NABORS INDUSTRIES LTD - 10-Q Quarterly Report

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

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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, 2003

COMMISSION FILE NUMBER: 000-49887

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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.)

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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 31, 2003 was 146,470,489. In addition, our subsidiary, Nabors Exchangeco
(Canada) Inc., has 423,193 exchangeable shares outstanding as of July 31, 2003
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.

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NABORS INDUSTRIES LTD. AND SUBSIDIARIES

INDEX

PART I FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

NABORS INDUSTRIES LTD. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(UNAUDITED)

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

2

NABORS INDUSTRIES LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)

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

3

NABORS INDUSTRIES LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

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)

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

5

NABORS INDUSTRIES LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY (CONTINUED)
(UNAUDITED)

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

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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 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 43 platform, 16 jack-up
and three barge rigs in the Gulf of Mexico and 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 oilfield management,
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 290 fluid hauling trucks,
approximately 700 fluid storage tanks, eight saltwater disposal wells and other
auxiliary equipment used in domestic drilling, workover and well-servicing
operations. In addition, we own a fleet of 30 marine transportation and supply
vessels, primarily in the Gulf of Mexico, which provide transportation of
drilling materials, supplies and crews for offshore operations. 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.

Our overall business is conducted through two major segments: (1) Contract
Drilling and (2) Manufacturing and Logistics. Our Contract Drilling segment
includes our drilling, workover and well-servicing operations, on land and
offshore, and our Manufacturing and Logistics segment includes our marine
transportation and supply services, top drive manufacturing, directional
drilling, rig instrumentation and software, and construction and logistics
operations.

As used in this Report, "we," "us," "our" and "Nabors" means Nabors
Industries Ltd. and, where the context requires, includes our subsidiaries.
Nabors became the publicly traded parent company of the Nabors group of
companies, effective June 24, 2002, pursuant to the corporate reorganization
described in our Annual Report on Form 10-K for the year ended December 31,
2002.

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, 2002. In our
management's opinion, the consolidated financial statements contain all
adjustments necessary to present fairly our financial position as of June 30,
2003, the results of our operations for each of the three-month and six-month
periods ended June 30, 2003 and 2002, and our cash flows for the six months
ended June 30, 2003 and 2002, in accordance with GAAP. Interim results for the
three and six months ended June 30, 2003 may not be indicative of results that
will be realized for the full year ending December 31, 2003.

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Our independent accountants have performed a review of, and issued a report
on, these consolidated interim financial statements in accordance with standards
established by the American Institute of Certified Public Accountants. Pursuant
to Rule 436(c) under the U.S. 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 and
all majority-owned subsidiaries. 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 affiliated entities accounted for using the equity method totaled
$58.4 million and $58.6 million as of June 30, 2003 and December 31, 2002,
respectively, and are included in other long-term assets in our consolidated
balance sheets.

RECLASSIFICATIONS

During the fourth quarter of 2002, we revised the classification of
revenues for certain rigs that we own that are leased to our joint venture in
Saudi Arabia, in which we have a 50% ownership interest. We now report 100% of
these revenues as Operating revenues. Previously, we had reported 50% of these
lease revenues as Earnings from unconsolidated affiliates and 50% as Operating
revenues. The effect of this change in classification resulted in an increase in
Operating revenues and offsetting decrease in Earnings from unconsolidated
affiliates of $6.1 million and $11.4 million for the three and six months ended
June 30, 2002, respectively. These reclassifications had no impact on total
revenues and other income, or net income.

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 net income and
earnings per share as if we had applied the fair value recognition

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provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," to our
stock-based employee compensation.

The pro forma amounts above were estimated using the Black-Scholes
option-pricing model with the following weighted average assumptions for grants
during the three and six months ended June 30, 2003 and 2002, respectively:
risk-free interest rates of 2.22% and 3.79%; volatility of 47.58% and 48.19%;
dividend yield of 0.0% for both periods; and expected life of 3.5 years for both
periods.

RECENT ACCOUNTING PRONOUNCEMENTS

In November 2002 the Financial Accounting Standards Board (FASB) issued
Interpretation No. 45 (FIN 45), "Guarantor's Accounting and Disclosure
Requirements, Including Guarantees of Indebtedness of Others." FIN 45 requires
that upon issuance of certain types of guarantees, a guarantor recognize and
account for the fair value of the guarantee as a liability. FIN 45 contains
exclusions to this requirement, including the exclusion of a parent's guarantee
of its subsidiaries' debt to a third party. The initial recognition and
measurement provisions of FIN 45 have been applied on a prospective basis for
guarantees issued or modified after December 31, 2002. During the six months
ended June 30, 2003, we issued new standby letters of credit which serve as
guarantees under the provisions of FIN 45. The application of the recognition
and measurement provisions of FIN 45 to these guarantees was insignificant. The
disclosure requirements of FIN 45 are effective for financial statements of both
interim and annual periods ending after December 15, 2002 and are included in
Note 6.

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. The consolidation requirements of FIN 46 apply immediately to VIEs
created after January 31, 2003. For VIEs created at an earlier date, the
consolidation requirements apply in the first fiscal year or interim period
beginning after June 15, 2003. Certain disclosure requirements apply in all
financial statements issued after January 31, 2003, regardless of when the VIE
was established. Based on current information, Nabors believes it has no
material interests in VIEs that require disclosure or consolidation under FIN
46.

In May 2003 the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS 149 amends and clarifies
financial accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities
under SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS 149 is effective in relation to certain issues for fiscal
quarters that began prior to June 15, 2003 and

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for certain contracts entered into after June 30, 2003. The adoption of SFAS 149
had no initial impact on our financial position, results of operations or cash
flows as of and for the three and six months ended June 30, 2003.

In May 2003 the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." This statement
establishes standards for how an issuer classifies and measures in its statement
of financial position certain financial instruments with characteristics of both
liabilities and equity. In accordance with the standard, financial instruments
that embody obligations for the issuer are required to be classified as
liabilities. SFAS 150 is effective for financial instruments entered into or
modified after May 31, 2003, and otherwise shall be effective at the beginning
of the first interim period beginning after June 15, 2003. The adoption of SFAS
150 had no initial impact on our financial position, results of operations or
cash flows as of and for the three and six months ended June 30, 2003.

NOTE 3 LONG-TERM DEBT

On June 10, 2003, Nabors Industries, Inc. (Nabors Delaware), our
wholly-owned subsidiary, completed a private placement of $700 million aggregate
principal amount of zero coupon senior exchangeable notes due 2023 that are
fully and unconditionally guaranteed by us. The notes were reoffered by the
initial purchaser of the notes to qualified institutional buyers under Rule 144A
of the Securities Act of 1933, as amended (the Securities Act), and outside the
United States in accordance with Regulation S under the Securities Act. The
notes do not bear interest, do not accrete and have a zero yield to maturity,
unless Nabors Delaware becomes obligated to pay contingent interest as defined
in the note indenture and described below.

The notes are exchangeable at the option of the holders into 14.2653 common
shares of Nabors per $1,000 principal amount of notes (subject to adjustment for
certain events) contingent upon the following circumstances: (1) if in any
calendar quarter beginning after the quarter ending September 30, 2003, 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 120%, or with
respect to all calendar quarters beginning on or after July 1, 2008, 110% of the
applicable exchange price per share of the Nabors' common shares on such last
trading day, (2) subject to certain exceptions, during the five business-day
period after any ten consecutive trading-day period in which the trading price
per $1,000 principal amount of notes for each day of the ten trading-day period
was less than 95% of the product of the closing sale price of such common shares
and the exchange rate of such note, (3) if we call the notes for redemption, or
(4) upon the occurrence of specified corporate transactions described in the
note indenture.

