Petrello
Deputy Chairman, President and Chief
Operating Officer

/s/ Bruce P. Koch
--------------------------------------
Bruce P. Koch
Vice President and Chief Financial
Officer

Dated: August 6, 2004

INDEX TO EXHIBITS

<Table>
<Caption>
EXHIBITS DESCRIPTION
- -------- -----------

15 Awareness Letter of Independent Registered Public Accounting
Firm.
31.1 Certification of Chairman and Chief Executive Officer
pursuant to Rule 13a-14(a) of the Securities Exchange Act of
1934, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of Vice President and Chief Financial Officer
pursuant to Rule 13a-14(a) of the Securities Exchange Act of
1934, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of Chairman and Chief Executive Officer, and
Vice President and Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
</Table>