NABORS INDUSTRIES LTD - 10-K Annual Report

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

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FORM 10-K

ANNUAL REPORT

Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004

COMMISSION FILE NUMBER: 000-49887

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NABORS INDUSTRIES LTD.

INCORPORATED IN BERMUDA
2ND FLOOR, INTERNATIONAL TRADING CENTRE
WARRENS
P.O. BOX 905E
ST. MICHAEL, BARBADOS
(246) 421-9471

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

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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF
THE SECURITIES EXCHANGE ACT OF 1934:

NAME OF EACH
TITLE OF EACH CLASS EXCHANGE ON WHICH REGISTERED
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Common Shares, $.001 par value per share The American Stock Exchange, LLC

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

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

YES [X] NO [ ]

The aggregate market value of the 112,391,895 common shares held by
non-affiliates of the registrant, based upon the closing price of our common
shares as of the last business day of our most recently completed second fiscal
quarter, June 30, 2004, of $45.22 per share as reported on the American Stock
Exchange, was $5,082,361,492. Common Shares held by each officer and director
and by each person who owns 5% or more of the outstanding common shares have
been excluded in that such persons may be deemed affiliates. This determination
of affiliate status is not necessarily a conclusive determination for other
purposes.

The number of common shares, par value $.001 per share, outstanding as of
February 28, 2005 was 150,423,275. In addition, our subsidiary, Nabors
Exchangeco (Canada) Inc., had 216,149 exchangeable shares outstanding as of
February 28, 2005 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.

DOCUMENTS INCORPORATED BY REFERENCE
(TO THE EXTENT INDICATED HEREIN)

Specified portions of the 2005 Notice of Annual Meeting of Shareholders and
Proxy Statement (Part III)

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NABORS INDUSTRIES LTD.
FORM 10-K ANNUAL REPORT
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004

TABLE OF CONTENTS

PART I

Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders

PART II

Item 5. Market for Registrant's Common Equity, Related Shareholder Matters
and Issuer Repurchases of Equity Securities
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
Item 9A. Controls and Procedures

PART III

Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
Item 14. Principal Accounting Fees and Services

PART IV

Item 15. Exhibits and Financial Statement Schedules

Our internet address is www.nabors.com. We make available free of charge
through our website our annual report on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K and amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of
1934 (the Exchange Act) as soon as reasonably practicable after we
electronically file such material with, or furnish it to, the Securities and
Exchange Commission. A glossary of drilling terms used in this document can be
found on our website. The SEC maintains an internet site (www.sec.gov) that
contains reports, proxy and information statements and other information
regarding issuers that file electronically with the SEC.

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 Act
of 1933 and Section 21E of the Exchange Act. 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 should recognize that events and actual results could turn out to be
significantly different from our expectations. By way of illustration, when used
in this document, words such as "anticipate," "believe," "expect," "plan,"
"intend," "estimate," "project," "will," "should," "could," "may," "predict" and
similar expressions are intended to identify forward-looking statements.

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

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

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

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- 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 changes in tax laws;

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

- general economic conditions.

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

The above description of risks and uncertainties is by no means
all-inclusive, but is designed to highlight what we believe are important
factors to consider. For a more detailed description of risk factors, please see
"Part I - Item 1 - BUSINESS - RISK FACTORS".

Unless the context requires otherwise, references in this Annual Report on
Form 10-K to "we," "us," "our," or "Nabors" means Nabors Industries Ltd. and,
where the context requires, includes our subsidiaries.

PART I

ITEM 1. BUSINESS

INTRODUCTION.

Nabors is the largest land drilling contractor in the world, with almost
600 land drilling rigs. We conduct oil, gas and geothermal land drilling
operations in the U.S. Lower 48 states, Alaska, Canada, South and Central
America, the Middle East, the Far East and Africa. We are also one of the
largest land well-servicing and workover contractors in the United States and
Canada. We own approximately 700 land workover and well-servicing rigs in the
United States, primarily in the southwestern and western United States, and
approximately 215 land workover and well-servicing rigs in Canada. Nabors is a
leading provider of offshore platform workover and drilling rigs, and owns 43
platform, 19 jack-up units and three barge rigs in the United States and
multiple international markets. These rigs provide well-servicing, workover and
drilling services. We have a 50% ownership interest in a joint venture in Saudi
Arabia, which owns 17 rigs. We also offer a wide range of ancillary well-site
services, including engineering, transportation, construction, maintenance, well
logging, directional drilling, rig instrumentation, data collection and other
support services in selected domestic and international markets. We time charter
a fleet of 33 marine transportation and supply vessels, 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. We have also made
selective investments in oil and gas exploration, development and production
activities.

Nabors was formed as a Bermuda-exempt company on December 11, 2001. Through
predecessors and acquired entities, Nabors has been continuously operating in
the drilling sector since the early 1900s. Our principal executive offices are
located at 2nd Fl. International Trading Centre, Warrens, St. Michael, Barbados.
Our phone number at our principal executive offices is (246) 421-9471.

OUR FLEET OF RIGS.

- - Land Rigs. A land-based drilling rig generally consists of engines, a
drawworks, a mast (or derrick), pumps to circulate the drilling fluid (mud)
under various pressures, blowout preventers, drill string and related
equipment. The engines power the different pieces of equipment, including a
rotary table or top drive that turns the drill string, causing the drill
bit to bore through the subsurface rock layers. Rock cuttings are carried
to the surface by the circulating drilling fluid. The intended well depth,
bore hole diameter and drilling site conditions are the principal factors
that determine the size and type of rig most suitable for a particular
drilling job. A land-based workover or well-servicing rig consists of a
mobile carrier, engine, drawworks and a mast. The primary function of a
workover or well-servicing rig is to act as a hoist so that pipe, sucker
rods and down-hole equipment can be run into and out of a well. Land-based
drilling, workover and well-servicing rigs can be moved between well sites
and between geographic areas of operations by using

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our fleet of cranes, loaders and transport vehicles. Because of size and
cost considerations, well servicing and workover rigs are used for these
operations rather than the larger drilling rigs.

- - Platform Rigs. Platform rigs provide offshore workover, drilling and
re-entry services. Our platform rigs have drilling and/or well-servicing or
workover equipment and machinery arranged in modular packages that are
transported to, and assembled and installed on, fixed offshore platforms
owned by the customer. Fixed offshore platforms are steel tower-like
structures that either stand on the ocean floor or are moored floating
structures. The top portion, or platform, sits above the water level and
provides the foundation upon which the platform rig is placed. We also own
several land rigs modified for offshore work for drilling on mudslide and
selected conventional offshore platforms. These rigs generally are
self-elevating and modular.

- - Jack-up Rigs. Jack-up rigs are mobile, self-elevating drilling and
workover platforms equipped with legs that can be lowered to the ocean
floor until a foundation is established to support the hull, which contains
the drilling and/or workover equipment, jacking system, crew quarters,
loading and unloading facilities, storage areas for bulk and liquid
materials, helicopter landing deck and other related equipment. The rig
legs may operate independently or have a mat attached to the lower portion
of the legs in order to provide a more stable foundation in soft bottom
areas. Many of our jack-up rigs are of cantilever design -- a feature that
permits the drilling platform to be extended out from the hull, allowing it
to perform drilling or workover operations over adjacent, fixed platforms.
Nabors' shallow workover jack-up rigs generally are subject to a maximum
water depth of approximately 125 feet, while some of our jack-up rigs may
drill in water depths as shallow as 13 feet. Nabors also has deeper water
depth capacity jack-up rigs that are capable of drilling at depths between
8 feet and 150 to 250 feet. The water depth limit of a particular rig is
determined by the length of the rig's legs and the operating environment.
Moving a rig from one drill site to another involves lowering the hull down
into the water until it is afloat and then jacking up its legs with the
hull floating. The rig is then towed to the new drilling site.

- - Inland Barge Rigs. One of Nabors' barge rigs is a full-size drilling unit.
Nabors also owns two workover inland barge rigs. These barges are designed
to perform plugging and abandonment, well service or workover services in
shallow inland, coastal or offshore waters. Our barge rigs can operate at
depths between three and twenty feet.

Additional information regarding the geographic markets in which we operate and
our business segments can be found in Note 17 of the Notes to Consolidated
Financial Statements included in Part II Item 8 below.

CUSTOMERS; TYPES OF DRILLING CONTRACTS.

Our customers include major oil and gas companies, foreign national oil and
gas companies and independent oil and gas companies. No customer accounted for
greater than 10% of consolidated revenues in 2004 or in 2003.

On land in the U.S. Lower 48 states and Canada, we typically contract on a
single-well basis, with extensions subject to mutual agreement on pricing and
other significant terms. Contracts relating to offshore drilling and land
drilling in Alaska and international markets generally provide for longer terms,
usually from one to five years. Offshore workover projects are often on a
single-well basis. We generally are awarded drilling contracts through
competitive bidding, although we occasionally enter into contracts by direct
negotiation. Most of our single-well contracts are subject to termination by the
customer on short notice, but some can be firm for a number of wells or a period
of time, and may provide for early termination compensation in certain
circumstances. The contract terms and rates may differ depending on a variety of
factors, including competitive conditions, the geographical area, the geological
formation to be drilled, the equipment and services to be supplied, the on-site
drilling conditions and the anticipated duration of the work to be performed.

In recent years, all of our drilling contracts have been daywork contracts.
A daywork contract generally provides for a basic rate per day when drilling
(the dayrate for us providing a rig and crew) and for lower rates when the rig
is moving, or when drilling operations are interrupted or restricted by
equipment breakdowns, adverse weather conditions or other conditions beyond our
control. In addition, daywork contracts may provide for a lump sum fee for the
mobilization and demobilization of the rig, which in most cases approximates our
incurred costs. A daywork contract differs from a footage contract (in which the
drilling contractor is paid on the basis of a rate per foot drilled) and a
turnkey contract (in which the drilling contractor is paid for drilling a well
to a specified depth for a fixed price).

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WELL SERVICING AND WORKOVER SERVICES.

Although some wells in the United States flow oil to the surface without
mechanical assistance, most are in mature production areas that require pumping
or some other form of artificial lift. Pumping oil wells characteristically
require more maintenance than flowing wells because of the operation of the
mechanical pumping equipment installed.

- - Well-Servicing/Maintenance Services. We provide maintenance services on
the mechanical apparatus used to pump or lift oil from producing wells.
These services include, among other things, repairing and replacing pumps,
sucker rods and tubing. We provide the rigs, equipment and crews for these
tasks, which are performed on both oil and natural gas wells, but which are
more commonly required on oil wells. Maintenance services typically take
less than 48 hours to complete. Well-servicing rigs generally are provided
to customers on a call-out basis. We are paid an hourly rate and work
typically is performed five days a week during daylight hours.

- - Workover Services. Producing oil and natural gas wells occasionally
require major repairs or modifications, called "workovers." Workovers
normally are carried out with a well-servicing rig that includes additional
specialized accessory equipment, which may include rotary drilling
equipment, mud pumps, mud tanks and blowout preventers. A workover may last
anywhere from a few days to several weeks.

- - Completion Services. The kinds of activities necessary to carry out a
workover operation are essentially the same as those that are required to
"complete" a well when it is first drilled. The completion process may
involve selectively perforating the well casing at the depth of discrete
producing zones, stimulating and testing these zones and installing
down-hole equipment. The completion process may take a few days to several
weeks.

- - Production and Other Specialized Services. We also can provide other
specialized services, including onsite temporary fluid-storage facilities,
the provision, removal and disposal of specialized fluids used during
certain completion and workover operations, and the removal and disposal of
salt water that often is produced in conjunction with the production of oil
and natural gas. We also provide plugging services for wells from which the
oil and natural gas has been depleted or further production has become
uneconomical.

OIL AND GAS INVESTMENTS.

Through our Ramshorn investments subsidiary, Nabors makes selective
investments in oil and gas exploration, development and production operations.
Additional information about recent activities for this segment can be found in
Part II Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations - Oil and Gas.

OTHER SERVICES.

Our Canrig drilling technologies subsidiary manufactures top drives, which
are installed on both onshore and offshore drilling rigs. Our top drives are
marketed throughout the world. During the last three years, approximately 45% of
our top drive sales were made to other Nabors companies. We also rent top drives
and provide top drive installation, repair and maintenance services to our
customers. Our EPOCH well services subsidiary offers rig instrumentation
equipment, including sensors, proprietary RIGWATCH(TM) software and computerized
equipment that monitors the real-time performance of a rig. In addition, EPOCH
specializes in daily reporting software for drilling operations, making this
data available through the internet via mywells.com. EPOCH also provides
mudlogging services. Our Ryan Energy Technologies subsidiary manufactures and
sells directional drilling and rig instrumentation and data collection services
to oil and gas exploration and service companies. Nabors has a 50% interest in
Peak Oilfield Services Company, a general partnership with a subsidiary of Cook
Inlet Region, Inc., a leading Alaskan native corporation. Peak Oilfield Services
provides heavy equipment to move drilling rigs, water, other fluids and
construction materials, primarily on Alaska's North Slope and in the Cook Inlet
region. The partnership also provides construction and maintenance for ice
roads, pads, facilities, equipment, drill sites and pipelines. Our Peak USA
subsidiary provides hauling and maintenance services for customers in the U.S.
Lower 48.

We time charter a fleet of 33 offshore support vessels, including one crew
boat, which operate in the Gulf of Mexico, Trinidad and the Middle East and
provide marine transportation of drilling materials, supplies and crews for
offshore rig operations and support for other offshore facilities. The supply
vessels are used as freight-carrying vessels for bringing drill pipe, tubing,
casing, drilling mud and other equipment to drilling rigs and production
platforms.

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OUR EMPLOYEES.

As of December 31, 2004, Nabors employed approximately 19,776 persons, of
whom approximately 2,516 were employed by unconsolidated affiliates. We believe
our relationship with our employees generally is good.

On October 18, 2000, the National Labor Relations Board ("NLRB") confirmed
the selection of a collective bargaining representative at our Alaska drilling
subsidiary. The unit covers most non-supervisory drilling and related field
personnel working on or about our rigs within the State of Alaska. Negotiations
with the union commenced during 2000; an agreement was reached with
representatives of the union in December 2002; was submitted to the union
membership for ratification; and was rejected by the membership in the first
quarter 2003. We anticipate that the continuation of a collective bargaining
unit at our Alaska drilling subsidiary will not have any material adverse impact
on the operations of that entity or Nabors as a whole. During the first quarter
2003 the NLRB commenced a suit asserting that our subsidiary committed an unfair
labor practice in failing to adequately bargain with the collective bargaining
representative in connection with a change in Nabors' medical insurance program.
The administrative law judge who heard the case ruled in Nabors' favor and the
matter was appealed to an appeals panel of the NLRB, which affirmed the judge's
ruling. The matter was not further appealed and is now concluded. On February
10, 2004, the Alaska State District Council of Laborers filed a charge with the
NLRB alleging that our subsidiary committed an unfair labor practice by
threatening certain employees for the purpose of inducing them to alter a
Pro-Active Safety Report. That charge since has been withdrawn. On January 27,
2005, the Alaska State District Council of Laborers filed a charge with the NLRB
alleging that our subsidiary committed an unfair labor practice by denying an
employee representation during an interview in connection with an investigation
into allegations made by the employee of certain misconduct by others. Nabors
denies the allegations, believes that it has meritorious defenses and further
believes that the outcome of the dispute will not have a material adverse effect
on our financial position, results of operations or cash flows.

Certain rig employees in Argentina and Australia are represented by
collective bargaining units.

SEASONALITY.