The notes are unsecured and are effectively junior in right of payment to
any of Nabors Delaware's future secured debt. The notes will rank equally with
any of Nabors Delaware's other existing and future unsecured and unsubordinated
debt and will be senior in right of payment to any of Nabors Delaware's
subordinated debt. The guarantee of Nabors will be similarly unsecured and have
a similar ranking to the notes so guaranteed. Holders of the notes have the
right to require Nabors Delaware to repurchase the notes at a purchase price
equal to 100% of the principal amount of the notes plus contingent interest and
additional amounts, if any, on June 15, 2008, June 15, 2013 and June 15, 2018 or
upon a fundamental change as described in the note indenture. If Nabors Delaware
is required to repurchase the notes, Nabors Delaware will have the right to
deliver, in lieu of cash, our common shares or a combination of cash and common
shares, subject to certain conditions. If Nabors Delaware elects to pay all or a
portion of the purchase price in our common shares, the number of common shares
we will issue will be equal to the purchase price divided by the market price of
the Nabors common shares. For these purposes, the market price means the average
of the sale prices of our common shares for the five trading day period ending
on the third business day prior to the applicable purchase date.

Nabors Delaware will be obligated to pay contingent interest during any
six-month period from June 15 to December 14 or from December 15 to June 14
commencing on or after June 15, 2008 for

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which the average trading price of the notes for each day of the applicable five
trading day reference period equals or exceeds 120% of the principal amount of
the notes as of the day immediately preceding the first day of the applicable
six-month interest period. 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. The five day trading reference period means the five trading days ending
on the second trading day immediately preceding the relevant six-month interest
period.

We used a portion of the net proceeds from the issuance of the notes to
redeem the remaining outstanding principal amount of Nabors Delaware's $825
million zero coupon convertible senior debentures due 2020 on June 20, 2003 and
our associated guarantees. The redemption price was $655.50 per $1,000 principal
amount of the debentures for an aggregate redemption price paid of approximately
$494.9 million. The redemption of the debentures did not result in any gain or
loss as the debentures were redeemed at prices equal to their carrying value on
June 20, 2003. The remainder of the proceeds of the notes were invested in cash
and marketable securities.

On April 1, 2003, we redeemed our 8.625% senior subordinated notes due
April 2008 and all associated guarantees at a redemption price of $1,043.13 per
$1,000 principal amount of the notes together with accrued and unpaid interest
to the date of redemption. The total redemption price was $45.2 million and
resulted in the recognition of a pretax loss of approximately $.9 million,
resulting from the redemption of the notes at prices higher than their carrying
value on April 1, 2003. This loss was recorded in other income in our
consolidated statements of income in the current quarter.

NOTE 4 DERIVATIVE FINANCIAL INSTRUMENTS

Nabors Delaware's $700 million zero coupon senior exchangeable notes due
2023 include a contingent interest provision, discussed in Note 3 above, which
qualifies as an embedded derivative under SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This embedded derivative is
required to be separated from the notes and valued at its fair value at the
inception of the note indenture. Any subsequent change in fair value will be
marked-to-market through our statements of income.

The fair value of the contingent interest provision at inception of the
note indenture was minimal. In addition, there was no significant change in the
fair value of this embedded derivative through June 30, 2003, resulting in no
impact on our statements of income for the three and six months ended June 30,
2003.

NOTE 5 INCOME TAXES

Our effective income (benefit) tax rate was (10%) during the three and six
months ended June 30, 2003 compared to 25% for the prior year periods. The tax
benefit position in 2003 resulted primarily from 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 legislative
proposals being considered by the U.S. Congress, and any responsive action taken
by Nabors.

NOTE 6 COMMITMENTS AND CONTINGENCIES

LITIGATION

On May 23, 2002, Steve Rosenberg, an individual shareholder of Nabors,
filed a complaint against Nabors and its directors in the United States District
Court for the Southern District of Texas (Civil Action No. 02-1942), alleging
that Nabors' May 10, 2002 proxy statement/prospectus contained certain material
misstatements and omissions in violation of federal securities laws and state
law. Nabors' May 10, 2002 proxy statement/prospectus was sent to shareholders in
connection with the special meeting to consider and vote on Nabors' proposed
reorganization and effective reorganization in Bermuda. Rosenberg requested that
the Court either enjoin the closing of the shareholder vote on the scheduled
date or the

11

effectuation of the reorganization. In addition, Rosenberg purported to bring a
class action on behalf of all shareholders, alleging that Nabors and its
directors violated their state law fiduciary duties by making these alleged
misstatements and omissions.

On March 18, 2003, the Court granted our motion and dismissed all claims
with prejudice. On April 14, 2003, Rosenberg filed an appeal of the United
States District Court's decision to the United States Fifth Circuit Court of
Appeals. The parties entered into settlement negotiations and in July 2003
reached a confidential settlement of all disputes between the parties. This
settlement had no material effect on our consolidated financial position,
results of operations or cash flows.

Nabors and its subsidiaries are defendants or otherwise involved in a
number of other lawsuits in the ordinary course of their business. In the
opinion of management, our ultimate liability with respect to 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 act 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 that the likelihood that we would be required to
perform or otherwise incur any significant 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:

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NOTE 7 EARNINGS PER SHARE

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

(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 due 2020, as the conversion in that period would have been
dilutive. For the three months ended June 30, 2003 and 2002 and the six
months ended June 30, 2002, the weighted average number of shares
outstanding-diluted excludes 7.2 million, 8.1 million and 8.1 million,
respectively, potentially dilutive shares issuable upon the conversion of
our $825 million zero coupon convertible senior debentures due 2020 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, 2003 and 2002 and for the six months ended June 30, 2002 also excludes
the related add-back of interest expense, net of tax, of $1.7 million, $1.9
million and $3.8 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 $.24 and $.23 for the three months ended June 30,
2003 and 2002, respectively, and at or above $.46 for the six months ended
June 30, 2002. We redeemed for cash the remaining outstanding principal
amount of our $825 million zero coupon convertible senior debentures due
2020 on June 20, 2003.

(2) For the three and six months ended June 30, 2003 and 2002, the weighted
average number of shares outstanding-diluted excludes 8.5 million
potentially dilutive shares issuable upon the conversion of our

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$1.381 billion zero coupon convertible senior debentures due 2021 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, 2003 and 2002 excludes the related add-back of interest expense of $3.0
million and $2.9 million, respectively, and net income for the six months
ended June 30, 2003 and 2002 excludes the related add-back of interest
expense of $6.0 million and $5.9 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 $.36 and $.35 for the three
months ended June 30, 2003 and 2002, respectively, and at or above $.71 and
$.69 for the six months ended June 30, 2003 and 2002, respectively.

(3) Includes the weighted average number of common shares of Nabors and the
weighted average number of exchangeable shares of Nabors Exchangeco (Canada)
Inc.

(4) Diluted earnings per share for the three and six months ended June 30, 2003
excludes 10.0 million potentially dilutive shares issuable upon the exchange
of our $700 million zero coupon exchangeable senior notes due 2023. Such
shares are contingently exchangeable under certain circumstances discussed
in Note 3 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, 2003. These notes were issued in June 2003 and therefore did not impact
the calculation of diluted earnings per share for the three and six months
ended June 30, 2002.

NOTE 8 SUPPLEMENTAL INCOME STATEMENT INFORMATION

Other income includes the following:

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NOTE 9 SEGMENT INFORMATION

The following table sets forth financial information with respect to our
reportable segments:

(1) Includes Earnings from unconsolidated affiliates, accounted for by the
equity method, of $1.0 million for the three months ended June 30, 2003 and
2002, and $1.9 million and $2.1 million for the six months ended June 30,
2003 and 2002, respectively.

(2) Includes Earnings from unconsolidated affiliates, accounted for by the
equity method, of $.4 million and $3.4 million for the three months ended
June 30, 2003 and 2002, respectively, and $5.4 million and $7.9 million for
the six months ended June 30, 2003 and 2002, respectively.

(3) Represents the elimination of inter-segment manufacturing and logistics
sales.

(4) Adjusted income derived from operating activities is computed by:
subtracting direct costs, general and administrative expenses, and
depreciation and amortization 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
derived from operating activities, because it believes that this financial
measure is an accurate

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reflection of the ongoing profitability of our company. A reconciliation of
this non-GAAP measure to consolidated income before income taxes, which is a
GAAP measure, is provided within the table above.

(5) Includes the elimination of inter-segment transactions and unallocated
corporate expenses, assets and capital expenditures.

(6) Includes $25.1 million and $25.3 million of investments in unconsolidated
affiliates, accounted for by the equity method, as of June 30, 2003 and
December 31, 2002, respectively.

(7) Includes $33.3 million of investments in unconsolidated affiliates,
accounted for by the equity method, as of June 30, 2003 and December 31,
2002.

NOTE 10 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, in August 2002.

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 Nabors' and Nabors
Delaware's investments in their subsidiaries using the equity method of
accounting.

The following condensed consolidating financial information presents:
condensed consolidating balance sheets as of June 30, 2003 and December 31,
2002, statements of income for the three and six months ended June 30, 2003 and
2002, and statements of cash flows for the six months ended June 30, 2003 and
2002 of (a) Nabors, Parent/Guarantor after June 24, 2002 and
Non-Parent/Non-Guarantor prior to June 24, 2002, (b) Nabors Delaware, issuer of
public debt securities guaranteed by Nabors and guarantor of the $225 million
4.875% senior notes due 2009 issued by Nabors Holdings, (c) Nabors Holdings,
issuer of the $225 million 4.875% senior notes due 2009, (d) the non-guarantor
subsidiaries, (e) consolidating adjustments necessary to consolidate Nabors and
its subsidiaries and (f) Nabors on a consolidated basis.

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CONDENSED CONSOLIDATING BALANCE SHEETS

18

CONDENSED CONSOLIDATING STATEMENTS OF INCOME

22

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

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REPORT OF INDEPENDENT ACCOUNTANTS

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, 2003, and the related
consolidated statements of income for each of the three-month and six-month
periods ended June 30, 2003 and 2002 and the consolidated statements of cash
flows and of changes in stockholders' equity for the six-month periods ended
June 30, 2003 and 2002. These interim financial statements are the
responsibility of the Company's management.

We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. 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
generally accepted auditing standards, 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 statements for
them to be in conformity with accounting principles generally accepted in the
United States of America.

We previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet as of
December 31, 2002, 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 January 29, 2003, except for Note 21,
as to which the date is March 18, 2003, we expressed an unqualified opinion on
those consolidated financial statements. In our opinion, the accompanying
consolidated balance sheet information as of December 31, 2002, 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
July 29, 2003

25

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

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 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 43 platform, 16 jack-up
and three barge rigs in the Gulf of Mexico and 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 oilfield management,
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 290 fluid hauling trucks,
approximately 700 fluid storage tanks, eight saltwater disposal wells and other
auxiliary equipment used in domestic drilling, workover and well-servicing
operations. In addition, we own a fleet of 30 marine transportation and supply
vessels, primarily in the Gulf of Mexico, which provide transportation of
drilling materials, supplies and crews for offshore operations. 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.

Our overall business is conducted through two major segments: (1) Contract
Drilling and (2) Manufacturing and Logistics. Our Contract Drilling segment
includes our drilling, workover and well-servicing operations, on land and
offshore, and our Manufacturing and Logistics segment includes our marine
transportation and supply services, top drive manufacturing, directional
drilling, rig instrumentation and software, and construction and logistics
operations. A discussion of our results of operations for the three and six
months ended June 30, 2003 and 2002 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,
2002.

As used in this Report, "we," "us," "our" and "Nabors" means Nabors
Industries Ltd. and, where the context requires, includes our subsidiaries.
Nabors became the publicly traded parent company of the Nabors group of
companies, effective June 24, 2002, pursuant to the corporate reorganization
described in our Annual Report on Form 10-K for the year ended December 31,
2002.

FORWARD-LOOKING STATEMENTS

We often discuss expectations regarding our future markets, demand for our
products and services, and our performance in our annual and quarterly reports,
press releases, and other written and oral statements. Statements that relate to
matters that are not historical facts are "forward-looking statements" within
the meaning of the safe harbor provisions of Section 27A of the Securities
Exchange Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
These "forward-looking statements" are based on an analysis of currently
available competitive, financial and economic data and our operating plans. They
are inherently uncertain and investors must 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.

26

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 and production activities,
could also materially affect our financial condition, 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, 2002
filed with the Securities and Exchange Commission under Item I, Part VI, "Risk
Factors."

27

RESULTS OF OPERATIONS

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

(1) This segment includes our drilling, workover and well-servicing operations,
on land and offshore.

(2) Includes Earnings from unconsolidated affiliates, accounted for by the
equity method, of $1.0 million for the three months ended June 30, 2003 and
2002, and $1.9 million and $2.1 million for the six months ended June 30,
2003 and 2002, respectively.

(3) This segment includes our marine transportation and supply services, top
drive manufacturing, directional drilling, rig instrumentation and
software, and construction and logistics operating units.

(4) Includes Earnings from unconsolidated affiliates, accounted for by the
equity method, of $.4 million and $3.4 million for the three months ended
June 30, 2003 and 2002, respectively, and $5.4 million and $7.9 million for
the six months ended June 30, 2003 and 2002, respectively.

(5) Represents the elimination of inter-segment manufacturing and logistics
sales.

(6) Adjusted cash flow derived from operating activities is computed by:
subtracting direct costs and general and administrative expenses 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 based on several criteria, including adjusted cash flows
derived from operating activities, because it believes that this financial
measure is an accurate reflection of the ongoing performance of our
business units. The following is a

29

reconciliation of net cash provided by operating activities from our
consolidated statements of cash flows, which is a GAAP measure, to this non-GAAP
measure:

(7) Includes the elimination of inter-segment transactions and unallocated
corporate expenses.

(8) Adjusted income derived from operating activities is computed by:
subtracting direct costs, general and administrative expenses, and
depreciation and amortization 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
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 consolidated income
before income taxes, which is a GAAP measure, is provided within the table
above.

(9) Excludes well-servicing rigs, which are measured in rig hours. Includes our
percentage ownership of rigs from unconsolidated affiliates. 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.

(10) International rig years include our percentage ownership of rigs from
unconsolidated affiliates which totaled 4.0 years and 3.5 years during the
three months ended June 30, 2003 and 2002, respectively, and 8.0 years and
7.0 years during the six months ended June 30, 2003 and 2002, respectively.

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

(12) The Canada well-servicing operation was acquired during April 2002 as part
of our acquisition of Enserco Energy Service Company Inc.

30

THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2003 COMPARED TO THREE MONTHS AND SIX
MONTHS ENDED JUNE 30, 2002

Operating revenues and Earnings from unconsolidated affiliates for the
three months ended June 30, 2003 totaled $433.9 million, representing an
increase of $77.4 million, or 22%, as compared to the prior year quarter.
Current quarter adjusted cash flow derived from operating activities, adjusted
income derived from operating activities and net income totaled $94.6 million,
$38.0 million and $29.0 million ($.19 per diluted share), respectively,
representing increases of 11%, 1% and 14% compared to the prior year quarter.
Operating revenues and Earnings from unconsolidated affiliates for the six
months ended June 30, 2003 totaled $889.7 million, representing an increase of
$146.3 million, or 20%, as compared to the prior year period. Adjusted cash flow
derived from operating activities, adjusted income derived from operating
activities and net income for the six months ended June 30, 2003 totaled $204.6
million, $94.0 million and $77.1 million ($.50 per diluted share), respectively,
representing increases (decreases) of 8%, (5%) and 14% compared to the prior
year period.