Our Canadian and Alaskan drilling and workover operations are subject to
seasonal variations as a result of weather conditions and generally experience
reduced levels of activity and financial results during the second calendar
quarter of each year. Seasonality does not have a material impact on the
remaining portions of our business. Our overall financial results reflect the
seasonal variations experienced in our Canadian and Alaskan operations.

RESEARCH AND DEVELOPMENT.

Research and development does not constitute a material part of our overall
business. However, technology is of growing importance to our business and
management expects to maintain its competitive position technologically with the
internal development of technology or through strategic acquisitions.

INDUSTRY/COMPETITIVE CONDITIONS.

To a large degree, Nabors' businesses depend on the level of capital
spending by oil and gas companies for exploration, development and production
activities. A sustained increase or decrease in the price of natural gas or oil
could have a material impact on exploration, development and production
activities by our customers and could also affect materially our financial
position, results of operations and cash flows. See "Risk Factors - Fluctuations
in oil and gas prices could adversely affect drilling activity and Nabors'
revenues, cash flows and profitability."

Our industry remains competitive. The number of rigs continues to exceed
demand in many of our markets, resulting in strong price competition. Many rigs
can be readily moved from one region to another in response to changes in levels
of activity, which may result in an oversupply of rigs in such areas. Many of
the total available contracts are currently awarded on a bid basis, which
further increases competition based on price. The land drilling, workover and
well-servicing market is generally more competitive than the offshore market due
to the larger number of rigs and market participants.

In all of our geographic market areas, we believe price and availability
and condition of equipment are the most significant factors in determining which
drilling contractor is awarded a job. Other factors include the availability of
trained personnel possessing the required specialized skills; the overall
quality of service and safety record; and domestically, the ability to offer
ancillary services. In international markets, experience in operating in certain
environments and customer alliances also have been factors in the selection of
Nabors.

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Certain competitors are present in more than one of Nabors' operating
regions, although no one competitor operates in all of these areas. In the U.S.
Lower 48 states, there are several hundred competitors with smaller national,
regional or local rig operations. In domestic land workover and well-servicing,
we compete with Key Energy Services, Inc. and with numerous other competitors
having smaller regional or local rig operations. In Canada and offshore, Nabors
competes with many firms of varying size, several of which have more significant
operations in those areas than Nabors. Internationally, Nabors competes directly
with various contractors at each location where it operates. Nabors believes
that the market for land drilling, workover and well-servicing contracts will
continue to be competitive for the foreseeable future.

Our other operating segments represent a relatively smaller part of our
business, and we have numerous competitors in each area. Our Canrig subsidiary
is one of the six major manufacturers of top drives. Its largest competitors are
Varco, Tesco and National Oilwell. EPOCH's largest competitor in the manufacture
of rig instrumentation systems is Varco's Totco subsidiary. Mudlogging services
are provided by a number of entities that serve the oil and gas industry on a
regional basis. EPOCH competes for mudlogging customers with Sperry Sun and
Baker Hughes in the Gulf Coast region, California and Alaska. In the U.S. Lower
48 states, there are hundreds of rig transportation companies, and there are at
least three or four that compete with Peak USA in each of its operating regions.
In Alaska, Peak Oilfield Services principally competes with Alaska Petroleum
Contractors for road, pad and pipeline maintenance, and is one of many drill
site and road construction companies, the largest of which is VECO Corporation.

OUR BUSINESS STRATEGY.

Since 1987, with the installation of our current management team, Nabors
has adhered to a consistent strategy aimed at positioning our company to grow
and prosper in good times and to mitigate adverse effects during periods of poor
market conditions. We have continued to strive to attain a financial posture
that would allow us to capitalize on market weakness by adding to our business
base, thereby enhancing our upside potential at reasonable costs. The principal
elements of our strategy have been to:

- - Maintain flexibility to respond to changing conditions.

- - Maintain a conservative and flexible balance sheet.

- - Build cost effectively a base of premium assets.

- - Build and maintain low operating costs through economies of scale.

- - Develop and maintain long-term, mutually attractive relationships with key
customers and vendors.

- - Build a diverse business in long-term, sustainable and worthwhile
geographic markets.

- - Recognize and seize opportunities as they arise.

- - Continually improve safety, quality and efficiency.

- - Implement leading edge technology where cost-effective to do so.

Our business strategy is designed to allow us to grow and remain profitable
in any market environment. The major developments in our business in the past
year illustrate our implementation of this strategy and its continuing success.

RISK FACTORS

In addition to the other information set forth elsewhere in this Form 10-K,
the following factors should be carefully considered when evaluating Nabors.

FLUCTUATIONS IN OIL AND GAS PRICES COULD ADVERSELY AFFECT DRILLING ACTIVITY AND
OUR REVENUES, CASH FLOWS AND PROFITABILITY

Our operations are materially dependent upon the level of activity in oil
and gas exploration and production. Both short-term and long-term trends in oil
and gas prices affect the level of such activity. Oil and gas prices and,
therefore, the level of drilling, exploration and production activity can be
volatile. Worldwide military, political and economic events, including
initiatives by the Organization of Petroleum Exporting Countries, may affect
both the demand for, and the supply of, oil and gas. Weather conditions,
governmental regulation (both in the United States and elsewhere), levels of
consumer demand, the availability of pipeline capacity, and other factors beyond
our control may also affect the supply of and demand for oil and gas. We believe
that any prolonged reduction in oil and gas prices would depress the level of
exploration and production activity. This would likely result in a corresponding
decline in the demand for our services and could have a material adverse effect
on our revenues, cash flows and profitability. Lower oil and gas prices could
also cause our customers to seek to terminate, renegotiate or fail to honor our
drilling contracts; affect the fair market value of our rig fleet which in turn
could trigger a write-down for accounting purposes; affect our ability to retain
skilled rig personnel; and affect

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our ability to obtain access to capital to finance and grow our business. There
can be no assurances as to the future level of demand for our services or future
conditions in the oil and gas and oilfield services industries.

WE OPERATE IN A HIGHLY COMPETITIVE INDUSTRY WITH EXCESS DRILLING CAPACITY, WHICH
MAY ADVERSELY AFFECT OUR RESULTS OF OPERATIONS

The oilfield services industry in which we operate is very competitive.
Contract drilling companies compete primarily on a regional basis, and
competition may vary significantly from region to region at any particular time.
Many drilling, workover and well-servicing rigs can be moved from one region to
another in response to changes in levels of activity and provided market
conditions warrant, which may result in an oversupply of rigs in an area. In
many markets in which we operate, the number of rigs available for use exceeds
the demand for rigs, resulting in price competition. Most drilling and workover
contracts are awarded on the basis of competitive bids, which also results in
price competition. The land drilling market generally is more competitive than
the offshore drilling market because there are larger numbers of rigs and
competitors.

THE NATURE OF OUR OPERATIONS PRESENTS INHERENT RISKS OF LOSS THAT, IF NOT
INSURED OR INDEMNIFIED AGAINST, COULD ADVERSELY AFFECT OUR RESULTS OF OPERATIONS

Our operations are subject to many hazards inherent in the drilling,
workover and well-servicing industries, including blowouts, cratering,
explosions, fires, loss of well control, loss of hole, damaged or lost drilling
equipment and damage or loss from inclement weather or natural disasters. Any of
these hazards could result in personal injury or death, damage to or destruction
of equipment and facilities, suspension of operations, environmental damage and
damage to the property of others. Our offshore operations are also subject to
the hazards of marine operations including capsizing, grounding, collision,
damage from heavy weather or sea conditions and unsound ocean bottom conditions.
In addition, our international operations are subject to risks of war, civil
disturbances or other political events. Generally, drilling contracts provide
for the division of responsibilities between a drilling company and its
customer, and we seek to obtain indemnification from our customers by contract
for certain of these risks. To the extent that we are unable to transfer such
risks to customers by contract or indemnification agreements, we seek protection
through insurance. However, there is no assurance that such insurance or
indemnification agreements will adequately protect us against liability from all
of the consequences of the hazards described above. The occurrence of an event
not fully insured or indemnified against, or the failure of a customer or
insurer to meet its indemnification or insurance obligations, could result in
substantial losses. In addition, there can be no assurance that insurance will
be available to cover any or all of these risks, or, even if available, that it
will be adequate or that insurance premiums or other costs will not rise
significantly in the future, so as to make such insurance prohibitive. It is
likely that we will face continued upward pressure in our upcoming insurance
renewals, our premiums and deductibles will be higher, and certain insurance
coverage either will be unavailable or more expensive than it has been in the
past. Moreover, our insurance coverage generally provides that we assume a
portion of the risk in the form of an insurance coverage deductible. We expect
that we may choose to increase the levels of deductibles (and thus assume a
greater degree of risk) from time to time in order to minimize the effect of
insurance premium increases.

THE PROFITABILITY OF OUR INTERNATIONAL OPERATIONS COULD BE ADVERSELY AFFECTED BY
WAR, CIVIL DISTURBANCE OR POLITICAL OR ECONOMIC TURMOIL

We derive a significant portion of our business from international markets,
including major operations in Canada, the Middle East, the Far East and South
and Central America. These operations are subject to various risks, including
the risk of war, civil disturbances and governmental activities that may limit
or disrupt markets, restrict the movement of funds or result in the deprivation
of contract rights or the taking of property without fair compensation. In
certain countries, our operations may be subject to the additional risk of
fluctuating currency values and exchange controls. In the international markets
in which we operate, we are subject to various laws and regulations that govern
the operation and taxation of our business and the import and export of our
equipment from country to country, the imposition, application and
interpretation of which can prove to be uncertain.

CHANGES TO OR NONCOMPLIANCE WITH GOVERNMENTAL REGULATION OR EXPOSURE TO
ENVIRONMENTAL LIABILITIES COULD ADVERSELY AFFECT OUR RESULTS OF OPERATIONS

The drilling of oil and gas wells is subject to various federal, state,
local and foreign laws, rules and regulations. Our cost of compliance with these
laws and regulations may be substantial. For example, federal law imposes a
variety of regulations on "responsible parties" related to the prevention of oil
spills and liability for damages from such spills. As an owner and operator of
onshore and offshore rigs and transportation equipment, we may be deemed to be a
responsible party under federal law. In addition, our well-servicing, workover
and production services operations routinely involve the

-7-

handling of significant amounts of waste materials, some of which are classified
as hazardous substances. Our operations and facilities are subject to numerous
state and federal environmental laws, rules and regulations, including, without
limitation, laws concerning the containment and disposal of hazardous
substances, oilfield waste and other waste materials, the use of underground
storage tanks and the use of underground injection wells. We generally require
customers to contractually assume responsibility for compliance with
environmental regulations. However, we are not always successful in allocating
to customers all of these risks nor is there any assurance that the customer
will be financially able to bear those risks assumed.

We employ personnel responsible for monitoring environmental compliance and
arranging for remedial actions that may be required from time to time and also
use outside experts to advise on and assist with our environmental compliance
efforts. Liabilities are recorded when the need for environmental assessments
and/or remedial efforts become known or probable and the cost can be reasonably
estimated.

Laws protecting the environment generally have become more stringent than
in the past and are expected to continue to become more so. Violation of
environmental laws and regulations can lead to the imposition of administrative,
civil or criminal penalties, remedial obligations; and in some cases injunctive
relief. Such violations could also result in liabilities for personal injuries,
property damage, and other costs and claims.

Under the Comprehensive Environmental Response, Compensation and Liability
Act, also known as CERCLA or Superfund, and related state laws and regulations,
liability can be imposed jointly on the entire group of responsible parties or
separately on any one of the responsible parties, without regard to fault or the
legality of the original conduct on certain classes of persons that contributed
to the release of a "hazardous substance" into the environment. Under CERCLA,
such persons may be liable for the costs of cleaning up the hazardous substances
that have been released into the environment and for damages to natural
resources.

Changes in federal and state environmental regulations may also negatively
impact oil and natural gas exploration and production companies, which in turn
could have a material adverse effect on us. For example, legislation has been
proposed from time to time in Congress which would reclassify certain oil and
natural gas production wastes as hazardous wastes, which would make the
reclassified wastes subject to more stringent handling, disposal and clean-up
requirements. If enacted, such legislation could dramatically increase operating
costs for oil and natural gas companies and could reduce the market for our
services by making many wells and/or oilfields uneconomical to operate.

The Oil Pollution Act of 1990, as amended, contains provisions specifying
responsibility for removal costs and damages resulting from discharges of oil
into navigable waters or onto the adjoining shorelines. In addition, the Outer
Continental Shelf Lands Act provides the federal government with broad
discretion in regulating the leasing of offshore oil and gas production sites.
Because our offshore support vessel operations rely on offshore oil and gas
exploration and production, if the government were to exercise its authority
under this law to restrict the availability of offshore oil and gas leases, such
an action could have a material adverse effect on our offshore support vessel
operations.

It is possible that future changes to tax laws (including tax treaties)
could have an impact on our ability to realize the tax savings recorded to date
as well as future tax savings as a result of our corporate reorganization,
depending on any responsive action taken by us.

RECENT LEGISLATION COULD CURTAIL OUR ABILITY TO TIME CHARTER VESSELS IN U.S.
COASTWISE TRADE

Our Sea Mar division time charters supply vessels to offshore operators in
U.S. waters. The vessels are owned by one of our financing company subsidiaries,
but are operated and managed by a U.S. citizen-controlled company pursuant to
long-term bareboat charters. As a result of recent legislation, beginning in
August 2007 Sea Mar will no longer be able to use this arrangement to qualify
vessels for employment in the U.S. coastwise trade. Accordingly, we will be
required to restructure the arrangement, redeploy the vessels outside the United
States, or sell the vessels by no later than such time.

As of December 31, 2004, the net assets of Sea Mar totaled approximately
$159.8 million. During 2004 Sea Mar had income before income taxes totaling $2.3
million.

AS A HOLDING COMPANY, WE DEPEND ON OUR SUBSIDIARIES TO MEET OUR FINANCIAL
OBLIGATIONS

We are a holding company with no significant assets other than the stock of
our subsidiaries. In order to meet our financial needs, we rely exclusively on
repayments of interest and principal on intercompany loans made by us to our
operating subsidiaries and income from dividends and other cash flow from such
subsidiaries. There can be no assurance that

-8-

our operating subsidiaries will generate sufficient net income to pay upstream
dividends or cash flow to make payments of interest and principal to us in
respect of their intercompany loans. In addition, from time to time, our
operating subsidiaries may enter into financing arrangements which may
contractually restrict or prohibit such upstream payments to us. There may also
be adverse tax consequences associated with making dividend payments upstream.

WE DO NOT CURRENTLY INTEND TO PAY DIVIDENDS

We have not paid any cash dividends on our common shares since 1982. Nabors
does not currently intend to pay any cash dividends on its common shares.
However, we note that there have been recent positive industry trends and
changes in tax law providing more favorable treatment of dividends. As a result,
we can give no assurance that we will not reevaluate our position on dividends
in the future.

BECAUSE OUR OPTION, WARRANT AND CONVERTIBLE SECURITIES HOLDERS HAVE A
CONSIDERABLE NUMBER OF COMMON SHARES AVAILABLE FOR ISSUANCE AND RESALE,
SIGNIFICANT ISSUANCES OR RESALES IN THE FUTURE MAY ADVERSELY AFFECT THE MARKET
PRICE OF OUR COMMON SHARES

As of February 28, 2005, we had 400,000,000 authorized common shares, of
which 150,423,275 shares were outstanding. In addition, 34,410,812 common shares
were reserved for issuance pursuant to option and employee benefit plans, and
18,476,525 shares were reserved for issuance upon conversion or repurchase of
outstanding zero coupon convertible debentures and zero coupon senior
exchangeable notes. In addition, up to 216,149 of our common shares could be
issuable on exchange of the shares of Nabors Exchangeco (Canada) Inc. We also
may sell up to $700 million of securities of various types in connection with a
shelf registration statement declared effective on January 16, 2003 by the
Securities and Exchange Commission. The sale, or availability for sale, of
substantial amounts of our common shares in the public market, whether directly
by us or resulting from the exercise of warrants or options (and, where
applicable, sales pursuant to Rule 144) or the conversion into common shares, or
repurchase of debentures and notes using common shares, would be dilutive to
existing security holders, could adversely affect the prevailing market price of
our common shares and could impair our ability to raise additional capital
through the sale of equity securities.