The increase in our Operating revenues and Earnings from unconsolidated
affiliates during the three months ended June 30, 2003 as compared to the prior
year quarter primarily resulted from higher revenues realized by our Canadian,
U.S. Lower 48 Land Drilling and International operations. The increase in our
Operating revenues and Earnings from unconsolidated affiliates during the six
months ended June 30, 2003 compared to the prior year period primarily resulted
from higher revenues realized by our Canadian and International operations. The
improved revenues from our Canadian operations resulted from a significant
increase in drilling activity primarily from our acquisition of Enserco Energy
Service Company Inc. in April 2002. The Enserco acquisition increased the number
of drilling rigs owned and operated by Nabors in Canada by 30 drilling rigs
while also adding over 200 well-servicing rigs. Additionally, the level of
drilling activity for our Canadian land drilling business increased during the
current year periods as a result of higher average price levels for natural gas.
International revenues improved primarily as a result of new contracts for our
operation in Mexico. The improved revenues for our U.S. Lower 48 Land Drilling
operations in the current quarter resulted from higher activity levels driven by
a gradual increase in demand for drilling services in that market during the
first half of 2003 partially offset by lower average dayrates.

The increase in adjusted cash flow derived from operating activities during
the three and six months ended June 30, 2003 resulted primarily from the
increase in revenues discussed above. Our results for the six months ended June
30, 2003 were also positively impacted by business interruption insurance
proceeds recorded in the first quarter of 2003 related to damage incurred on one
of our land drilling rigs in Alaska during 2001 (see discussion below). However,
the overall increases in adjusted cash flow derived from operating activities in
the current year periods were partially offset by lower average dayrates in our
U.S. Lower 48 Land Drilling operations resulting from the weakness in this
market over the period beginning in the second quarter of 2001 and extending
through the end of 2002.

The changes in adjusted income derived from operating activities for the
three and six months ended June 30, 2003 were impacted by increases in
depreciation and amortization expense of 18% and 21%, respectively, compared to
the prior year periods, resulting in only a small increase for the current
quarter and a decrease for the six months ended June 30, 2003 compared to the
prior year periods. These increases in depreciation and amortization expense
resulted from full periods of depreciation in the current year periods on assets
acquired in the April 2002 Enserco acquisition and depreciation in the current
year periods on assets acquired in the October 2002 Ryan Energy Technologies,
Inc. acquisition, as well as other capital expenditures during the second half
of 2002 and first half of 2003.

Natural gas prices are the primary driver of our U.S. Lower 48 Land
Drilling, Canadian land and U.S. Offshore (Gulf of Mexico) operations while oil
prices are the primary driver of our Alaskan, International and U.S.
Well-servicing operations. Natural gas and oil prices began increasing in the
latter part of the first quarter of 2002, and averaged $5.64 per million cubic
feet (mcf) and $29.02 per barrel, respectively, during the current year quarter,
as compared to $3.39 per mcf and $26.29 per barrel for the prior year quarter.
Natural gas and oil prices averaged $6.00 per mcf and $31.45 per barrel,
respectively,

31

during the six months ended June 30, 2003, as compared to $2.98 per mcf and
$24.01 per barrel for the prior year period.

Our operating results for the third quarter of 2003 are expected to
increase from levels realized during the current quarter primarily as a result
of the expected continuance of improved drilling activity for our U.S. Lower 48
Land Drilling operations and expected improvements in activity levels for our
Canadian drilling operations, which were impacted by a seasonal decline in
activity during the second quarter. Canadian drilling activity is subject to
substantial levels of seasonality, as activity levels typically peak in the
first quarter, decline substantially in the second quarter, and then generally
increase over the last half of the year. As a result of our recent acquisitions
in Canada, this seasonality has a more significant impact on our overall results
as our Canadian operations represent a larger portion of our overall operations.
We also expect a continuing recovery in our U.S. Offshore (Gulf of Mexico)
operations, which began during the current quarter. Results for the remainder of
2003 should also be positively impacted by the addition of new contracts in our
International operations. Our U.S. Land Well-servicing operations should
maintain a steady to slightly upward trend for the remainder of 2003.
Additionally, we expect results from our operations in Alaska to remain flat
throughout the remainder of 2003.

Contract drilling. The business units that comprise this segment contain
one or more of the following operations: drilling, workover and well-servicing,
on land and offshore. For the three months ended June 30, 2003, Operating
revenues and Earnings from unconsolidated affiliates for the contract drilling
segment totaled $399.7 million and adjusted cash flow derived from operating
activities totaled $99.6 million, representing increases of 23% and 22%,
respectively, compared to the prior year quarter. Rig years (excluding
well-servicing rigs) increased to 244.1 years during the three months ended June
30, 2003 from 194.6 years during the prior year quarter. For the six months
ended June 30, 2003, Operating revenues and Earnings from unconsolidated
affiliates for the contract drilling segment totaled $813.7 million and adjusted
cash flow derived from operating activities totaled $209.4 million, representing
increases of 19% and 15%, respectively, compared to the prior year period. Rig
years (excluding well-servicing rigs) increased to 245.5 years during the six
months ended June 30, 2003 from 203.8 years during the prior year period.

U.S. Lower 48 Land Drilling Operating revenues totaled $116.6 million and
$208.3 million for the three and six months ended June 30, 2003, respectively,
representing increases of 20% and 1% for the three and six months ended June 30,
2003, respectively, as compared to the prior year periods. Adjusted cash flow
derived from operating activities totaled $23.4 million and $37.5 million for
the three and six months ended June 30, 2003, respectively, representing
decreases of 1% and 28%, respectively, compared to the prior year periods. The
increases in revenues for the three and six months ended June 30, 2003 resulted
primarily from an increase in rig years driven by the overall increase in
natural gas drilling activity that began in the first quarter of 2003, which was
only partially offset by lower average dayrates compared to the prior year
periods. The decreases in adjusted cash flow derived from operating activities
for the three and six months ended June 30, 2003 resulted from the lower average
dayrates compared to the prior year periods combined with rising labor costs.
Drilling activity for our U.S. Land Drilling operations expanded considerably
during the first half of 2003, increasing rig years to 136.8 years for the
current quarter compared to 105.6 years during the prior year quarter, and
increasing rig years to 123.0 years for the six months ended June 30, 2003
compared to 106.6 years during the prior year period.

U.S. Land Well-servicing Operating revenues and adjusted cash flow derived
from operating activities totaled $81.5 million and $18.8 million, respectively,
during the current quarter, representing increases of 7% and 16%, respectively,
compared to the prior year quarter, and totaled $158.2 million and $34.0
million, respectively, during the six months ended June 30, 2003, representing
increases of 5% and 11%, respectively, compared to the prior year period. The
improved results for the three and six months ended June 30, 2003 resulted from
an increase in well-servicing activity driven by increased capital spending by
our customers in the first half of 2003 and an increase in average dayrates
compared to the prior year periods. The higher capital spending resulted from
the improvement in oil prices which began in 2002 and was sustained during the
first half of 2003. U.S. Land Well-servicing hours increased to 281,810 hours
during the current quarter from 262,326 hours during the prior year quarter and
increased to
32

555,323 hours during the six months ended June 30, 2003 from 504,605 hours
during the prior year period. Natural gas related activity within our U.S. Land
Well-servicing operations also increased as a result of higher commodity prices.

U.S. Offshore Operating revenues totaled $24.7 million and $46.4 million
for the three and six months ended June 30, 2003, respectively, representing an
increase of 3% during the current quarter and a decrease of 10% for the six
months ended June 30, 2003 compared to the prior year periods. Adjusted cash
flow derived from operating activities totaled $5.1 million and $6.2 million for
the three and six months ended June 30, 2003, respectively, representing
increases of 345% and 100%, respectively, compared to the prior year periods.
The increase in revenues for the three months ended June 30, 2003 resulted from
increased rig years compared to the prior year quarter. The decrease in revenues
for the six months ended June 30, 2003 resulted primarily from lower rig years
compared to the prior year period. The increase in adjusted cash flow derived
from operating activities for the current year periods resulted primarily from
increased working days for our 1,000 horsepower workover rigs that currently
generate higher daily cash margins than the remainder of our rigs. Results for
this business unit were also impacted by lower costs reflecting increased
monitoring of costs on working rigs and reductions in fixed overhead and costs
for non-working rigs. Rig years for our U.S. Offshore operations totaled 15.0
years for the current quarter compared to 14.5 years during the prior year
quarter, and 14.2 years for the six months ended June 30, 2003 compared to 14.7
years during the prior year period.

Alaskan Operating revenues and adjusted cash flow derived from operating
activities totaled $30.4 million and $13.4 million, respectively, during the
current quarter representing a decrease of 2% and an increase of 31%,
respectively, compared to the prior year quarter. The slight decrease in
Operating revenues resulted from lower drilling activity reflected in the
decrease in rig years to 9.1 years in the current quarter from 9.6 years in the
prior year quarter. Adjusted cash flow derived from operating activities
increased as a result of higher average dayrates in the current quarter compared
to the prior year quarter. Alaskan Operating revenues and adjusted cash flow
derived from operating activities totaled $66.4 million and $31.6 million,
respectively, during the six months ended June 30, 2003, representing a decrease
of 6% and an increase of 32%, respectively, compared to the prior year period.
The decrease in Operating revenues resulted from lower drilling activity
reflected in the decrease in rig years to 8.9 years in the current six month
period from 10.4 years in the prior year period. Adjusted cash flow derived from
operating activities increased during the six months ended June 30, 2003
compared to the prior year period as a result of higher average dayrates and an
incremental $5.7 million, representing business interruption insurance proceeds
recorded in the first quarter of 2003 related to damage incurred on one of our
land drilling rigs in Alaska in 2001. We also recorded a $1.9 million gain in
the first quarter of 2003 as a result of a casualty insurance settlement in
excess of the carrying value of the damaged portion of this rig, which is
included in other income in our consolidated statement of income for the six
months ended June 30, 2003.

Canadian Operating revenues totaled $49.8 million and $150.6 million for
the three and six months ended June 30, 2003, respectively, representing
increases of 138% and 208%, respectively, compared to the prior year periods.
Adjusted cash flow derived from operating activities totaled $5.5 million and
$38.7 million, respectively, during the three and six months ended June 30,
2003, respectively, representing increases of 117% and 156%, respectively,
compared to the prior year periods. As discussed above, these increases reflect
an increase in both well-servicing revenues and drilling revenues which resulted
from the acquisition of Enserco in April 2002 and an overall increase in
Canadian drilling activity. Rig years in Canada increased to 23.4 years during
the current quarter from 11.4 years during the prior year quarter, and increased
substantially to 41.0 years during the six months ended June 30, 2003 from 19.2
years during the prior year period. Canadian Well-servicing hours totaled 46,458
hours and 139,160 hours for the three and six months ended June 30, 2003,
respectively, compared to 30,528 hours for the three and six months ended June
30, 2002 as our Canadian Well-servicing operations were acquired as part of the
Enserco acquisition in April 2002.

International Operating revenues and Earnings from unconsolidated
affiliates for the three and six months ended June 30, 2003 totaled $96.6
million and $183.8 million, respectively, representing increases
33

of 25% and 17%, respectively, compared to the prior year periods. Adjusted cash
flow derived from operating activities for the three and six months ended June
30, 2003 totaled $33.4 million and $61.5 million, respectively, representing
increases of 20% and 7%, respectively, compared to the prior year periods. The
increase in Operating revenues and Earnings from unconsolidated affiliates
during the current year periods resulted from new contracts for our operation in
Mexico. International rig years increased to 59.8 years during the current
quarter from 53.5 years during the prior year quarter and increased to 58.4
years during the six months ended June 30, 2003 from 52.9 years during the prior
year period.

Manufacturing and logistics. This segment includes our marine
transportation and supply services, drilling technology and top drive
manufacturing, directional drilling, rig instrumentation and software, and
construction and transportation operations. Manufacturing and logistics
Operating revenues and Earnings from unconsolidated affiliates during the three
and six months ended June 30, 2003 totaled $46.6 million and $101.8 million,
respectively, representing increases of 12% and 25%, respectively, compared with
the prior year periods. Adjusted cash flow derived from operating activities for
this segment for the three and six months ended June 30, 2003 totaled $4.9
million and $15.8 million, respectively, representing decreases of 62% and 41%,
respectively, compared to the prior year periods. The increase in revenues for
this segment primarily resulted from the acquisition of Ryan during the fourth
quarter of 2002. This increase was only partially offset by decreased revenues
from our top drive manufacturing and service operation. While Ryan's results
have been additive to our revenues, adjusted cash flow derived from operating
activities from this new business was minimal for the current quarter and a
small loss was realized for the six months ended June 30, 2003. In addition,
decreased results for our marine transportation operations resulted in lower
profitability for this segment as compared to the prior year periods.

Other Financial Information. Our gross margin percentage decreased slightly
to 31% in the current quarter from 32% in the prior year quarter and decreased
to 32% in the first six months of 2003 from 34% in the prior year period. This
percentage is calculated by dividing gross margin by operating revenues. Gross
margin is calculated by subtracting direct costs from operating revenues. The
decrease in our gross margin percentages during the three and six months ended
June 30, 2003 primarily resulted from lower average dayrates in our U.S. Lower
48 Land Drilling operations and lower average margins for our Canadian
operations. The decrease in margins for our Canadian operations reflects the
addition of well-servicing operations in Canada in April 2002 which tend to have
lower margins than drilling operations.

General and administrative expenses increased by $7.7 million, or 23%, in
the current quarter and by $16.2 million, or 25%, in the first six months of
2003 compared to the prior year periods resulting from increases related to our
recent Canadian acquisitions and increased International activity. As a
percentage of operating revenues, general and administrative expenses increased
slightly (9.4% vs. 9.3%) during the current quarter compared to the prior year
quarter and increased (9.3% vs. 8.9%) for the six months ended June 30, 2003
compared to the prior year period.

Depreciation and amortization expense increased by $8.7 million, or 18%, in
the current quarter and by $18.9 million, or 21%, in the first six months of
2003 compared to the prior year periods. Depreciation and amortization expense
increased as a result of full periods of depreciation in the current year
periods on assets acquired in the April 2002 Enserco acquisition and
depreciation in the current year periods on assets acquired in the October 2002
Ryan Energy Technologies, Inc. acquisition, as well as other capital
expenditures during the second half of 2002 and first half of 2003.

Interest expense increased by $4.2 million, or 29%, in the current quarter
and by $9.7 million, or 33%, in the first six months of 2003 compared to the
prior year periods primarily as a result of higher average outstanding debt
balances, resulting from the August 2002 issuance of our $225 million aggregate
principal amount of 4.875% senior notes due 2009 and $275 million aggregate
principal amount of 5.375% senior notes due 2012, which combined to add
approximately $4.9 million and $10.1 million to interest expense for the three
and six months ended June 30, 2003, respectively. This was partially offset by
the redemption of our 8.625% senior subordinated notes due April 2008 on April
1, 2003 discussed below. We expect lower interest expense in future periods
resulting from the redemption on June 20, 2003 of Nabors Delaware's $825 million
zero coupon convertible senior debentures due 2020 that had an effective
interest

34

rate of 2.5%, the redemption of our 8.625% senior subordinated notes due April
2008 on April 1, 2003, and the issuance of Nabors Delaware's $700 million zero
coupon senior exchangeable notes due 2023 which will not accrue interest unless
Nabors Delaware becomes obligated to pay contingent interest.

Interest income decreased by $1.1 million, or 14%, in the current quarter
and by $2.7 million, or 16%, in the first six months of 2003 compared to the
prior year periods reflecting lower average yields on investments resulting from
the overall declining interest rate environment partially offset by higher cash
and marketable securities balances.

Other income decreased by $2.6 million, or 99%, in the current quarter and
by $3.1 million, or 99%, in the first six months of 2003 compared to the prior
year periods. Other income for the three and six months ended June 30, 2003
includes net gains on marketable securities of $3.1 million and $2.6 million,
respectively, and gains on long-term assets of $.8 million and $3.3 million,
respectively, partially offset by mark-to-market losses recorded on our range
cap and floor derivative instrument of approximately $2.6 million and $3.7
million, respectively. Other income for the three and six months ended June 30,
2002 includes net gains on marketable securities of approximately $.5 million
and $3.0 million, respectively, and foreign currency transaction gains of
approximately $2.5 million and $2.3 million, respectively, partially offset by
the recognition of approximately $1.3 million and $3.4 million, respectively, in
corporate reorganization expense.