PROVISIONS OF OUR ORGANIZATIONAL DOCUMENTS MAY DETER A CHANGE OF CONTROL
TRANSACTION AND DECREASE THE LIKELIHOOD OF A SHAREHOLDER RECEIVING A CHANGE OF
CONTROL PREMIUM

Our board of directors is divided into three classes, with each class
serving a staggered three-year term. In addition, our board of directors has the
authority to issue a significant amount of common shares and up to 25,000,000
preferred shares and to determine the price, rights (including voting rights),
conversion ratios, preferences and privileges of the preferred shares, in each
case without further vote or action by the holders of the common shares.
Although we have no present plans to issue preferred shares, the classified
board and our board's ability to issue additional preferred shares may
discourage, delay or prevent changes in control of Nabors that are not supported
by our board, thereby possibly preventing certain of our shareholders from
realizing a possible premium on their shares. In addition, the requirement in
the indenture for Series B of our $700 million zero coupon senior exchangeable
notes due 2023 to pay a make-whole premium in the form of an increase in the
exchange rate in certain circumstances could have the effect of making a change
in control of Nabors more expensive.

WE HAVE A SUBSTANTIAL AMOUNT OF DEBT OUTSTANDING

We had approximately $2.0 billion in debt outstanding at December 31, 2004,
resulting in a funded debt to capital ratio of 0.41:1 and a net funded debt to
capital ratio of 0.17:1. Both of these ratios are a method for calculating the
amount of leverage a company has in relation to its capital.

ACQUISITIONS AND DIVESTITURES

We have grown from a land drilling business centered in the U.S. Lower 48,
Canada and Alaska to an international business with operations on land and
offshore in many of the major oil, gas and geothermal markets in the world. At
the beginning of 1990, our fleet consisted of 44 land drilling rigs in Canada,
Alaska and in various international markets. Today, Nabors' worldwide fleet
consists of almost 600 land drilling rigs, approximately 700 domestic and 215
international land workover and well-servicing rigs, 43 offshore platform rigs,
19 jack-up units, three barge rigs and a large component of trucks and fluid
hauling vehicles. This growth was fueled in part by strategic acquisitions.
Although Nabors continues to examine opportunities, there can be no assurance
that attractive rigs or other acquisition opportunities will continue to be
available, that the pricing will be economical or that we will be successful in
making such acquisitions in the future.

-9-

From time to time, we may sell a subsidiary or group of assets outside of
our core markets or business, if it is economically advantageous for us to do
so.

ENVIRONMENTAL COMPLIANCE

Nabors does not presently anticipate that compliance with currently
applicable environmental regulations and controls will significantly change its
competitive position, capital spending or earnings during 2005. Nabors believes
it is in material compliance with applicable environmental rules and
regulations, and the cost of such compliance is not material to the business or
financial condition of Nabors. For a more detailed description of the
environmental laws and regulations applicable to Nabors operations, see above
under Risk Factors -- Noncompliance with governmental regulation or exposure to
environmental liabilities could adversely affect Nabors' results of operations.

ITEM 2. PROPERTIES

Many of the international drilling rigs and certain of the Alaska rigs in
our fleet are supported by mobile camps which house the drilling crews and a
significant inventory of spare parts and supplies. In addition, we own various
trucks, forklifts, cranes, earth moving and other construction and
transportation equipment, which are used to support the drilling and logistics
operations.

Nabors and its subsidiaries own or lease executive and administrative
office space in St. Michael, Barbados (principal executive office); Houston,
Texas; Anchorage, Alaska; Harvey, Houma, Iberia, and New Iberia, Louisiana;
Bakersfield, California; Magnolia, Texas; Calgary and Nisku, Alberta, Canada;
Sana'a, Yemen; Dubai, U.A.E.; Dhahran, Saudi Arabia; and Anaco, Venezuela. We
also own or lease a number of facilities and storage yards used in support of
operations in each of our geographic markets.

Nabors and its subsidiaries own certain mineral interests in connection
with their investing and operating activities. Nabors does not consider these
properties to be material to its overall operations.

Additional information about our properties can be found in Notes 2 and 5
(each, under the caption "Property, Plant and Equipment") and 13 (under the
caption "Operating Leases") of the Notes to Consolidated Financial Statements in
Part II Item 8 below. The revenues and property, plant and equipment by
geographic area for the fiscal years ended December 31, 2002, 2003 and 2004, can
be found in Note 17 of the Notes to Consolidated Financial Statements in Part II
Item 8 below. A description of our rig fleet is included under the caption
"Introduction" in Part I Item 1 - Business.

Nabors' management believes that our equipment and facilities are adequate
to support our current level of operations as well as an expansion of drilling
operations in those geographical areas where we may expand.

ITEM 3. LEGAL PROCEEDINGS

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

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

Not applicable.

-10-

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND
ISSUER REPURCHASES OF EQUITY SECURITIES

I. MARKET AND SHARE PRICES.

Our shares are traded on the American Stock Exchange under the symbol
"NBR". At December 31, 2004, there were approximately 2,218 shareholders of
record. We have not paid any cash dividends on our common shares since 1982.
Nabors does not currently intend to pay any cash dividends on its common shares.
However, we note that there have been recent positive industry trends and
changes in tax law providing more favorable treatment of dividends. As a result,
we can give no assurance that we will not reevaluate our position on dividends
in the future.

The following table sets forth the reported high and low sales prices of
our common shares as reported on the American Stock Exchange.

SHARE PRICE
---------------
CALENDAR YEAR HIGH LOW
- ------------- ------ ------

2003 First quarter $42.60 $32.20
Second quarter 45.85 37.65
Third quarter 40.50 33.87
Fourth quarter 42.52 35.76

2004 First quarter 49.32 41.01
Second quarter 47.70 40.02
Third quarter 47.87 41.25
Fourth quarter 54.25 45.87

II. DIVIDEND POLICY.

See "Part I - Item 1 - Business - Risk Factors - We do not currently intend
to pay dividends."

III. SHAREHOLDER MATTERS.

Bermuda has exchange controls which apply to residents in respect of the
Bermudian dollar. As an exempt company, Nabors is considered to be nonresident
for such controls; consequently, there are no Bermuda governmental restrictions
on the Company's ability to make transfers and carry out transactions in all
other currencies, including currency of the United States.

There is no reciprocal tax treaty between Bermuda and the United States
regarding withholding taxes. Under existing Bermuda law, there is no Bermuda
income or withholding tax on dividends, if any, paid by Nabors to its
shareholders. Furthermore, no Bermuda tax or other levy is payable on the sale
or other transfer (including by gift or on the death of the shareholder) of
Nabors common shares (other than by shareholders resident in Bermuda).

-11-

ITEM 6. SELECTED FINANCIAL DATA

OPERATING DATA (1)(2)

YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------
2004 2003 2002 2001 2000 1999 1998
---------- ---------- ---------- ---------- ---------- -------- ----------

(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS AND RATIO DATA)

Revenues and other income:
Operating revenues $2,394,031 $1,880,003 $1,466,443 $2,201,736 $1,388,660 $666,429 $1,008,169
Earnings (losses) from
unconsolidated affiliates 4,057 10,183 14,775 26,334 26,283 3,757 (305)
Investment income 50,064 33,813 36,961 56,437 39,451 12,908 1,275
---------- ---------- ---------- ---------- ---------- -------- ----------
Total revenues and other income 2,448,152 1,923,999 1,518,179 2,284,507 1,454,394 683,094 1,009,139
---------- ---------- ---------- ---------- ---------- -------- ----------
Costs and other deductions:
Direct costs 1,572,649 1,276,953 973,910 1,366,967 938,651 446,597 663,551
General and administrative
expenses 195,388 165,403 141,895 135,496 106,504 65,288 77,026
Depreciation and amortization 254,939 226,528 187,665 184,119 148,087 98,152 84,949
Depletion 45,460 8,599 7,700 5,777 4,326 1,741 --
Interest expense 48,507 70,740 67,068 60,722 35,370 30,395 15,463
Losses (gains) on sales of
long-lived assets, impairment
charges and other expense
(income), net (4,629) 1,153 (833) (26,186) (8,287) (4,708) (31,831)
---------- ---------- ---------- ---------- ---------- -------- ----------
Total costs and other deductions 2,112,314 1,749,376 1,377,405 1,726,895 1,224,651 637,465 809,158
---------- ---------- ---------- ---------- ---------- -------- ----------
Income before income taxes 335,838 174,623 140,774 557,612 229,743 45,629 199,981
Income tax expense (benefit) 33,381 (17,605) 19,285 200,162 92,387 17,925 74,993
---------- ---------- ---------- ---------- ---------- -------- ----------
Net income $ 302,457 $ 192,228 $ 121,489 $ 357,450 $ 137,356 $ 27,704 $ 124,988
========== ========== ========== ========== ========== ======== ==========
Earnings per diluted share $ 1.92 $ 1.25 $ .81 $ 2.24 $ .90 $ .23 $ 1.16
Weighted average number of diluted
common shares outstanding 164,030 156,897 149,997 168,790 152,417 120,449 112,555
Capital expenditures and
acquisitions of businesses (3) $ 544,429 $ 353,138 $ 702,843 $ 803,241 $ 334,279 $837,732 $ 315,057
Interest coverage ratio (4) 14.1 : 1 6.8 : 1 6.0 : 1 13.3 : 1 11.8 : 1 5.8 : 1 19.4 : 1

TWELVE
MONTHS ENDED
DECEMBER 31, YEAR ENDED SEPTEMBER 30,
(UNAUDITED) ------------------------
1997 1997 1996
------------ ---------- ---------

(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS AND RATIO DATA)

Revenues and other income:
Operating revenues $1,114,758 $1,028,853 $ 719,604
Earnings (losses) from
unconsolidated affiliates 274 450 139
Investment income 4,056 15,384 8,052
---------- ---------- ---------
Total revenues and other income 1,119,088 1,044,687 727,795
---------- ---------- ---------
Costs and other deductions:
Direct costs 774,856 737,780 539,665
General and administrative
expenses 72,478 70,371 56,862
Depreciation and amortization 72,350 66,391 46,117
Depletion -- -- --
Interest expense 16,323 16,520 11,884
Losses (gains) on sales of
long-lived assets, impairment
charges and other expense
(income), net (26,382) (28,785) (8,333)
---------- ---------- ---------
Total costs and other deductions 909,625 862,277 646,195
---------- ---------- ---------
Income before income taxes 209,463 182,410 81,600
Income tax expense (benefit) 73,443 67,602 11,100
---------- ---------- ---------
Net income $ 136,020 $ 114,808 $ 70,500
========== ========== =========
Earnings per diluted share $ 1.24 $ 1.08 $ .75
Weighted average number of diluted
common shares outstanding 113,793 111,975 93,752
Capital expenditures and
acquisitions of businesses (3) $ 381,196 $ 399,895 $ 177,925
Interest coverage ratio (4) 18.3 : 1 16.1 : 1 11.7 : 1

BALANCE SHEET DATA (1)(2)

AS OF DECEMBER 31,
----------------------------------------------------------------------------------------
2004 2003 2002 2001 2000 1999 1998
---------- ---------- ---------- ---------- ---------- ---------- ----------

(IN THOUSANDS, EXCEPT RATIO DATA)
Cash and cash equivalents, and
short-term and long-term
marketable and non-marketable
securities $1,411,047 $1,579,090 $1,345,799 $ 918,637 $ 550,953 $ 111,666 $ 47,340
Working capital 381,658 917,274 618,454 700,816 524,437 195,817 36,822
Property, plant and equipment, net 3,275,495 2,990,792 2,801,067 2,451,386 1,835,039 1,678,664 1,127,154
Total assets 5,862,609 5,602,692 5,063,872 4,151,915 3,136,868 2,398,003 1,465,907
Long-term debt 1,201,686 1,985,553 1,614,656 1,567,616 854,777 482,600 217,034
Shareholders' equity $2,929,393 $2,490,275 $2,158,455 $1,857,866 $1,806,468 $1,470,074 $ 867,469
Funded debt to capital ratio:
Gross (5) 0.41 : 1 0.48 : 1 0.49 : 1 0.46 : 1 0.32 : 1 0.25 : 1 0.26 : 1
Net (6) 0.17 : 1 0.22 : 1 0.26 : 1 0.26 : 1 0.15 : 1 0.20 : 1 0.17 : 1

AS OF
DECEMBER 31, AS OF SEPTEMBER 30,
(UNAUDITED) ----------------------
1997 1997 1996
------------ ---------- ---------

(IN THOUSANDS, EXCEPT RATIO DATA)
Cash and cash equivalents, and
short-term and long-term
marketable and non-marketable
securities $ 42,135 $ 53,323 $ 115,866
Working capital 62,571 70,872 172,091
Property, plant and equipment, net 923,402 861,393 511,203
Total assets 1,281,306 1,234,232 871,274
Long-term debt 226,299 229,507 229,504
Shareholders' equity $ 767,340 $ 727,843 $ 457,822
Funded debt to capital ratio:
Gross (5) 0.27 : 1 0.27 : 1 0.35 : 1
Net (6) 0.20 : 1 0.20 : 1 0.21 : 1

(1) Our acquisitions' results of operations and financial position have been
included beginning on the respective dates of acquisition and include Ryan
Energy Technologies, Inc. (October 2002), Enserco Energy Service Company
Inc. (April 2002), Command Drilling Corporation (November 2001), Pool
Energy Services Co. (November 1999), Bayard Drilling Technologies, Inc.
(April 1999), New Prospect Drilling Company (May 1998), Can-Tex Drilling &
Exploration, Ltd. land rigs (May 1998), Veco Drilling, Inc. land rigs
(November 1997), Diamond L Drilling & Production land rigs (November 1997),
Cleveland Drilling Company, Inc. (August 1997), Chesley Pruet Drilling
Company (April 1997), Adcor-Nicklos Drilling Company (January 1997,
retroactive to October 1996), Noble Drilling Corporation land rigs
(December 1996), Exeter Drilling Company and its subsidiary, and J.W.
Gibson Well Services Company (April 1996). The results of operations also
reflect the disposition of our UK North Sea (November 1996) and J.W. Gibson
(January 1998) operations.

(2) We changed our fiscal year end from September 30 to December 31, effective
for the fiscal year beginning January 1, 1998.

(3) Represents capital expenditures and the portion of the purchase price of
acquisitions allocated to fixed assets and goodwill based on their fair
market value.

(4) The interest coverage ratio is computed by calculating the sum of income
before income taxes, interest expense, depreciation and amortization, and
depletion expense and then dividing by interest expense. This ratio is a
method for calculating the amount of cash flows available to cover interest
expense.

(5) The gross 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.

(6) The net funded debt to capital ratio is calculated by dividing net funded
debt by net funded debt plus capital. Net funded debt is defined as the sum
of (1) short-term borrowings, (2) current portion of long-term debt and (3)
long-term debt and then subtracting cash and cash equivalents and
marketable and non-marketable securities. Capital is defined as
shareholders' equity.

-12-

ITEM 7. 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. We conduct
oil, gas and geothermal land drilling operations in the U.S. Lower 48 states,
Alaska, Canada, South and Central America, the Middle East, the Far East and
Africa. Nabors also is one of the largest land well-servicing and workover
contractors in the United States and Canada and is a leading provider of
offshore platform workover and drilling rigs in the United States and multiple
international markets. To further supplement and complement our primary
business, we offer a wide range of ancillary well-site services, including
engineering, transportation, construction, maintenance, well logging,
directional drilling, rig instrumentation, data collection and other support
services, in selected domestic and international markets. We have also made
selective investments in oil and gas exploration, development and production
activities.

The majority of our business is conducted through our various Contract
Drilling operating segments, which include our drilling, workover and
well-servicing operations, on land and offshore. Our limited oil and gas
exploration, development and production operations are included in a category
labeled Oil and Gas for segment reporting purposes. Our operating segments
engaged in marine transportation and supply services, drilling technology and
top drive manufacturing, directional drilling, rig instrumentation and software,
and construction and logistics operations are aggregated in a category labeled
Other Operating Segments for segment reporting purposes. A discussion of our
results of operations for the last three years is included below. This
discussion should be read in conjunction with our consolidated financial
statements and notes thereto included in Part II Item 8 below.

-13-

RESULTS OF OPERATIONS

The following tables set forth certain information with respect to our
reportable segments and rig activity:

YEAR ENDED DECEMBER 31, INCREASE (DECREASE)
------------------------------------ ------------------------------------
2004 2003 2002 2004 TO 2003 2003 TO 2002
---------- ---------- ---------- --------------- ---------------

(IN THOUSANDS, EXCEPT PERCENTAGES
AND RIG ACTIVITY)
Reportable segments:
Operating revenues and
Earnings from unconsolidated
affiliates:
Contract Drilling: (1)
U.S. Lower 48 Land Drilling $ 748,999 $ 476,258 $ 374,659 $272,741 57% $101,599 27%
U.S. Land Well-servicing 360,010 312,279 294,428 47,731 15% 17,851 6%
U.S. Offshore 132,778 101,566 105,717 31,212 31% (4,151) (4%)
Alaska 83,835 112,092 118,199 (28,257) (25%) (6,107) (5%)
Canada 426,675 322,303 141,497 104,372 32% 180,806 128%
International 444,289 396,884 320,160 47,405 12% 76,724 24%
---------- ---------- ---------- -------- --------
Subtotal Contract Drilling (2) 2,196,586 1,721,382 1,354,660 475,204 28% 366,722 27%
Oil and Gas (3) 65,303 16,919 7,223 48,384 286% 9,696 134%
Other Operating Segments (4) (5) 205,615 201,660 174,775 3,955 2% 26,885 15%
Other reconciling items (6) (69,416) (49,775) (55,440) (19,641) (39%) 5,665 10%
---------- ---------- ---------- -------- --------
Total $2,398,088 $1,890,186 $1,481,218 $507,902 27% $408,968 28%
========== ========== ========== ======== ========

Adjusted income (loss) derived from
operating activities: (7)
Contract Drilling:
U.S. Lower 48 Land Drilling $ 93,573 $ 16,800 $ 23,415 $ 76,773 457% $ (6,615) (28%)
U.S. Land Well-servicing 57,712 47,082 38,631 10,630 23% 8,451 22%
U.S. Offshore 20,611 1,649 (1,397) 18,962 N/M (8) 3,046 218%
Alaska 16,052 37,847 31,387 (21,795) (58%) 6,460 21%
Canada 91,421 59,856 17,413 31,565 53% 42,443 244%
International 89,211 77,964 76,121 11,247 14% 1,843 2%
---------- ---------- ---------- -------- --------
Subtotal Contract Drilling 368,580 241,198 185,570 127,382 53% 55,628 30%
Oil and Gas 13,736 5,850 (1,058) 7,886 135% 6,908 N/M (8)
Other Operating Segments (5,333) 3,266 24,660 (8,599) (263%) (21,394) (87%)
Other reconciling items (9) (47,331) (37,611) (39,124) (9,720) (26%) 1,513 4%
---------- ---------- ---------- -------- --------
Total $ 329,652 $ 212,703 $ 170,048 $116,949 55% $ 42,655 25%
Interest expense (48,507) (70,740) (67,068) 22,233 31% (3,672) (5%)
Investment income 50,064 33,813 36,961 16,251 48% (3,148) (9%)
Gains (losses) on sales of long-lived
assets, impairment charges and
other income (expense), net 4,629 (1,153) 833 5,782 N/M (8) (1,986) (238%)
---------- ---------- ---------- -------- --------
Income before income taxes $ 335,838 $ 174,623 $ 140,774 $161,215 92% $ 33,849 24%
========== ========== ========== ======== ========

Rig activity:
Rig years: (10)
U.S. Lower 48 Land Drilling 199.0 143.1 103.0 55.9 39% 40.1 39%
U.S. Offshore 14.4 14.1 14.5 .3 2% (.4) (3%)
Alaska 6.9 7.9 9.3 (1.0) (13%) (1.4) (15%)
Canada 46.5 42.1 22.9 4.4 10% 19.2 84%
International (11) 67.7 61.1 55.1 6.6 11% 6.0 11%
---------- ---------- ---------- -------- --------
Total rig years 334.5 268.3 204.8 66.2 25% 63.5 31%
========== ========== ========== ======== ========
Rig hours: (12)
U.S. Land Well-servicing 1,137,914 1,088,511 1,014,657 49,403 5% 73,854 7%
Canada Well-servicing (13) 377,170 321,472 164,785 55,698 17% 156,687 95%
---------- ---------- ---------- -------- --------
Total rig hours 1,515,084 1,409,983 1,179,442 105,101 7% 230,541 20%
========== ========== ========== ======== ========

-14-

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

(2) Includes Earnings from unconsolidated affiliates, accounted for by the
equity method, of $1.6 million, $2.8 million and $3.9 million for the years
ended December 31, 2004, 2003 and 2002, respectively.

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

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

(5) Includes Earnings from unconsolidated affiliates, accounted for by the
equity method, of $2.5 million, $7.4 million and $10.9 million for the
years ended December 31, 2004, 2003 and 2002, respectively.

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

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

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

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

(10) Excludes well-servicing rigs, which are measured in rig hours. Includes our
equivalent percentage ownership of rigs owned by 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.

(11) International rig years include our equivalent percentage ownership of rigs
owned by unconsolidated affiliates which totaled 4.0 years, 3.8 years and
3.7 years during the years ended December 31, 2004, 2003 and 2002,
respectively.

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

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

-15-

2004 COMPARED TO 2003

Operating revenues and Earnings from unconsolidated affiliates for 2004
totaled $2.4 billion, representing an increase of $507.9 million, or 27%,
compared to 2003. Adjusted income derived from operating activities and net
income for 2004 totaled $329.7 million and $302.5 million ($1.92 per diluted
share), respectively, representing increases of 55% and 57%, respectively,
compared to 2003.

The increase in our operating results during 2004 resulted from higher
revenues realized by essentially all of our business units as a result of higher
activity levels and higher average dayrates during 2004 compared to 2003. This
increase in activity reflects an increase in demand for our services in these
markets during 2004, which resulted from continuing higher price levels for
natural gas and oil during 2003 and 2004.

Natural gas prices are the primary driver of our U.S. Lower 48 Land
Drilling, Canadian and U.S. Offshore (Gulf of Mexico) operations, while oil
prices are the primary driver of our Alaskan, International and U.S. Land
Well-servicing operations. The Henry Hub natural gas spot price (per Bloomberg)
averaged $5.90 per million cubic feet (mcf) during 2004, up from a $5.49 per mcf
average during 2003. West Texas intermediate spot oil prices (per Bloomberg)
averaged $41.51 per barrel during 2004, up from a $31.06 per barrel average
during 2003.

Our operating results for 2005 are expected to increase from levels
realized during 2004 given our current expectation of the continuation of high
commodity prices during 2005 and the related impact on drilling and
well-servicing activity and dayrates. The expected increase in drilling activity
and dayrates should have the largest impact on our U.S. Lower 48 Land Drilling
and Canadian operations. 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. We also expect an improvement in operating results
for our U.S. Offshore operations during 2005 primarily as a result of higher
dayrates and a continuing improvement in the utilization of our workover jack-up
rigs. We expect results from our International operations during 2005 to
increase compared to 2004 as a result of new rigs operating under contract in
Saudi Arabia and our expectations of opportunities in various regions of the
world, with the largest impact expected from our operations in North Africa, the
Middle East and Mexico. Our U.S. Land Well-servicing operations are expected to
improve given our expectations of commodity prices during 2005 discussed above.
We expect results from our operations in Alaska to be reduced overall in 2005
compared to 2004, resulting from the lack of demand for drilling services by
major operators in that market.

CONTRACT DRILLING Our Contract Drilling operating segments contain one or
more of the following operations: drilling, workover and well-servicing, on land
and offshore. Operating revenues and Earnings from unconsolidated affiliates for
these operating segments totaled $2.2 billion and adjusted income derived from
operating activities totaled $368.6 million during 2004, representing increases
of 28% and 53%, respectively, compared to 2003. Rig years (excluding
well-servicing rigs) increased to 334.5 years during 2004 from 268.3 years
during 2003, as a result of increased capital spending by our customers, which
resulted from the improvement in commodity prices discussed above.

U.S. Lower 48 Land Drilling Operating revenues totaled $749.0 million
during 2004, representing an increase of 57% compared to 2003. Adjusted income
derived from operating activities totaled $93.6 million during 2004 compared to
$16.8 million during 2003. The increase in operating results during 2004
primarily resulted from increased drilling activity, which was driven by higher
natural gas prices and is reflected in the increase in rig years to 199.0 years
during 2004 from 143.1 years during 2003, and higher average dayrates compared
to the prior year.

U.S. Land Well-servicing Operating revenues and adjusted income derived
from operating activities totaled $360.0 million and $57.7 million,
respectively, during 2004, representing increases of 15% and 23%, respectively,
compared to 2003. The increase in operating results during 2004 primarily
resulted from an increase in average dayrates compared to the prior year and an
increase in well-servicing activity, which was driven by higher oil prices and
is reflected in the increase in well-servicing hours to 1,137,914 hours during
2004 compared to 1,088,511 hours during 2003.

U.S. Offshore Operating revenues totaled $132.8 million during 2004,
representing an increase of 31% compared to 2003. Adjusted income derived from
operating activities totaled $20.6 million during 2004 compared to $1.6 million
during 2003. The increase in operating results during 2004 primarily resulted
from the addition of three new platform rigs for deepwater development projects,
one of which commenced operations in the first quarter of 2004, and two of which
commenced operations late in the second quarter of 2004. Our U.S. Offshore
operations were also positively impacted by an increase in average dayrates for
our platform and jack-up rigs during 2004 compared to 2003. Rig years for our
U.S.

-16-

Offshore operations were relatively flat during 2004 compared to 2003, totaling
14.4 years for 2004 compared to 14.1 years during 2003.

Alaskan Operating revenues and adjusted income derived from operating
activities totaled $83.8 million and $16.1 million, respectively, during 2004,
representing decreases of 25% and 58%, respectively, compared to 2003. These
decreases primarily resulted from lower drilling activity, deferred revenue
recognized on one of our rigs in 2003 that did not recur in 2004, and an
incremental $5.7 million of Operating revenues recorded in the first quarter of
2003, representing business interruption insurance proceeds related to the
damage incurred on one of our land drilling rigs. The decrease in drilling
activity during 2004 primarily resulted from the completion of a significant
long-term contract in late 2003 that has not yet been renewed or replaced and is
reflected in the decrease in rig years to 6.9 years during 2004 from 7.9 years
during 2003.

Canadian Operating revenues and adjusted income derived from operating
activities totaled $426.7 million and $91.4 million, respectively, during 2004,
representing increases of 32% and 53%, respectively, compared to 2003. These
increases resulted from an increase in drilling and well-servicing revenues,
resulting from an overall increase in drilling and well-servicing activity
(which was driven by increased natural gas prices), and an increase in average
dayrates compared to the prior year. Rig years in Canada increased to 46.5 years
during 2004 from 42.1 years during 2003. Well-servicing hours increased to
377,170 hours during 2004 from 321,472 hours during 2003. Our Canadian results
were also positively impacted by the strengthening of the Canadian dollar versus
the U.S. dollar during 2004.

International Operating revenues and Earnings from unconsolidated
affiliates and adjusted income derived from operating activities totaled $444.3
million and $89.2 million, respectively, during 2004, representing increases of
12% and 14%, respectively, compared to 2003. The increase in operating results
during 2004 primarily resulted from an increase in operations in Mexico and
Saudi Arabia and from the addition of operations in India and Indonesia, which
began in the fourth quarter of 2003, partially offset by a decrease in
operations in Trinidad, Yemen, Colombia and Algeria compared to the prior year.
International rig years increased to 67.7 years during 2004 from 61.1 years
during 2003.

OIL AND GAS This operating segment represents our oil and gas exploration,
development and production operations, which we conduct in multiple locations,
including South Texas, North Louisiana, South Louisiana, Offshore Gulf of
Mexico, and Colombia. Oil and Gas Operating revenues increased to $65.3 million
during 2004 from $16.9 million during 2003. Adjusted income derived from
operating activities increased to $13.7 million during 2004 from $5.9 million
during 2003. Operating results increased during 2004 as a result of new
investments in oil and gas properties resulting from the agreements executed
with El Paso Corporation in the fourth quarter of 2003. The increase in adjusted
income derived from operating activities for 2004 was partially offset by $2.4
million in expense (included in direct costs in our consolidated statements of
income) recognized during the second quarter of 2004 as a result of a dry hole
offshore in the Gulf of Mexico, which exceeded $1.4 million in expense
recognized during the fourth quarter of 2003 as a result of a dry hole also in
the Gulf of Mexico.

In the fourth quarter of 2003 we entered into four separate agreements with
wholly-owned subsidiaries of El Paso Corporation resulting in the significant
expansion of our oil and gas operations. Under two of these agreements, we are
committed to contribute a portion of the cost to develop wells with a
combination of proved undeveloped, probable and possible reserves located
primarily in South Texas, North Louisiana and Offshore Gulf of Mexico, in
exchange for a net profits interest in such wells. El Paso serves as operator of
all the wells covered in this development program. Under the other two
agreements with El Paso, we have committed to share in the cost of drilling
exploratory wells in South Texas and South Louisiana in exchange for a share in
the prospect leases where the wells are drilled. Based on our current estimation
of oil and gas production levels, we expect to receive returns from the wells
under the developmental drilling program through the first quarter of 2006 and
from the successful wells drilled to date under the exploratory drilling program
through 2014.

Additionally, in May 2004, we entered into agreements under which we will
contribute a portion of the cost to drill exploration and developmental wells in
Colombia in exchange for an interest in each of the prospects. The terms of the
agreements call for an estimated three year exploratory drilling program and,
for any successful prospects, up to an additional 22-24 year developmental
drilling program.

We also make investments in oil and gas properties with several of our
customers. Based on our current estimation of future oil and gas production
levels, we expect to receive returns from these investments through 2015.