Our effective income (benefit) tax rate was (10%) during the three and six
months ended June 30, 2003 compared to 25% for the prior year periods. The tax
benefit position in 2003 resulted primarily from 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 legislative
proposals being considered by the U.S. Congress, and any responsive action taken
by Nabors.

LIQUIDITY AND CAPITAL RESOURCES

CASH FLOWS

Operating Activities. Net cash provided by operating activities totaled
$120.8 million during the six months ended June 30, 2003, compared to net cash
provided by operating activities totaling $194.7 million during the prior year
period. During the six months ended June 30, 2003, net income was increased for
non-cash items such as depreciation and amortization, and was reduced for
changes in our balance sheet accounts and our deferred income tax benefit.
During the six months ended June 30, 2002, net income was increased for non-cash
items such as depreciation and amortization and deferred income tax expense, and
was reduced for changes in our balance sheet accounts.

Investing Activities. Net cash provided by investing activities totaled
$64.7 million during the six months ended June 30, 2003, compared to $239.5
million used for investing activities during the prior year period. During the
current year period, cash was primarily provided by sales, net of purchases, of
marketable securities and was used primarily for capital expenditures. During
the prior year period, cash was primarily used for capital expenditures, the
acquisition of 20.5% of the issued and outstanding shares of Enserco and was
primarily provided by sales, net of purchases, of marketable securities.

Financing Activities. Financing activities provided cash totaling $168.6
million during the six months ended June 30, 2003 compared to cash used for
financing activities of $12.3 million during the prior year period. During the
current year period, cash was provided primarily by approximately $689.5 million
in net proceeds from the issuance of the $700 million zero coupon senior
exchangeable notes due 2023 by Nabors Delaware on June 10, 2003 and was used
primarily for the reduction of long-term debt of $542.8 million. Cash was also
provided during the current year period by our receipt of proceeds from the
exercise of options to acquire 152,000 of our common shares. During the prior
year period, cash was primarily used for the reduction of long-term debt,
partially offset by cash provided by our receipt of proceeds from the exercise
of options to acquire 641,000 shares of Nabors Delaware common stock.

35

On June 10, 2003, Nabors Delaware completed a private placement of $700
million aggregate principal amount of zero coupon senior exchangeable notes due
2023 that are fully and unconditionally guaranteed by us. The notes were
reoffered by the initial purchaser of the notes to qualified institutional
buyers under Rule 144A of the Securities Act of 1933, as amended (the Securities
Act), and outside the United States in accordance with Regulation S under the
Securities Act. The notes do not bear interest, do not accrete and have a zero
yield to maturity, unless Nabors Delaware becomes obligated to pay contingent
interest as defined in the note indenture. Cash provided by issuance of the
notes, net of issuance costs, totaled $689.5 million.

We used a portion of the net proceeds from the issuance of the notes to
redeem the remaining outstanding principal amount of Nabors Delaware's $825
million zero coupon convertible senior debentures due 2020 on June 20, 2003. The
redemption price was $655.50 per $1,000 principal amount of the debentures for
an aggregate redemption price paid of approximately $494.9 million. The
remainder of the proceeds of the notes were invested in cash and marketable
securities and will be used for general corporate purposes, possibly including
the redemption of a portion of the outstanding amount of our 6.8% senior notes
due April 15, 2004 and for acquisitions.

On April 1, 2003, we redeemed our 8.625% senior subordinated notes due
April 2008 and all associated guarantees at a redemption price of $1,043.13 per
$1,000 principal amount of the notes together with accrued and unpaid interest
to the date of redemption.

FUTURE CASH REQUIREMENTS

As of June 30, 2003, we had long-term debt, including current maturities,
of $2.3 billion and cash and cash equivalents and investments in marketable
securities of $1.5 billion.

Our 6.8% senior notes are due April 15, 2004 for an aggregate principal
amount of $295.3 million. This amount is classified in current liabilities in
our consolidated balance sheet as of June 30, 2003.

As of June 30, 2003, we had outstanding capital expenditure purchase
commitments of approximately $22.5 million, primarily for rig-related enhancing
and sustaining capital expenditures. We have historically completed a number of
acquisitions during down markets 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 stock. Future
acquisitions may be paid for using existing cash or issuance of debt or Nabors
stock. Such capital expenditures and acquisitions are at our discretion and will
depend on our view of market conditions and other factors.

Our 2002 Annual Report on Form 10-K includes our contractual cash
obligations table as of December 31, 2002. As a result of the issuance of Nabors
Delaware's $700 million zero coupon senior exchangeable notes due 2023 on June
10, 2003 and the redemption of certain existing debt in the current quarter, we
are presenting the following table in this Report which summarizes our remaining
contractual cash obligations related to long-term debt as of June 30, 2003:

(1) Represents our $1.381 billion zero coupon convertible senior debentures
which can be put to us on February 5, 2006.

No other significant changes have occurred to the contractual cash
obligations disclosed in our 2002 Annual Report on Form 10-K.

36

GUARANTEES

We enter into various agreements providing financial or performance
assurance to third parties. Certain of these agreements act 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 that the likelihood that we would be required to
perform or otherwise incur any significant 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:

FINANCIAL CONDITION AND SOURCES OF LIQUIDITY

As of June 30, 2003, we had cash and cash equivalents and investments in
marketable securities of $1.5 billion and working capital of $1.0 billion. This
compares to cash and cash equivalents and investments in marketable securities
of $1.3 billion and working capital of $618.5 million as of December 31, 2002.

The increase in cash and cash equivalents and investments in marketable
securities relates primarily to the issuance of the zero coupon senior
exchangeable notes due 2023 by Nabors Delaware during the current quarter, which
resulted in net proceeds of $689.5 million, partially offset by reductions in
long-term debt of $542.8 million during the current period. Cash and cash
equivalents and investments in marketable securities were also increased during
the six months ended June 30, 2003 by cash provided by operating activities
totaling $120.8 million and decreased by capital expenditures of $149.3 million
during the period. The increase in working capital relates primarily to the
increase in cash and cash equivalents and short-term marketable securities and
the redemption of Nabors Delaware's $825 million zero coupon convertible senior
debentures due 2020 on June 20, 2003 for an aggregate redemption price paid of
approximately $494.9 million, which was classified in current liabilities as of
December 31, 2002, only partially offset by the reclassification of $295.3
million principal amount of our 6.8% senior notes due April 15, 2004 to current
liabilities as of June 30, 2003.

Our funded debt to capital ratio was 0.49:1 as of June 30, 2003 and
December 31, 2002. Our net funded debt to capital ratio was 0.26:1 as of June
30, 2003 and December 31, 2002. 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 5.4:1 as of June 30, 2003, compared to 6.0:1 as of December
31, 2002. The interest coverage ratio is computed by calculating the

37

sum of income before income taxes, interest expense, and depreciation and
amortization 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, 2003. Availability and borrowings
under our credit facilities as of June 30, 2003 are as follows:

(IN THOUSANDS)
Credit available $ 86,142
Letters of credit outstanding (52,555)
--------
Remaining availability $ 33,587
--------

Additionally, we have $2.6 million in letters of credit outstanding under a
letter of credit facility that expired on September 5, 2002. As these letters of
credit mature they will be reissued under existing letter of credit facilities,
as necessary.

We have a shelf registration statement on file with the 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 and our debt service
requirements for the next twelve months.

RECENT ACCOUNTING PRONOUNCEMENTS

In November 2002 the Financial Accounting Standards Board (FASB) issued
Interpretation No. 45 (FIN 45), "Guarantor's Accounting and Disclosure
Requirements, Including Guarantees of Indebtedness of Others." FIN 45 requires
that upon issuance of certain types of guarantees, a guarantor recognize and
account for the fair value of the guarantee as a liability. FIN 45 contains
exclusions to this requirement, including the exclusion of a parent's guarantee
of its subsidiaries' debt to a third party. The initial recognition and
measurement provisions of FIN 45 have been applied on a prospective basis for
guarantees issued or modified after December 31, 2002. During the six months
ended June 30, 2003, we issued new standby letters of credit which serve as
guarantees under the provisions of FIN 45. The application of the recognition
and measurement provisions of FIN 45 to these guarantees was insignificant. The
disclosure requirements of FIN 45 are effective for financial statements of both
interim and annual periods ending after December 15, 2002 and are included in
Note 6 to our accompanying consolidated financial statements.