OTHER OPERATING SEGMENTS These operations include our marine transportation
and supply services, drilling technology and top drive manufacturing,
directional drilling, rig instrumentation and software, and construction and
logistics operations. Operating revenues and Earnings from unconsolidated
affiliates for our Other Operating Segments totaled $205.6

-17-

million during 2004, representing an increase of 2% compared to 2003. This
increase primarily resulted from an increase in revenues for our drilling
technology and top drive manufacturing, directional drilling, and rig
instrumentation and software operations during 2004 compared to 2003. This
increase in revenues was primarily driven by the strengthening in the drilling
market in the U.S. and Canada during 2004 as discussed for our Contract Drilling
segments above. This increase was partially offset by a decrease in revenues for
our marine and supply services operations resulting from the consolidation of
Sea Mar Management LLC beginning in 2004 (see discussion in Note 6 to our
consolidated financial statements in Part II Item 8) and a decrease in average
dayrates during 2004 compared to 2003, which resulted from the loss of some
higher rate contracts during the first quarter of 2004 and from an increase in
the impact of competition in the markets in which we operate during 2004.
Adjusted loss derived from operating activities totaled $5.3 million during 2004
compared to adjusted income derived from operating activities totaling
$3.3 million during 2003. This decrease primarily resulted from a decrease in
results for our Alaskan construction and logistics operations compared to 2003,
which resulted from certain projects in 2003 that did not recur in 2004 and the
loss of a significant contract during the second quarter of 2003, and decreased
margins from our marine transportation and supply services, which was driven by
lower average dayrates compared to 2003.

OTHER FINANCIAL INFORMATION General and administrative expenses totaled
$195.4 million during 2004, representing an increase of $30.0 million, or 18%,
compared to 2003. This increase primarily resulted from increased activity in a
number of our operating segments including our U.S. Lower 48 Land Drilling, U.S.
Land Well-servicing and Canadian operations, and from increased expenses at our
corporate level. As a percentage of operating revenues, general and
administrative expenses decreased (8.2% vs. 8.8%) during 2004 compared to 2003,
as these expenses were spread over a larger revenue base.

Depreciation and amortization expense totaled $254.9 million during 2004,
representing an increase of $28.4 million, or 13%, compared to 2003. This
increase primarily resulted from an increase in average rig years for our U.S.
Lower 48 Land Drilling, Canadian land drilling and International operations
compared to the prior year, and depreciation on capital expenditures made during
2003 and 2004.

Depletion expense totaled $45.5 million during 2004 compared to $8.6
million during 2003. This increase resulted from depletion on oil and gas
properties added through our agreements with El Paso Corporation in the fourth
quarter of 2003.

Interest expense totaled $48.5 million during 2004, representing a decrease
of $22.2 million, or 31%, compared to 2003. This decrease resulted from the
payment upon maturity of our 6.8% senior notes in April 2004 and the redemption
of our $825 million zero coupon convertible senior debentures in June 2003. In
June 2003 we issued $700 million in zero coupon senior exchangeable notes; the
proceeds of which were used to redeem our $825 million senior debentures. The
$700 million notes will not accrue interest unless we become obligated to pay
contingent interest, while our $825 million senior debentures had an effective
interest rate of 2.5%. The amount of contingent interest payable per note in
respect to any six-month period will equal 0.185% of the principal amount of a
note commencing on or after June 15, 2008 only if certain conditions relating to
the trading price of the notes are met (see Note 8 to our consolidated financial
statements in Part II Item 8 for a more detailed description).

Investment income totaled $50.1 million during 2004, representing an
increase of $16.3 million, or 48%, compared to 2003. This increase primarily
resulted from an increase in gains realized on sales of marketable securities
and an increase in gains realized upon redemption of non-marketable securities
during 2004. This increase was partially offset by a decrease in interest income
resulting from lower average cash and marketable securities balances in 2004
compared to 2003 and from lower average yields on our investments driven by an
overall declining interest rate environment.

Gains (losses) on sales of long-lived assets, impairment charges and other
income (expense), net increased to $4.6 million during 2004 from ($1.2) million
during 2003. These amounts for 2004 include mark-to-market gains on our range
cap and floor derivative instrument of approximately $2.4 million. These amounts
for 2003 include the recognition of approximately $1.2 million of expense
related to the settlement of amounts due to the counterparty for our range cap
and floor derivative instrument (offset by mark-to-market gains on that
derivative instrument of $.1 million) and a loss of approximately $.9 million
resulting from the redemption of our 8.625% senior subordinated notes at prices
higher than their carrying value on April 1, 2003, partially offset by gains on
sales of long-lived assets of approximately $2.5 million.

Our effective income tax (benefit) rate was 10% during 2004 compared to
(10%) for 2003. The change from an income tax benefit in 2003 to an income tax
expense in 2004 resulted from a higher proportion of our taxable income being
generated in the U.S. for 2004 compared to 2003. Income generated in the U.S. is
generally taxed at a higher rate than in international jurisdictions in which we
operate. Our effective tax rate for 2004 was also positively impacted by the
release of certain tax reserves, which were determined to no longer be
necessary, resulting in a reduction in deferred income tax expense (non-cash)
totaling approximately $16.0 million ($.10 per diluted share). In October 2004
the U.S. Congress passed and the

-18-

President signed into law the American Jobs Creation Act of 2004. The Act did
not impact the corporate reorganization completed by Nabors effective June 24,
2002, that made us a foreign entity. It is possible that future changes to tax
laws (including tax treaties) could have an impact on our ability to realize the
tax savings recorded to date as well as future tax savings as a result of our
corporate reorganization, depending on any responsive action taken by Nabors. We
expect our effective tax rate during 2005 to be in the 22% - 25% range because
we expect a high proportion of our income to be generated in the U.S., which is
generally taxed at a higher rate than in international jurisdictions in which we
operate.

2003 COMPARED TO 2002

Operating revenues and Earnings from unconsolidated affiliates for 2003
totaled $1.9 billion, representing an increase of $409.0 million, or 28%,
compared to 2002. Adjusted income derived from operating activities and net
income for 2003 totaled $212.7 million and $192.2 million ($1.25 per diluted
share), respectively, representing increases of 25% and 58%, respectively,
compared to 2002.

The increase in our Operating revenues and Earnings from unconsolidated
affiliates during 2003 primarily resulted from higher revenues realized by our
Canadian, U.S. Lower 48 Land Drilling and International operations. The improved
revenues from our Canadian operations resulted from an increase in the level of
activity for our land drilling and well-servicing operations driven by increased
demand for our services in that market during 2003 and 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. The improved
revenues for our U.S. Lower 48 Land Drilling operations resulted from higher
activity levels driven by a gradual increase in demand for drilling services in
that market during 2003. The overall increase in demand in these markets was
driven by higher average price levels for natural gas in 2003 compared to 2002.
International revenues improved primarily as a result of six new long-term
contracts for our operation in Mexico.

The increase in adjusted income derived from operating activities during
2003 primarily resulted from the increase in revenues discussed above. However,
the overall increase in adjusted income derived from operating activities for
2003 was partially offset by lower average dayrates in our U.S. Lower 48 Land
Drilling operations during 2003 and lower margins realized by certain of our
Other Operating Segments. The decrease in average dayrates for our U.S. Lower 48
Land Drilling operations resulted from dayrates declining during 2002 and
remaining flat until the latter part of 2003 when dayrates began to rise. This
decline in dayrates during 2002 resulted from the weakness in this market over
the period beginning in the third quarter of 2001 and extending through the end
of 2002. The decrease in margins for our Other Operating Segments is discussed
in detail below.

As discussed above, natural gas prices are the primary driver of our U.S.
Lower 48 Land Drilling, Canadian and U.S. Offshore operations, while oil prices
are the primary driver of our Alaskan, International and U.S. Land
Well-servicing operations. The Henry Hub natural gas spot price (per Bloomberg)
averaged $5.49 per mcf during 2003, up from a $3.37 per mcf average during 2002.
West Texas intermediate spot oil prices (per Bloomberg) averaged $31.06 per
barrel during 2003, up from a $26.17 per barrel average during 2002.

CONTRACT DRILLING Operating revenues and Earnings from unconsolidated
affiliates for our Contract Drilling operating segments totaled $1.7 billion and
adjusted income derived from operating activities totaled $241.2 million in
2003, representing increases of 27% and 30%, respectively, compared to 2002. Rig
years (excluding well-servicing rigs) increased to 268.3 years during 2003 from
204.8 years during 2002 as a result of increased capital spending by our
customers, which resulted from the improvement in commodity prices.

U.S. Lower 48 Land Drilling Operating revenues and adjusted income derived
from operating activities totaled $476.3 million and $16.8 million,
respectively, in 2003, representing an increase of 27% and a decrease of 28%,
respectively, compared to 2002. The increase in Operating revenues resulted from
the increase in drilling activity driven by higher natural gas prices, which is
reflected in the increase in rig years to 143.1 years during 2003 compared to
103.0 years during 2002. Adjusted income derived from operating activities
decreased during 2003, despite the increase in rig activity, as a result of
lower average dayrates, rising labor costs and higher depreciation expense.

U.S. Land Well-servicing Operating revenues and adjusted income derived
from operating activities totaled $312.3 million and $47.1 million,
respectively, in 2003, representing increases of 6% and 22%, respectively,
compared to 2002. The improved results in 2003 resulted from an increase in
well-servicing utilization driven by the increase in spending by our customers
during 2003 and a marginal increase in average dayrates compared to 2002. The
strengthening in this market resulted primarily from the improvement in
commodity prices in 2003. U.S. Land Well-servicing hours increased to 1,088,511
hours during 2003 from 1,014,657 hours during 2002.

-19-

U.S. Offshore Operating revenues and adjusted income derived from operating
activities totaled $101.6 million and $1.6 million, respectively, in 2003,
representing a decrease of 4% and an increase of 218%, respectively, compared to
2002. The decrease in Operating revenues in 2003 primarily relates to the
inclusion in our 2002 Operating revenues of $6.4 million of business
interruption insurance proceeds related to our Dolphin 105 jack-up rig, which
was lost in a hurricane during 2002, and from lower rig years in 2003 compared
to 2002. Rig years for our U.S. Offshore operations totaled 14.1 years during
2003 compared to 14.5 years during 2002. The decrease in Operating revenues in
2003 was partially offset by higher average dayrates in 2003 compared to 2002
resulting from an overall tightening of rig supply in the U.S. Gulf of Mexico
during 2003. The increase in adjusted income derived from operating activities
during 2003 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, which was only partially offset by lower rig years in
2003. Adjusted income derived from operating activities for 2003 was also
positively impacted by lower costs due to increased monitoring of costs on
working rigs and reductions in fixed overhead and costs for non-working rigs.

Alaskan Operating revenues and adjusted income derived from operating
activities totaled $112.1 million and $37.8 million, respectively, in 2003,
representing a decrease of 5% and an increase of 21%, respectively, compared to
2002. The decrease in Operating revenues resulted from lower drilling activity
reflected in the decrease in rig years to 7.9 years during 2003 from 9.3 years
during 2002, which was primarily driven by two of our customers decreasing their
level of winter exploration activity. This reduced activity level was partially
offset by an incremental $5.7 million of Operating revenues, representing
business interruption insurance proceeds recorded during 2003 related to the
damage incurred on one of our land drilling rigs in 2001, which exceeded the
$3.1 million in business interruption insurance proceeds recorded during 2002
related to another rig damaged in 2001. The increase in adjusted income derived
from operating activities resulted from the higher level of business
interruption insurance proceeds recognized in 2003 than in 2002 and from
projects where we earned a standby with crew rate, which adds to revenues at a
level lower than standard rates, but with minimal costs of operation.

Canadian Operating revenues and adjusted income derived from operating
activities totaled $322.3 million and $59.9 million, respectively, in 2003,
representing increases of 128% and 244%, respectively, compared to 2002. These
increases reflect an increase in drilling and well-servicing revenues, which
resulted from an overall increase in Canadian drilling and well-servicing
activity driven by increased commodity prices, and from our acquisition of
Enserco in April 2002. Rig years in Canada increased to 42.1 years during 2003
from 22.9 years during 2002. Canadian Well-servicing hours totaled 321,472 hours
during 2003 compared to 164,785 hours during the period from April 26, 2002, the
date we acquired Enserco, through December 31, 2002.

International Operating revenues and Earnings from unconsolidated
affiliates, and adjusted income derived from operating activities totaled $396.9
million and $78.0 million, respectively, in 2003, representing increases of 24%
and 2%, respectively, compared to 2002. The improved results in 2003 primarily
resulted from six new long-term contracts for our operation in Mexico.
International rig years increased to 61.1 years during the current year from
55.1 years during 2002 primarily as a result of these new contracts.

OIL AND GAS Oil and Gas Operating revenues totaled $16.9 million during
2003, representing an increase of 134% compared to 2002. Adjusted income derived
from operating activities totaled $5.9 million during 2003 compared to an
adjusted loss derived from operating activities totaling $1.1 million during
2002. The increase in operating results during 2004 as a result of new
investments in oil and gas properties resulting from the agreements executed
with El Paso Corporation in the fourth quarter of 2003.

OTHER OPERATING SEGMENTS Operating revenues and Earnings from
unconsolidated affiliates for our Other Operating Segments totaled $201.7
million during 2003 representing an increase of 15% compared to 2002. This
increase primarily resulted from the acquisition of Ryan Energy Technologies,
Inc. during the fourth quarter of 2002. Adjusted income derived from operating
activities for our Other Operating Segments totaled $3.3 million during 2003
representing a decrease of 87% compared to 2002. While Ryan's results have been
additive to our revenues, this new business realized a loss during 2003. In
addition, decreased margins from our marine transportation services, which
resulted from lower average dayrates, and from our top drive manufacturing
operations, which resulted from fewer top drive sales in 2003 compared to 2002,
resulted in lower profitability for our Other Operating Segments compared to
2002.

OTHER FINANCIAL INFORMATION General and administrative expenses increased
by $23.5 million, or 17%, in 2003 compared to 2002 primarily as a result of
increases related to our Canadian acquisitions in 2002 and increased
International activity. As a percentage of operating revenues, general and
administrative expenses decreased in 2003 compared to 2002 (8.8% vs. 9.7%) as
these expenses were spread over a larger revenue base.

-20-

Depreciation and amortization expense increased by $38.9 million, or 21%,
in 2003 compared to 2002 as a result of an increase in average rig years for our
Canadian land drilling, U.S. Lower 48 Land Drilling and International
operations, a full year of depreciation in 2003 on assets acquired in our
Enserco (April 2002) and Ryan (October 2002) acquisitions, as well as other
capital expenditures during 2002 and 2003.

Depletion expense totaled $8.6 million during 2003 compared to $7.7 million
during 2002. This increase resulted from depletion on oil and gas properties
added through our agreements with El Paso Corporation in the fourth quarter of
2003.

Interest expense increased by $3.7 million, or 5%, in 2003 compared to 2002
resulting from the issuance of our $225 million aggregate principal amount of
4.875% senior notes and our $275 million aggregate principal amount of 5.375%
senior notes in August 2002, which was only partially offset by reduced interest
costs realized in 2003 from the issuance of our $700 million zero coupon senior
exchangeable notes in June 2003. Such notes will not accrue interest unless we
become obligated to pay contingent interest. The proceeds from this debt
issuance were used to redeem our $825 million zero coupon convertible senior
debentures, which had an effective interest rate of 2.5%. We also redeemed our
8.625% senior subordinated notes due April 2008 on April 1, 2003.

Investment income decreased by $3.1 million, or 9%, in 2003 compared to
2002, reflecting lower average yields on investments resulting from the overall
declining interest rate environment, partially offset by higher average cash and
marketable securities balances.