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. The consolidation requirements of FIN 46 apply immediately to VIEs
created after January 31, 2003. For VIEs created at an earlier date, the
consolidation requirements apply in the first fiscal year or interim period
beginning after June 15, 2003. Certain disclosure requirements apply in all
financial statements issued after January 31, 2003, regardless of when the VIE
was established. Based on current information, Nabors believes it has no
material interests in VIEs that require disclosure or consolidation under FIN
46.

In May 2003 the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 149, "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities." SFAS 149 amends and clarifies financial accounting and
reporting for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities under SFAS No. 133,
"Accounting for

38

Derivative Instruments and Hedging Activities." SFAS 149 is effective in
relation to certain issues for fiscal quarters that began prior to June 15, 2003
and for certain contracts entered into after June 30, 2003. The adoption of SFAS
149 had no initial impact on our financial position, results of operations or
cash flows as of and for the three and six months ended June 30, 2003.

In May 2003 the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." This statement
establishes standards for how an issuer classifies and measures in its statement
of financial position certain financial instruments with characteristics of both
liabilities and equity. In accordance with the standard, financial instruments
that embody obligations for the issuer are required to be classified as
liabilities. SFAS 150 is effective for financial instruments entered into or
modified after May 31, 2003, and otherwise shall be effective at the beginning
of the first interim period beginning after June 15, 2003. The adoption of SFAS
150 had no initial impact on our financial position, results of operations or
cash flows as of and for the three and six months ended June 30, 2003.

CRITICAL ACCOUNTING POLICIES

We disclosed our critical accounting policies in our 2002 Annual Report on
Form 10-K. No significant changes have occurred to those policies with the
exception of the following:

Self Insurance Accruals. We are self-insured for certain losses relating to
workers' compensation, employers' liability, general liability, automobile
liability and property damage. Effective April 1, 2003, with our insurance
renewal, certain changes have been made to our insurance coverage. Effective for
the period from April 1, 2003 to March 31, 2004, our exposure (that is, our
deductible) per occurrence is $1.0 million for workers' compensation, $2.0
million for employers' liability and marine employers' liability (Jones Act) and
$5.0 million for general liability losses. Our self insurance for automobile
liability loss is $0.5 million per occurrence. We maintain actuarially supported
accruals in our consolidated balance sheets to cover the self-insurance
retentions.

We are self-insured for certain other losses relating to rig, equipment,
property, business interruption and political, war and terrorism risks.
Effective April 1, 2003, our per occurrence self-insurance retentions are $10.0
million for rig physical damage and business interruption for 29 specific
high-value rigs. The remainder of the fleet is subject to a $5.0 million
self-insurance retention. However, our rigs, equipment and property in Canada
and Saudi Arabia are subject to $1.0 million self-insurance retentions. As a
result, with the exception of Canada and Saudi Arabia, we are self-insured for
29 higher value rigs up to $10.0 million and for the remainder of our rigs up to
$5.0 million.

Political violence (war and terrorism) insurance is procured for our
operations in Mexico, the Caribbean, South America, Africa, the Middle East and
Asia. Political violence losses are subject to $0.25 million per occurrence
deductibles, except for Colombia which is subject to deductibles of $10.0
million and $1.0 million for political risk and terrorism, respectively. There
is no assurance that such coverage will adequately protect Nabors against
liability from all potential consequences.

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 2002 Annual Report on Form 10-K.

During the three and six months ended June 30, 2003, we recorded interest
savings related to our interest rate swap agreement accounted for as a fair
value hedge of $1.7 million and $3.3 million, respectively, which served to
reduce interest expense. The fair value of our interest rate swap agreement was
a gain of approximately $15.8 million as of June 30, 2003, which is recorded as
a derivative asset, included in other long-term assets, offset by an increase to
the carrying value of our 5.375% senior notes due 2012. The change in cumulative
fair value of this derivative instrument from December 31, 2002 resulted in an
increase in our derivative asset and the carrying value of our senior notes of
$5.8 million for the six months ended June 30, 2003.

39

The fair value of our range cap and floor transaction was a loss of
approximately $7.5 million as of June 30, 2003, which is recorded as a
derivative liability in other long-term liabilities. We recorded a loss of $2.6
million during the three months ended June 30, 2003 related to the change in
cumulative fair value of this derivative instrument from March 31, 2003 and a
loss of $3.7 million during the six months ended June 30, 2003 related to the
change in cumulative fair value of this derivative instrument from December 31,
2002. These losses are included in other income in our consolidated statements
of income.

Nabors Delaware's $700 million zero coupon senior exchangeable notes due
2023 include a contingent interest provision, discussed in Note 3 to our
accompanying consolidated financial statements, which qualifies as an embedded
derivative under SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." This embedded derivative is required to be separated from
the notes and valued at its fair value at inception of the note agreement. Any
subsequent change in fair value will be marked-to-market through our statements
of income.

The fair value of the contingent interest provision at inception of the
note indenture was minimal. In addition, there was no significant change in the
fair value of this embedded derivative through June 30, 2003, resulting in no
impact on our statements of income for the three and six months ended June 30,
2003.

ITEM 4. CONTROLS AND PROCEDURES

(a) Disclosure Controls and Procedures. We maintain a set of disclosure
controls and procedures (as such term is defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange
Act)) that are designed to ensure that information required to be disclosed in
our reports filed under the Exchange Act 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 entities.

We evaluated the effectiveness of the design and operation of our
disclosure controls and procedures pursuant to Rule 13a-14 of the Exchange Act
under the supervision and with the participation of management, including our
Chairman and Chief Executive Officer, and Vice President and Chief Financial
Officer, as of the end of the period covered by this report. Based on that
evaluation, our Chairman and Chief Executive Officer, and Vice President and
Chief Financial Officer concluded that, as of the end of such period, our
disclosure controls and procedures are effective.

(b) Internal Controls Over Financial Reporting. There have not been any
changes in our internal controls over financial reporting (as such term is
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the
fiscal quarter to which this report relates that have materially affected, or
are reasonably likely to materially affect, our internal controls over financial
reporting.

PART II OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

On May 23, 2002, Steve Rosenberg, an individual shareholder of Nabors,
filed a complaint against Nabors and its directors in the United States District
Court for the Southern District of Texas (Civil Action No. 02-1942), alleging
that Nabors' May 10, 2002 proxy statement/prospectus contained certain material
misstatements and omissions in violation of federal securities laws and state
law. Nabors' May 10, 2002 proxy statement/prospectus was sent to shareholders in
connection with the special meeting to consider and vote on Nabors' proposed
reorganization and effective reorganization in Bermuda. Rosenberg requested that
the Court either enjoin the closing of the shareholder vote on the scheduled
date or the effectuation of the reorganization. In addition, Rosenberg purported
to bring a class action on behalf of all

40

shareholders, alleging that Nabors and its directors violated their state law
fiduciary duties by making these alleged misstatements and omissions.

On March 18, 2003, the Court granted our motion and dismissed all claims
with prejudice. On April 14, 2003, Rosenberg filed an appeal of the United
States District Court's decision to the United States Fifth Circuit Court of
Appeals. The parties entered into settlement negotiations and in July 2003
reached a confidential settlement of all disputes between the parties. This
settlement had no material effect on our consolidated financial position,
results of operations or cash flows.

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

ITEM 2. CHANGES IN SECURITIES

On June 10, 2003, Nabors Industries, Inc. (Nabors Delaware), our
wholly-owned subsidiary, completed a private placement with Citigroup Global
Markets Inc. as the initial purchaser of $700 million aggregate principal amount
of zero coupon senior exchangeable notes due 2023 that are fully and
unconditionally guaranteed by us. The issue price of the notes was 100% of
principal amount and net cash provided to us by issuance of the notes totaled
$689.5 million. The notes were reoffered by the initial purchaser of the notes
to qualified institutional buyers under Rule 144A of the Securities Act and
outside the United States in accordance with Regulation S under the Securities
Act. The notes do not bear interest, do not accrete and have a zero yield to
maturity, unless Nabors Delaware becomes obligated to pay contingent interest as
defined in the note indenture.

The notes are exchangeable at the option of the holders into 14.2653 common
shares of Nabors per $1,000 principal amount of notes (subject to adjustment for
certain events) contingent upon the following circumstances: (1) if in any
calendar quarter beginning after the quarter ending September 30, 2003, 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 120%, or with
respect to all calendar quarters beginning on or after July 1, 2008, 110% of the
applicable exchange price per share of the Nabors' common shares on such last
trading day, (2) subject to certain exceptions, during the five business-day
period after any ten consecutive trading-day period in which the trading price
per $1,000 principal amount of notes for each day of the ten trading-day period
was less than 95% of the product of the closing sale price of such common shares
and the exchange rate of such note, (3) if we call the notes for redemption, or
(4) upon the occurrence of specified corporate transactions described in the
note indenture.

The notes are unsecured and are effectively junior in right of payment to
any of Nabors Delaware's future secured debt. The notes will rank equally with
any of Nabors Delaware's other existing and future unsecured and unsubordinated
debt and will be senior in right of payment to any of Nabors Delaware's
subordinated debt. The guarantee of Nabors will be similarly unsecured and have
a similar ranking to the notes so guaranteed. Holders of the notes have the
right to require Nabors Delaware to repurchase the notes at a purchase price
equal to 100% of the principal amount of the notes plus contingent interest and
additional amounts, if any, on June 15, 2008, June 15, 2013 and June 15, 2018 or
upon a fundamental change as described in the note indenture. If Nabors Delaware
is required to repurchase the notes, Nabors Delaware will have the right to
deliver, in lieu of cash, our common shares or a combination of cash and common
shares, subject to certain conditions. If Nabors Delaware elects to pay all or a
portion of the purchase price in our common shares, the number of common shares
we will issue will be equal to the purchase price divided by the market price of
the Nabors' common shares. For these purposes, the market price means the
average of the sale prices of our common shares for the five trading-day period
ending on the third business day prior to the applicable purchase date.

Nabors Delaware will be obligated to pay contingent interest during any
six-month period from June 15 to December 14 or from December 15 to June 14
commencing on or after June 15, 2008 for
41

which the average trading price of the notes for each day of the applicable five
trading-day reference period equals or exceeds 120% of the principal amount of
the notes as of the day immediately preceding the first day of the applicable
six-month interest period. 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. The five trading-day reference period means the five trading days ending
on the second trading day immediately preceding the relevant six-month interest
period.

We used a portion of the net proceeds from the issuance of the notes to
redeem the remaining outstanding principal amount of Nabors Delaware's $825
million zero coupon convertible senior debentures due 2020 on June 20, 2003 and
our associated guarantees. The redemption price was $655.50 per $1,000 principal
amount of the debentures for an aggregate redemption price paid of approximately
$494.9 million. The redemption of the debentures did not result in any gain or
loss as the debentures were redeemed at prices equal to their carrying value on
June 20, 2003. The remainder of the proceeds of the notes were invested in cash
and marketable securities and will be used for general corporate purposes,
possibly including the redemption of a portion of the outstanding amount of our
6.8% senior notes due April 15, 2004 and for acquisitions.

Copies of the Indenture and Registration Rights Agreement relating to the
notes are included as exhibits to this Quarterly Report on Form 10-Q. This
discussion is not, and is not to be deemed, an offer to sell the zero coupon
senior exchangeable notes or the common shares of Nabors underlying such
securities to any person.

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

At the 2003 Annual General Meeting of Shareholders of Nabors Industries
Ltd. held on June 3, 2003, 130,551,007 shares were present in person or by
proxy, constituting 89.4% 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 III directors to
the Board of Directors of Nabors Delaware to serve for a three-year term, until
2005:

Eugene M. Isenberg
Votes cast in favor: 128,260,818
Votes withheld: 2,290,189

Jack Wexler
Votes cast in favor: 122,218,949
Votes withheld: 8,332,058

Class I Directors, James L. Payne, Hans W. Schmidt and Richard F. Syron
continued in office with terms expiring in 2004. Class II Directors Anthony G.
Petrello, Myron M. Sheinfeld and Martin J. Whitman continued in office with
terms expiring in 2005.

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:

Appointment of PricewaterhouseCoopers as Independent Auditors

Votes cast in favor: 127,771,119
Votes cast against: 1,751,564
Votes abstaining: 1,028,324

42

Approval of the 2003 Employee Stock Plan: The shareholders approved the
2003 Employee Stock Plan of Nabors:

2003 Employee Stock Plan
Votes cast in favor: 74,389,869
Votes cast against: 54,895,917
Votes abstaining: 1,265,221

ITEM 5. OTHER INFORMATION

RELATED PARTY -- SPLIT-DOLLAR LIFE INSURANCE AGREEMENTS

Pursuant to their employment agreements, Nabors and its Chairman and Chief
Executive Officer, President and Chief Operating Officer, former Vice Chairman
and certain other key employees entered into split-dollar life insurance
agreements pursuant to which we pay a portion of the premiums under life
insurance policies with respect to these individuals and, in certain instances,
members of their families. Under these agreements, we are reimbursed for such
premiums upon the occurrence of specified events, including the death of an
insured individual. Any recovery of premiums paid by Nabors could potentially be
limited to the cash surrender value of these policies under certain
circumstances. As such, the values of these policies are recorded at their
respective cash surrender values in our consolidated balance sheets. We have
made premium payments to date totaling $12.8 million related to these policies.
The cash surrender value of these policies of approximately $9.5 million is
included in other long-term assets in our consolidated balance sheet as of June
30, 2003.

Under the Sarbanes-Oxley Act of 2002, the future payment of premiums by
Nabors under these agreements may be deemed to be prohibited loans by us to
these individuals. We have paid no premiums related to these agreements since
the adoption of the Sarbanes-Oxley Act, and have postponed premium payments
related to these agreements pending clarification of the Act's application to
these insurance agreements. We will monitor developments and intend to take
appropriate action to ensure that these agreements do not violate applicable
law.

43

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

4.1 Indenture, dated as of June 10, 2003, between Nabors
Industries, Inc., Nabors Industries Ltd. and Bank One, N.A.
(incorporated by reference to Exhibit 4.1 to Nabors
Delaware's and Nabors' Registration Statement on Form S-3
filed with the Commission on August 8, 2003).
4.2 Registration Rights Agreement, dated as of June 10, 2003, by
and among Nabors Industries, Inc., Nabors Industries Ltd.
and Citigroup Global Markets Inc. (incorporated by reference
to Exhibit 4.2 to Nabors Delaware's and Nabors' Registration
Statement on Form S-3 filed with the Commission on August 8,
2003).
4.3 Form of Zero Coupon Senior Exchangeable Note Due 2023
(included in Exhibit 4.1).
10.1 2003 Employee Stock Option Plan (incorporated by reference
to Annex D of Nabors Notice of 2003 Annual General Meeting
of Shareholders and Proxy Statement, File No. 000-49887,
filed May 8, 2003).
15 Awareness Letter of Independent Accountants.
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
pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of 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.

(b) Reports on Form 8-K

- Report on Form 8-K filed with the U.S. Securities and Exchange
Commission on June 3, 2003, with respect to Nabors' press release
announcing that Nabors Industries, Inc. had priced $700 million of
Zero Coupon Senior Convertible Notes Due 2023 in a private placement
transaction.

44

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
President and Chief Operating Officer

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

Dated: August 8, 2003

45

INDEX TO EXHIBITS