Gains (losses) on sales of long-lived assets, impairment charges and other
income (expense), net decreased to ($1.2) million during 2003 from $.8 million
during 2002. These amounts for 2003 include the recognition of approximately
$1.2 million of expense related to the settlement of amounts due to the
counterparty for our range cap and floor derivative instrument (offset by
mark-to-market gains on that derivative instrument of $.1 million) and a loss of
approximately $.9 million resulting from the redemption of our 8.625% senior
subordinated notes at prices higher than their carrying value on April 1, 2003,
partially offset by gains on sales of long-lived assets of approximately $2.5
million. These amounts for 2002 include gains on sales of long-lived assets of
approximately $8.3 million, partially offset by impairment charges of
approximately $3.7 million related to our reclassification of four supply
vessels to held-for-sale (see Note 2 to our consolidated financial statements
included in Part II Item 8 below), mark-to-market losses recorded on our range
cap and floor derivative instrument of approximately $2.0 million and the
recognition of approximately $3.8 million in non-recurring corporate
reorganization expense.

Our effective income (benefit) tax rate was (10%) during 2003 compared to
14% during 2002. The tax benefit position for 2003 resulted primarily from tax
savings realized as a result of our corporate reorganization effective June 24,
2002.

LIQUIDITY AND CAPITAL RESOURCES

CASH FLOWS

Our cash flows primarily depend on the level of spending by our customers,
oil and gas companies, for exploration, development and production activities.
Sustained increases or decreases in the price of natural gas or oil could have a
material impact on these activities, and could also materially affect our cash
flows. Certain sources and uses of cash, such as the level of discretionary
capital expenditures, purchases and sales of marketable securities, issuances
and repurchases of debt, and repurchases of our common shares are within our
control and are adjusted as necessary based on market conditions. The following
is a discussion of our cash flows for the years ended December 31, 2004 and
2003.

OPERATING ACTIVITIES Net cash provided by operating activities totaled
$563.2 million during 2004 compared to net cash provided by operating activities
of $395.7 million during 2003. During 2004 and 2003 net income was increased for
non-cash items such as depreciation and amortization, and depletion, and was
reduced for changes in our working capital and other balance sheet accounts.

INVESTING ACTIVITIES Net cash used for investing activities totaled $549.1
million during 2004 compared to net cash used for investing activities totaling
$408.2 million during 2003. During 2004 and 2003 cash was used for capital
expenditures and purchases, net of sales, of marketable and non-marketable
securities.

-21-

FINANCING ACTIVITIES Net cash used for financing activities totaled $221.2
million during 2004 compared to net cash provided by financing activities of
$171.5 million during 2003. During 2004 cash was used for the reduction of
long-term debt (including the payment upon maturity of our 6.8% senior notes in
April 2004) and was provided by our receipt of proceeds from the exercise of
options to acquire our common shares by our employees. During 2003 cash was
provided by the issuance of our $700 million zero coupon senior exchangeable
notes during June 2003 and our receipt of proceeds from the exercise of options
to acquire our common shares by our employees, and was used for the reduction of
long-term debt.

FUTURE CASH REQUIREMENTS

As of December 31, 2004, we had long-term debt, including current
maturities, of $2.0 billion and cash and cash equivalents and investments in
marketable and non-marketable securities of $1.4 billion.

Our $1.381 billion zero coupon convertible senior debentures can be put to
us on February 5, 2006, February 5, 2011 and February 5, 2016, for a purchase
price equal to the issue price plus accrued original issue discount to the date
of repurchase. The amount of the purchase price would total $826.8 million,
$936.2 million and $1.1 billion if the debentures were put to us on February 5,
2006, February 5, 2011 or February 5, 2016, respectively.

Additionally, each of our $700 million zero coupon senior exchangeable
notes and our $1.381 billion zero coupon convertible senior debentures provide
that upon an exchange or conversion, as applicable, of these convertible debt
instruments, we will be required to pay holders of these debt instruments, in
lieu of common shares, cash up to the principal amount of the instruments and,
at our option, consideration in the form of either cash or our common shares for
any amount above the principal amount of the instruments required to be paid
pursuant to the terms of the indentures. As our $1.381 billion zero coupon
convertible senior debentures can be converted at any time resulting in our
payment of cash, the outstanding principal amount of these debentures of $804.6
million is included in current liabilities in our balance sheet as of December
31, 2004. These debentures previously would have been classified in current
liabilities beginning in the first quarter of 2005 as a result of the holders
having the option to put the debentures to us on February 5, 2006. If the $1.381
billion debentures were converted, our cash obligation would be an amount equal
to the lesser of 8.5 million multiplied by the sale price of our common shares
on the trading day immediately prior to the related conversion date or the
principal amount of the debentures on the date of conversion. If these
debentures had been converted on December 31, 2004, we would have been required
to pay cash totaling approximately $435 million to the holders of the debentures
(based on the closing price for our common shares on December 30, 2004 of
$51.18). As this amount is substantially lower than the $826.8 million that the
holders of the debentures will receive if they put the debentures to us on the
first put date of February 5, 2006 or if they sold the debentures in the open
market, we do not currently expect the debentures to be converted and any
payment to be required prior to February 5, 2006 (when the holders have the
option to put the debentures back to us), unless the price for our shares were
to exceed approximately $94. Our $700 million zero coupon senior exchangeable
notes cannot be exchanged until the price for our shares exceeds approximately
$84 or in various other circumstances as described in the note indenture (see
discussion in Note 8 to our consolidated financial statements included in Part
II Item 8).

As of December 31, 2004, we had outstanding purchase commitments of
approximately $114.2 million, primarily for rig-related enhancing and sustaining
capital expenditures. Total capital expenditures for 2005 are currently expected
to be approximately $550 million, including currently planned rig-related
enhancing and sustaining capital expenditures. This amount could change
significantly based on market conditions and new business opportunities.

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

-22-

Historical capital expenditures and acquisitions of businesses, which
represent the portion of the purchase price of acquisitions allocated to fixed
assets and goodwill based on their fair market value, are classified as follows:

YEAR ENDED DECEMBER 31,
------------------------------
2004 2003 2002
-------- -------- --------

(IN THOUSANDS)
Sustaining $229,154 $159,932 $102,633
Enhancement 130,656 110,852 136,837
Acquisition of assets and businesses 65,550 13,578 439,632
New construction 63,766 15,060 14,008
Net profits interests in oil and gas properties 55,303 53,716 9,733
-------- -------- --------
$544,429 $353,138 $702,843
======== ======== ========

See our discussion of guarantees issued by Nabors that could have a
potential impact on our financial position, results of operations or cash flows
in future periods included under Off-Balance Sheet Arrangements (Including
Guarantees) below.

The following table summarizes our contractual cash obligations as of
December 31, 2004:

PAYMENTS DUE BY PERIOD
--------------------------------------------------------------
TOTAL < 1 YEAR 1-3 YEARS 3-5 YEARS THEREAFTER
---------- -------- --------- --------- ----------

(IN THOUSANDS)
Contractual cash obligations:
Long-term debt:
Principal $2,026,800 $ -- $826,800(1) $925,000(2) $275,000
Interest 163,439 25,750 51,501 47,387 38,801
Operating leases (3) 29,025 11,462 13,677 2,575 1,311
Purchase commitments (4) 114,156 114,156 -- -- --
Employment contracts (3) 8,559 2,440 4,450 1,669 --
Pension funding obligations (5) 1,027 1,027 -- -- --
---------- -------- -------- -------- --------
Total contractual cash obligations $2,343,006 $154,835 $896,428 $976,631 $315,112
========== ======== ======== ======== ========

(1) Represents our $1.381 billion zero coupon convertible senior debentures
which can be put to us on February 5, 2006. The principal amount of these
debentures of $804.6 million are classified in current liabilities as of
December 31, 2004. However, we do not expect these debentures to be
converted for cash within the next 12 months based on the current market
value of our shares (see discussion above).

(2) Includes our $700 million zero coupon senior exchangeable notes, which can
be put to us on June 15, 2008, and $225 million of our senior notes due
2009.

(3) See Note 13 to our accompanying consolidated financial statements.

(4) Purchase commitments include agreements to purchase goods or services that
are enforceable and legally binding and that specify all significant terms,
including: fixed or minimum quantities to be purchased; fixed, minimum or
variable pricing provisions; and the approximate timing of the transaction.

(5) See Note 11 to the accompanying consolidated financial statements.

During 2002 our Board of Directors authorized the continuation of a share
repurchase program under which we may repurchase our common shares in the open
market. Under this program we are authorized to purchase up to $400 million of
our common shares. Through December 31, 2004, approximately $248 million of our
common shares have been repurchased under this program.

FINANCIAL CONDITION AND SOURCES OF LIQUIDITY

Our primary sources of liquidity are cash and cash equivalents, marketable
and non-marketable securities and cash generated from operations. As of December
31, 2004, we had cash and cash equivalents and investments in marketable and
non-marketable securities of $1.4 billion (including $510.5 million of long-term
marketable and non-marketable securities) and working capital of $381.7 million.
This compares to cash and cash equivalents and investments in marketable and
non-

-23-

marketable securities of $1.6 billion (including $612.4 million of long-term
marketable securities) and working capital of $917.3 million as of December 31,
2003.

Our funded debt to capital ratio was 0.41:1 as of December 31, 2004 and
0.48:1 as of December 31, 2003. Our net funded debt to capital ratio was 0.17:1
as of December 31, 2004 and 0.22:1 as of December 31, 2003. The funded debt to
capital ratio is calculated by dividing funded debt by funded debt plus capital.
Funded debt is defined as the sum of (1) short-term borrowings, (2) current
portion of long-term debt and (3) long-term debt. Capital is defined as
shareholders' equity. The net funded debt to capital ratio nets cash and cash
equivalents and marketable and non-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. Non-marketable securities
consist of investments in overseas funds investing primarily in a variety of
public and private U.S. and non-U.S. securities (including asset-backed
securities and mortgage-backed securities, global structured asset
securitizations, whole loan mortgages, and participations in whole loans and
whole loan mortgages). These investments are classified as non-marketable,
because they do not have published fair values, and are recorded at cost in our
consolidated balance sheets (the current portion is classified as non-marketable
securities under current assets and the long-term portion is included as a
component of other long-term assets). Our interest coverage ratio was 14.1:1 as
of December 31, 2004, compared to 6.8:1 as of December 31, 2003. The interest
coverage ratio is computed by calculating the sum of income before income taxes,
interest expense, depreciation and amortization, and depletion expense and then
dividing by interest expense. This ratio is a method for calculating the amount
of cash flows available to cover interest expense.

We have three letter of credit facilities with various banks as of December
31, 2004. Availability and borrowings under our credit facilities as of December
31, 2004 are as follows:

(IN THOUSANDS)
Credit available $110,000
Letters of credit outstanding (77,876)
--------
Remaining availability $ 32,124
========

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

Our current cash and cash equivalents, investments in marketable and
non-marketable securities and projected cash flow generated from current
operations are expected to more than adequately finance our sustaining capital
expenditures, our debt service requirements, and all other expected cash
requirements for the next twelve months.

See our discussion of the impact of changes in market conditions on our
derivative financial instruments discussed under Item 7A. Quantitative and
Qualitative Disclosures About Market Risk below.

OFF-BALANCE SHEET ARRANGEMENTS (INCLUDING GUARANTEES)

We are a party to certain transactions, agreements or other contractual
arrangements defined as "off- balance sheet arrangements" that could have a
material future effect on our financial position, results of operations,
liquidity and capital resources. The most significant of these off-balance sheet
arrangements involve agreements and obligations in which we provide financial or
performance assurance to third parties. Certain of these agreements serve as
guarantees, including standby letters of credit issued on behalf of insurance
carriers in conjunction with our workers' compensation insurance program, other
financial surety instruments such as bonds, 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.

-24-

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

MAXIMUM AMOUNT
--------------------------------------------
2005 2006 2007 THEREAFTER TOTAL
------- ---- ---- ---------- -------

(IN THOUSANDS)
Financial standby letters of
credit and other financial
surety instruments $81,067 $ -- $-- $302 $81,369
Guarantee of residual value in
lease agreements 684 65 -- -- 749
Contingent consideration in
acquisition 2,000 500 -- -- 2,500
------- ---- --- ---- -------
Total $83,751 $565 $-- $302 $84,618
======= ==== === ==== =======

OTHER MATTERS

RECENT LEGISLATION, COAST GUARD REGULATIONS AND ACTIONS

Our Sea Mar division time charters supply vessels to offshore operators in
U.S. waters. The vessels are owned by one of our financing company subsidiaries,
but are operated and managed by a U.S. citizen-controlled company pursuant to
long-term bareboat charters. As a result of recent legislation, beginning in
August 2007 Sea Mar will no longer be able to use this arrangement to qualify
vessels for employment in the U.S. coastwise trade. Accordingly, we will be
required to restructure the arrangement, redeploy the vessels outside the United
States, or sell the vessels by no later than such time.

As of December 31, 2004, the net assets of Sea Mar totaled approximately
$159.8 million. During 2004 Sea Mar had income before income taxes totaling $2.3
million.

RECENT ACCOUNTING PRONOUNCEMENTS

We currently account for stock-based compensation as prescribed by
Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued
to Employees," and because we grant options at prices equal to the market price
of our shares on the date of the grant we do not record compensation expense
related to these grants. In December 2004 the Financial Accounting Standards
Board (FASB) issued a revision to Statement of Financial Accounting Standards
(SFAS) No. 123, "Share-Based Payment," which will eliminate our ability to
account for stock-based compensation using APB 25 and instead would require us
to account for stock option awards using a fair-value based method resulting in
compensation expense for stock option awards. The statement will be effective
for stock options granted, modified, or settled in cash in interim and annual
periods beginning after June 15, 2005. Additionally, for stock options granted
or modified after December 15, 1994 that have not vested as of the effective
date of the statement, compensation cost will be measured and recorded based on
the same estimates of fair value calculated as of the date of grant as currently
disclosed within the table required by SFAS No. 148, "Accounting for Stock-Based
Compensation - an Amendment to FAS 123," presented in Note 2 to our accompanying
consolidated financial statements. The statement may have a material adverse
effect on our results of operations during the periods of adoption and annual
and interim periods thereafter. If this statement had been adopted in its
current form as of January 1, 2004, we would have recorded additional
compensation expense, net of related tax effects, of approximately $22.5 million
during 2004 and our diluted earnings per share for 2004 would have been reduced
by $.14 per share.

In October 2004 the FASB ratified the consensus reached by the Emerging
Issues Task Force (EITF) in EITF 04-8, which addresses the issue of when the
dilutive effect of contingently convertible debt instruments should be included
in diluted earnings per share computations. Based on the concepts described in
EITF 04-8, we will be required to treat our $700 million zero coupon senior
exchangeable notes as converted for purposes of computing diluted earnings per
share, regardless of whether any triggering contingency has been met or is
likely to be met. The provisions in EITF 04-8 are effective for periods ending
after December 15, 2004, including the year ended December 31, 2004. As a result
of this accounting change, we are required to include additional common shares
in the denominator of our diluted earnings per share calculation in all periods
where the price for our shares exceeds $70.10. These additional shares represent
the value in excess of the principal amount of the notes and would be calculated
using the treasury stock method. We do not expect this accounting change to have
a material effect on our financial position, results of operations or cash
flows.

-25-

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

RELATED PARTY TRANSACTIONS

Pursuant to his employment agreement entered into in October 1996, we
provided an unsecured, non-interest bearing loan of approximately $2.9 million
to Nabors' Deputy Chairman, President and Chief Operating Officer. This loan is
due on September 30, 2006.

Pursuant to their employment agreements, Nabors and its Chairman and Chief
Executive Officer, Deputy Chairman, President and Chief Operating Officer, 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 $13.2 million related to these policies. The cash surrender value of
these policies of approximately $11.8 million and $11.4 million is included in
other long-term assets in our consolidated balance sheets as of December 31,
2004 and 2003, respectively.

Under the Sarbanes-Oxley Act of 2002, the payment of premiums by Nabors
under the agreements with our Chairman and Chief Executive Officer and with our
Deputy Chairman, President and Chief Operating Officer may be deemed to be
prohibited loans by us to these individuals. We have paid no premiums related to
our agreements with these individuals since the adoption of the Sarbanes-Oxley
Act and have postponed premium payments related to our agreements with these
individuals.

In the ordinary course of business, we enter into various rig leases, rig
transportation and related oilfield services agreements with our Alaskan and
Saudi Arabian unconsolidated affiliates at market prices. Revenues from business
transactions with these affiliated entities totaled $63.2 million, $51.3 million
and $46.8 million for the years ended December 31, 2004, 2003 and 2002,
respectively. Expenses from business transactions with these affiliated entities
totaled $3.3 million, $3.3 million and $3.0 million for the years ended December
31, 2004, 2003 and 2002, respectively. Additionally, we had accounts receivable
from these affiliated entities of $20.7 million and $20.9 million as of December
31, 2004 and 2003, respectively. We had accounts payable to these affiliated
entities of $1.8 million and $.5 million as of December 31, 2004 and 2003,
respectively, and a note payable with one of these affiliated entities of $4.1
million and $4.3 million as of December 31, 2004 and 2003, respectively, which
is included in other long-term liabilities.

Additionally, we own certain marine vessels that are chartered under a
bareboat charter arrangement to Sea Mar Management LLC, an entity in which we
own a 25% interest. Under the requirements of FIN 46R this entity was
consolidated by Nabors beginning in 2004. Revenues from business transactions
with Sea Mar totaled $29.5 million and $18.0 million for the years ended
December 31, 2003 and 2002, respectively. Expenses from business transactions
with Sea Mar totaled $47.9 million and $28.1 million for the years ended
December 31, 2003 and 2002, respectively. Accounts receivable from and accounts
payable to Sea Mar as of December 31, 2003 totaled $3.0 million and $3.2
million, respectively.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of our financial statements in conformity with GAAP
requires management to make certain estimates and assumptions. These estimates
and assumptions affect the reported amounts of assets and liabilities, the
disclosures of contingent assets and liabilities at the balance sheet date and
the amounts of revenues and expenses recognized

-26-

during the reporting period. We analyze our estimates based on our historical
experience and various other assumptions that we believe to be reasonable under
the circumstances. However, actual results could differ from such estimates. The
following is a discussion of our critical accounting estimates. Management
considers an accounting estimate to be critical if:

- it requires assumptions to be made that were uncertain at the time the
estimate was made; and

- changes in the estimate or different estimates that could have been
selected could have a material impact on our consolidation financial
position or results of operations.

For a summary of all of our significant accounting policies, see Note 2 to
the accompanying consolidated financial statements.

DEPRECIATION OF PROPERTY, PLANT AND EQUIPMENT The drilling, workover and
well-servicing industries are very capital intensive. Property, plant and
equipment represented 56% of our total assets as of December 31, 2004, and
depreciation constituted 12% of our total costs and other deductions for the
year ended December 31, 2004.

Depreciation for our primary operating assets, drilling and workover rigs,
is calculated based on the units-of-production method over an approximate
4,900-day period, with the exception of our jack-up rigs which are depreciated
over an 8,030-day period, after provision for salvage value. When our drilling
and workover rigs are not operating, a depreciation charge is provided using the
straight-line method over an assumed depreciable life of 20 years, with the
exception of our jack-up rigs, where a 30-year depreciable life is used.

Depreciation on our buildings, well-servicing rigs, oilfield hauling and
mobile equipment, marine transportation and supply vessels, and other machinery
and equipment is computed using the straight-line method over the estimated
useful life of the asset after provision for salvage value (buildings - 10 to 30
years; well-servicing rigs - 3 to 15 years; marine transportation and supply
vessels - 10 to 25 years; oilfield hauling and mobile equipment and other
machinery and equipment - 3 to 10 years).

These depreciation periods and the salvage values of our property, plant
and equipment were determined through an analysis of the useful lives of our
assets and based on our experience with the salvage values of these assets.
Periodically, we review our depreciation periods and salvage values for
reasonableness given current conditions. Depreciation of property, plant and
equipment is therefore based upon estimates of the useful lives and salvage
value of those assets. Estimation of these items requires significant management
judgment. Accordingly, management believes that accounting estimates related to
depreciation expense recorded on property, plant and equipment are critical.

There have been no factors related to the performance of our portfolio of
assets, changes in technology or other factors that indicate that these lives do
not continue to be appropriate. Accordingly, for the years ended December 31,
2004, 2003 and 2002, no significant changes have been made to the depreciation
rates applied to property, plant and equipment, the underlying assumptions
related to estimates of depreciation, or the methodology applied. However,
certain events could occur that would materially affect our estimates and
assumptions related to depreciation. Unforeseen changes in operations or
technology could substantially alter management's assumptions regarding our
ability to realize the return on our investment in operating assets and
therefore affect the useful lives and salvage values of our assets.

IMPAIRMENT OF LONG-LIVED ASSETS As discussed above, the drilling, workover
and well-servicing industries are very capital intensive, which is evident in
the fact that our property, plant and equipment represented 56% of our total
assets as of December 31, 2004. Other long-lived assets subject to impairment
consist primarily of goodwill, which represented 6% of our total assets as of
December 31, 2004. We review our long-lived assets for impairment when events or
changes in circumstances indicate that the carrying amounts of such assets may
not be recoverable. In addition, we review goodwill and intangible assets with
indefinite lives for impairment annually, as required by SFAS No. 142, "Goodwill
and Other Intangible Assets." An impairment loss is recorded in the period in
which it is determined that the carrying amount of the long-lived asset is not
recoverable. Such determination requires us to make judgments regarding
long-term forecasts of future revenues and costs related to the assets subject
to review in order to determine the future cash flows associated with the asset
or, in the case of goodwill, our reporting units. These long-term forecasts are
uncertain in that they require assumptions about demand for our products and
services, future market conditions, technological advances in the industry, and
changes in regulations governing the industry. Significant and unanticipated
changes to the assumptions could require a provision for impairment in a future
period. As the determination of whether impairment charges should be recorded on
our long-lived assets is subject to significant management judgment and an
impairment of these assets could result in a material charge on our consolidated
statements of income, management believes that accounting estimates related to
impairment of long-lived assets is critical.

-27-

Assumptions made in the determination of future cash flows are made with
the involvement of management personnel at the operational level where the most
specific knowledge of market conditions and other operating factors exists. For
the years ended December 31, 2004, 2003 and 2002, no significant changes have
been made to the methodology utilized to determine future cash flows.

Given the nature of the evaluation of future cash flows and the application
to specific assets and specific times, it is not possible to reasonably quantify
the impact of changes in these assumptions.

INCOME TAXES Deferred taxes represent a substantial liability for Nabors.
For financial reporting purposes, management determines our current tax
liability as well as those taxes incurred as a result of current operations yet
deferred until future periods. In accordance with the liability method of
accounting for income taxes as specified in SFAS No. 109, "Accounting for Income
Taxes," the provision for income taxes is the sum of income taxes both currently
payable and deferred. Currently payable taxes represent the liability related to
our income tax return for the current year while the net deferred tax expense or
benefit represents the change in the balance of deferred tax assets or
liabilities reported on our consolidated balance sheets. The changes in deferred
tax assets or liabilities are determined based upon changes in differences
between the basis of assets and liabilities for financial reporting purposes and
the basis of assets and liabilities for tax purposes as measured by the enacted
tax rates that management estimates will be in effect when these differences
reverse. In addition to estimating the future tax rates applicable to the
reversal of tax differences, management must also make certain assumptions
regarding whether tax differences are permanent or temporary, management must
estimate the timing of their reversal, and whether taxable operating income in
future periods will be sufficient to fully recognize any gross deferred tax
assets. Valuation allowances are established to reduce deferred tax assets when
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. In determining the need for valuation allowances,
management has considered and made judgments and estimates regarding estimated
future taxable income and ongoing prudent and feasible tax planning strategies.
These judgments and estimates are made for each tax jurisdiction in which we
operate as the calculation of deferred taxes is completed at that level.
Further, under U.S. federal tax law, the amount and availability of loss
carryforwards (and certain other tax attributes) are subject to a variety of
interpretations and restrictive tests applicable to Nabors and our subsidiaries.
The utilization of such carryforwards could be limited or effectively lost upon
certain changes in ownership. Accordingly, although we believe substantial loss
carryforwards are available to us, no assurance can be given concerning the
realization of such loss carryforwards, or whether or not such loss
carryforwards will be available in the future. These loss carryforwards are also
considered in our calculation of taxes for each jurisdiction in which we
operate. Additionally, we record reserves for uncertain tax positions which are
subject to a significant level of management judgment related to the ultimate
resolution of those tax positions. Accordingly, management believes that the
estimate related to the provision for income taxes is critical to our results of
operations.

For the years ended December 31, 2004, 2003 and 2002, management made no
material changes in its assumptions regarding the determination of the provision
for income taxes. However, certain events could occur that would materially
affect management's estimates and assumptions regarding the deferred portion of
our income tax provision, including estimates of future tax rates applicable to
the reversal of tax differences, the classification of timing differences as
temporary or permanent, reserves recorded for uncertain tax positions, and any
valuation allowance recorded as a reduction to our deferred tax assets.
Management's assumptions related to the preparation of our income tax provision
have historically proved to be reasonable in light of the ultimate amount tax
liability due in all taxing jurisdictions.

For the year ended December 31, 2004, our provision for income taxes was
$33.4 million, consisting of $20.9 million of current tax expense and $12.5
million of deferred tax expense. Changes in management's estimates and
assumptions regarding the tax rate applied to deferred tax assets and
liabilities, the ability to realize the value of deferred tax assets, or the
timing of the reversal of tax basis differences could potentially impact the
provision for income taxes. Changes in these assumptions could potentially
change the effective tax rate. A 1% change in the effective tax rate from 10% to
11% would increase the current year income tax provision by approximately $3.4
million.

INSURANCE RESERVES Our operations are subject to many hazards inherent in
the drilling, workover and well-servicing industries, including blowouts,
cratering, explosions, fires, loss of well control, loss of hole, damaged or
lost drilling equipment and damage or loss from inclement weather or natural
disasters. Any of these hazards could result in personal injury or death, damage
to or destruction of equipment and facilities, suspension of operations,
environmental damage and damage to the property of others. Generally, drilling
contracts provide for the division of responsibilities between a drilling
company and its customer, and we seek to obtain indemnification from our
customers by contract for certain of these risks. To the extent that we are
unable to transfer such risks to customers by contract or indemnification
agreements, we seek protection through insurance. However, there is no assurance
that such insurance or indemnification agreements will adequately protect us
against liability from all of the consequences of the hazards described above.
Moreover, our insurance coverage generally provides that we assume a portion of
the risk in the form of an insurance coverage deductible.

-28-

Based on the risks discussed above, it is necessary for us to estimate the
level of our liability related to insurance and record reserves for these
amounts in our consolidated financial statements. Reserves related to insurance
are based on the facts and circumstances specific to the insurance claims and
our past experience with similar claims. The actual outcome of insured claims
could differ significantly from estimated amounts. We maintain
actuarially-determined accruals in our consolidated balance sheets to cover
self-insurance retentions for workers' compensation, employers' liability,
general liability and automobile liability claims. These accruals are based on
certain assumptions developed utilizing historical data to project future
losses. Loss estimates in the calculation of these accruals are adjusted based
upon actual claim settlements and reported claims. These loss estimates and
accruals recorded in our financial statements for claims have historically been
reasonable in light of the actual amount of claims paid.

As the determination of our liability for insurance claims is subject to
significant management judgment and in certain instances is based on actuarially
estimated and calculated amounts, and such liabilities could be material in
nature, management believes that accounting estimates related to insurance
reserves are critical.

For the years ended December 31, 2004, 2003 and 2002, no significant
changes have been made to the methodology utilized to estimate insurance
reserves. For purposes of earnings sensitivity analysis, if the December 31,
2004 reserves for insurance were adjusted (increase or decreased) by 10%, total
costs and other deductions would have changed by $9.8 million, or .5%.

FAIR VALUE OF ASSETS ACQUIRED AND LIABILITIES ASSUMED We have completed a
number of large acquisitions in recent years as discussed in Note 3 to our
accompanying consolidated financial statements. In conjunction with our
accounting for these acquisitions, it was necessary for us to estimate the
values of the assets acquired and liabilities assumed in the various business
combinations, which involved the use of various assumptions. These estimates may
be affected by such factors as changing market conditions, technological
advances in the industry or changes in regulations governing the industry. The
most significant assumptions, and the ones requiring the most judgment, involve
the estimated fair values of property, plant and equipment, and the resulting
amount of goodwill, if any. Unforeseen changes in operations or technology could
substantially alter management's assumptions and could result in lower estimates
of values of acquired assets or of future cash flows. This could result in
impairment charges being recorded in our consolidated statements of income. As
the determination of the fair value of assets acquired and liabilities assumed
is subject to significant management judgment and a change in purchase price
allocations could result in a material difference in amounts recorded in our
consolidated financial statements, management believes that accounting estimates
related to the valuation of assets acquired and liabilities assumed are
critical.

The determination of the fair value of assets and liabilities are based on
the market for the assets and the settlement value of the liabilities. These
estimates are made by management based on our experience with similar assets and
liabilities. For the years ended December 31, 2004, 2003 and 2002, no
significant changes have been made to the methodology utilized to value assets
acquired or liabilities assumed. As we have not recorded any significant
impairment charges on property, plant and equipment or goodwill in either of the
years ended December 31, 2004, 2003 and 2002, our estimates of the fair values
of assets acquired and liabilities assumed have proved to be reliable.

Given the nature of the evaluation of the fair value of assets acquired and
liabilities assumed and the application to specific assets and liabilities, it
is not possible to reasonably quantify the impact of changes in these
assumptions.

-29-

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We may be exposed to certain market risks arising from the use of financial
instruments in the ordinary course of business. This risk arises primarily as a
result of potential changes in the fair market value of financial instruments
that would result from adverse fluctuations in foreign currency exchange rates,
credit risk, interest rates, and marketable and non-marketable security prices
as discussed below.

FOREIGN CURRENCY RISK We operate in a number of international areas and are
involved in transactions denominated in currencies other than U.S. dollars,
which exposes us to foreign exchange rate risk. The most significant exposures
arise in connection with our operations in Canada, which usually are
substantially unhedged.

At various times, we utilize local currency borrowings (foreign
currency-denominated debt), the payment structure of customer contracts and
foreign exchange contracts to selectively hedge our exposure to exchange rate
fluctuations in connection with monetary assets, liabilities, cash flows and
commitments denominated in certain foreign currencies. A foreign exchange
contract is a foreign currency transaction, defined as an agreement to exchange
different currencies at a given future date and at a specified rate. A
hypothetical 10% decrease in the value of all our foreign currencies relative to
the U.S. dollar as of December 31, 2004 would result in a $15.5 million decrease
in the fair value of our net monetary assets denominated in currencies other
than U.S. dollars.

CREDIT RISK Our financial instruments that potentially subject us to
concentrations of credit risk consist primarily of cash equivalents, investments
and marketable and non-marketable securities, accounts receivable, and our
interest rate swap and range cap and floor transactions. Cash equivalents such
as deposits and temporary cash investments are held by major banks or investment
firms. Our investments in marketable and non-marketable securities are managed
within established guidelines which limit the amounts that may be invested with
any one issuer and which provide guidance as to issuer credit quality. We
believe that the credit risk in such instruments is minimal. In addition, our
trade receivables are with a variety of U.S., international and foreign-country
national oil and gas companies. Management considers this credit risk to be
limited due to the financial resources of these companies. We perform ongoing
credit evaluations of our customers and we generally do not require material
collateral. We maintain reserves for potential credit losses, and such losses
have been within management's expectations.

INTEREST RATE, AND MARKETABLE AND NON-MARKETABLE SECURITY PRICE RISK Our
financial instruments that are potentially sensitive to changes in interest
rates include our $1.381 billion zero coupon convertible senior debentures, our
$700 million zero coupon senior exchangeable notes, our 4.875% and 5.375% senior
notes, our interest rate swap and range cap and floor transactions, our
investments in debt securities (including corporate, asset-backed, U.S.
Government, Government agencies, foreign government, mortgage-backed debt and
mortgage-CMO debt securities) and our investment in overseas funds investing
primarily in a variety of public and private U.S. and non-U.S. securities
(including asset-backed securities and mortgage-backed securities, global
structured asset securitizations, whole loan mortgages, and participations in
whole loans and whole loan mortgages), which are classified as non-marketable
securities.

We may utilize derivative financial instruments that are intended to manage
our exposure to interest rate risks. The use of derivative financial instruments
could expose us to further credit risk and market risk. Credit risk in this
context is the failure of a counterparty to perform under the terms of the
derivative contract. When the fair value of a derivative contract is positive,
the counterparty would owe us, which can create credit risk for us. When the
fair value of a derivative contract is negative, we would owe the counterparty,
and therefore, we would not be exposed to credit risk. We attempt to minimize
credit risk in derivative instruments by entering into transactions with major
financial institutions that have a significant asset base. Market risk related
to derivatives is the adverse effect to the value of a financial instrument that
results from changes in interest rates. We try to manage market risk associated
with interest-rate contracts by establishing and monitoring parameters that
limit the type and degree of market risk that we undertake.

Our $700 million zero coupon senior exchangeable notes include a contingent
interest provision, discussed under Liquidity and Capital Resources above, which
qualifies as an embedded derivative under SFAS 133, as amended by SFAS 149. 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 of this embedded derivative would be recorded in our consolidated
statements of income. The fair value of the contingent interest provision at
inception of the note indenture was nominal. In addition, there was no
significant change in the fair value of this embedded derivative through
December 31, 2004, resulting in no impact on our consolidated statements of
income for the year ended December 31, 2004.

On October 21, 2002, we entered into an interest rate swap transaction with
a third-party financial institution to hedge our exposure to changes in the fair
value of $200 million of our fixed rate 5.375% senior notes due 2012, which has

-30-

been designated as a fair value hedge under SFAS 133, as amended by SFAS 149.
Additionally, on October 21, 2002, we purchased a LIBOR range cap and sold a
LIBOR floor, in the form of a cashless collar, with the same third-party
financial institution with the intention of mitigating and managing our exposure
to changes in the three-month U.S. dollar LIBOR rate. This transaction does not
qualify for hedge accounting treatment under SFAS 133, as amended by SFAS 149,
and any change in the cumulative fair value of this transaction will be
reflected as a gain or loss in our consolidated statements of income.

During the years ended December 31, 2004, 2003 and 2002, we recorded
interest savings related to our interest rate swap agreement accounted for as a
fair value hedge of $6.5 million, $6.8 million and $1.2 million, respectively,
which served to reduce interest expense. The fair value of our interest rate
swap agreement is recorded as a derivative asset, included in other long-term
assets, and totaled approximately $4.6 million and $4.2 million as of December
31, 2004 and 2003, respectively. The carrying value of our 5.375% senior notes
has been increased by the same amount as of December 31, 2004 and 2003.

The fair value of our range cap and floor transaction is recorded as a
derivative asset, included in other long-term assets, and totaled approximately
$.3 million as of December 31, 2004, and is recorded as a derivative liability,
included in other long-term liabilities, and totaled approximately $3.7 million
and $3.8 million as of December 31, 2003 and 2002, respectively. In June 2004 we
unwound $100 million of the $200 million range cap and floor derivative
instrument. We recorded gains of approximately $2.4 million and losses of
approximately $1.1 million and $3.8 million for the years ended December 31,
2004, 2003 and 2002, respectively, related to this derivative instrument; such
amounts are included in losses (gains) on sales of long-lived assets, impairment
charges and other expense (income), net in our consolidated statements of
income.

A hypothetical 10% adverse shift in quoted interest rates as of December
31, 2004 would decrease the fair values of our interest rate swap, and range cap
and floor, by approximately $5.6 million and $.5 million, respectively.

FAIR VALUE OF FINANCIAL INSTRUMENTS The fair value of our fixed rate
long-term debt is estimated based on quoted market prices or prices quoted from
third-party financial institutions. The carrying and fair values of our
long-term debt, including the current portion, are as follows:

DECEMBER 31,
-------------------------------------------------------------------------------
2004 2003
------------------------------------- -------------------------------------
EFFECTIVE EFFECTIVE
INTEREST CARRYING INTEREST CARRYING
RATE VALUE FAIR VALUE RATE VALUE FAIR VALUE
--------- ---------- ---------- --------- ---------- ----------

(IN THOUSANDS, EXCEPT
INTEREST RATES)
4.875% senior notes
due August 2009 5.00% $ 223,764 $ 232,058 4.88% $ 223,499 $ 234,585
5.375% senior notes
due August 2012 3.09%(1) 277,922(2) 292,454(2) 2.91%(1) 277,248(2) 290,813(2)
$700 million zero
coupon senior
exchangeable notes
due June 2023 0% 700,000 668,581 0% 700,000 643,651
$1.381 billion zero
coupon convertible
senior debentures
due February 2021 2.5%(3) 804,550 797,233 2.5%(3) 784,807 780,880
6.8% senior notes due
April 2004 (4) N/A -- -- 6.8% 295,267 299,681
Other long-term debt 0% -- -- 8.25% 4,117 4,117
---------- ---------- ---------- ----------
$2,006,236 $1,990,326 $2,284,938 $2,253,727
========== ========== ========== ==========

(1) Includes the effect of interest savings realized from the interest rate
swap executed on October 21, 2002.

(2) Includes $4.6 million and $4.2 million related to the fair value of the
interest rate swap as of December 31, 2004 and 2003, respectively.

-31-

(3) Represents the rate at which accretion of the original discount at issuance
of these debentures is charged to interest expense.

(4) Our 6.8% senior notes due April 2004 were redeemed upon maturity in April
2004.

The fair values of our cash equivalents, trade receivables and trade
payables approximate their carrying values due to the short-term nature of these
instruments. Our cash and cash equivalents and investments in marketable debt
and equity securities are included in the table below. The table provided below
does not include our investments in non-marketable securities, which are carried
at cost.

DECEMBER 31,
-------------------------------------------------------------------------------
2004 2003
-------------------------------------- --------------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
LIFE LIFE
FAIR VALUE INTEREST RATES (YEARS) FAIR VALUE INTEREST RATES (YEARS)
---------- -------------- -------- ---------- -------------- --------

(IN THOUSANDS, EXCEPT
INTEREST RATES)
Cash and cash
equivalents $ 384,709 .88%-2.56% .1 $ 579,737 .71%-1.87% .1
Available-for-sale
marketable equity
securities 40,723 N/A N/A 48,843 N/A N/A
Marketable debt
securities:
Commercial paper
and CDs 6,970 2.30% .2 50,743 1.40% .1
Corporate debt
securities 384,569 2.12%-8.85% .5 319,327 1.26%-8.85% 1.2
U.S. Government
debt securities -- -- -- 7,103 4.75%-5.87% .4
Government
agencies debt
securities 97,515 2.13%-3.88% .3 285,358 1.25%-5.63% 1.0
Mortgage-backed
debt securities -- -- -- 119 7.50% --
Mortgage-CMO
debt securities 26,326 2.67%-5.00% .6 29,275 4.50%-5.00% --
Asset-backed debt
securities 311,701 1.41%-6.53% 1.0 211,585 1.35%-6.79% .9
---------- ----------
$1,252,513 $1,532,090
========== ==========

Our investments in marketable debt securities listed in the above table and
a portion of our investment in non-marketable securities are sensitive to
changes in interest rates. Additionally, our investment portfolio of marketable
debt and equity securities, which are carried at fair value, expose us to price
risk. A hypothetical 10% decrease in the market prices for all marketable
securities as of December 31, 2004 would decrease the fair value of our
available-for-sale securities by $86.8 million.

-32-

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX

PAGE NO.
--------

Management's Report on Internal Control over Financial
Reporting......................................................... 34

Report of Independent Registered Public Accounting Firm.............. 35

Consolidated Balance Sheets as of December 31, 2004 and 2003......... 36

Consolidated Statements of Income for the Years Ended
December 31, 2004, 2003 and 2002.................................. 37

Consolidated Statements of Cash Flows for the Years Ended
December 31, 2004, 2003 and 2002.................................. 38

Consolidated Statements of Changes in Shareholders' Equity for
the Years Ended December 31, 2004, 2003 and 2002.................. 39

Notes to Consolidated Financial Statements........................... 42

-33-

MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

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

Because of its inherent limitations, a system of internal control over financial
reporting can provide only reasonable assurance and may not prevent or detect
misstatements. Further, because of changes in conditions, effectiveness of
internal controls over financial reporting may vary over time.

Management conducted an evaluation of the effectiveness of the Company's
internal control over financial reporting based on the framework in Internal
Control -- Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Based on this evaluation,
management concluded that the Company's system of internal control over
financial reporting was effective as of December 31, 2004. Management's
assessment of the effectiveness of the Company's internal control over financial
reporting as of December 31, 2004 has been audited by PricewaterhouseCoopers
LLP, an independent registered public accounting firm, as stated in their report
included below which expresses an unqualified opinion on management's assessment
of the effectiveness of internal control over financial reporting as of December
31, 2004.

-34-

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
NABORS INDUSTRIES LTD. AND SUBSIDIARIES

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

We have completed an integrated audit of Nabors Industries Ltd.'s 2004
consolidated financial statements and of its internal control over financial
reporting as of December 31, 2004 and audits of its 2003 and 2002 consolidated
financial statements in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Our opinions, based on our audits,
are presented below.

Consolidated financial statements

In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of cash flows and of changes in shareholders'
equity present fairly, in all material respects, the financial position of
Nabors Industries Ltd. and its subsidiaries at December 31, 2004 and 2003, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 2004 in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit of
financial statements includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

Internal control over financial reporting

Also, in our opinion, management's assessment, included in the accompanying
Management's Report on Internal Control Over Financial Reporting, that the
Company maintained effective internal control over financial reporting as of
December 31, 2004 based on criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission, is fairly stated, in all material respects, based on those criteria.
Furthermore, in our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2004,
based on criteria established in Internal Control - Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission. The
Company's management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express opinions on
management's assessment and on the effectiveness of the Company's internal
control over financial reporting based on our audit. We conducted our audit of
internal control over financial reporting in accordance with the standards of
the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in
all material respects. An audit of internal control over financial reporting
includes obtaining an understanding of internal control over financial
reporting, evaluating management's assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing such other
procedures as we consider necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinions.

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

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

/s/ PRICEWATERHOUSECOOPERS LLP

Houston, Texas
March 7, 2005

-35-

CONSOLIDATED BALANCE SHEETS
NABORS INDUSTRIES LTD. AND SUBSIDIARIES

December 31,
-----------------------
2004 2003
---------- ----------

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

Assets
Current assets:
Cash and cash equivalents $ 384,709 $ 579,737
Marketable securities 428,342 339,936
Accounts receivable, net 540,103 410,487
Inventory 28,653 23,289
Deferred income taxes 39,599 36,442
Non-marketable securities 87,500 47,000
Other current assets 72,068 78,756
---------- ----------
Total current assets 1,580,974 1,515,647

Marketable securities 439,462 612,417
Property, plant and equipment, net 3,275,495 2,990,792
Goodwill, net 327,225 315,627
Other long-term assets 239,453 168,209
---------- ----------
Total assets $5,862,609 $5,602,692
========== ==========

Liabilities and Shareholders' Equity
Current liabilities:
Current portion of long-term debt $ 804,550 $ 299,385
Trade accounts payable 211,600 128,840
Accrued liabilities 171,234 160,745
Income taxes payable 11,932 9,403
---------- ----------
Total current liabilities 1,199,316 598,373

Long-term debt 1,201,686 1,985,553
Other long-term liabilities 146,337 155,667
Deferred income taxes 385,877 372,824
---------- ----------
Total liabilities 2,933,216 3,112,417
---------- ----------
Commitments and contingencies (Note 13)

Shareholders' equity:
Common shares, par value $.001 per share:
Authorized common shares 400,000;
issued 149,861 and 146,656, respectively 150 147
Capital in excess of par value 1,358,374 1,270,362
Accumulated other comprehensive income 148,229 99,583
Retained earnings 1,422,640 1,120,183
---------- ----------
Total shareholders' equity 2,929,393 2,490,275
---------- ----------
Total liabilities and shareholders' equity $5,862,609 $5,602,692
========== ==========

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

-36-

CONSOLIDATED STATEMENTS OF INCOME
NABORS INDUSTRIES LTD. AND SUBSIDIARIES

Year Ended December 31,
------------------------------------
2004 2003 2002
---------- ---------- ----------

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

Revenues and other income:
Operating revenues $2,394,031 $1,880,003 $1,466,443
Earnings from unconsolidated affiliates 4,057 10,183 14,775
Investment income 50,064 33,813 36,961
---------- ---------- ----------
Total revenues and other income 2,448,152 1,923,999 1,518,179
---------- ---------- ----------

Costs and other deductions:
Direct costs 1,572,649 1,276,953 973,910
General and administrative expenses 195,388 165,403 141,895
Depreciation and amortization 254,939 226,528 187,665
Depletion 45,460 8,599 7,700
Interest expense 48,507 70,740 67,068
Losses (gains) on sales of long-lived
assets, impairment charges and other
expense (income), net (4,629) 1,153 (833)
---------- ---------- ----------
Total costs and other deductions 2,112,314 1,749,376 1,377,405
---------- ---------- ----------

Income before income taxes 335,838 174,623 140,774
---------- ---------- ----------

Income tax expense (benefit):
Current 20,867 8,494 10,185
Deferred 12,514 (26,099) 9,100
---------- ---------- ----------
Total income tax expense (benefit) 33,381 (17,605) 19,285
---------- ---------- ----------
Net income $ 302,457 $ 192,228 $ 121,489
========== ========== ==========

Earnings per share:
Basic $ 2.03 $ 1.31 $ .85
Diluted $ 1.92 $ 1.25 $ .81

Weighted average number of common shares outstanding:
Basic 148,936 146,495 143,655
Diluted 164,030 156,897 149,997

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

-37-

CONSOLIDATED STATEMENTS OF CASH FLOWS
NABORS INDUSTRIES LTD. AND SUBSIDIARIES

Year Ended December 31,
-----------------------------------
2004 2003 2002
--------- ----------- ---------

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

Cash flows from operating activities:
Net income $ 302,457 $ 192,228 $ 121,489
Adjustments to net income:
Depreciation and amortization 254,939 226,528 187,665
Depletion 45,460 8,599 7,700
Deferred income tax expense (benefit) 12,514 (26,099) 9,100
Deferred financing costs amortization 5,058 5,464 5,122
Pension liability amortization 856 -- --
Discount amortization on long-term debt 20,244 25,521 30,790
Amortization of loss on cash flow hedges 151 150 50
Losses (gains) on long-term assets, net 874 (2,476) (4,570)
Gains on marketable and non-marketable securities, net (20,638) (6,145) (2,877)
(Gains) losses on derivative instruments (2,363) 1,140 1,983
Sales of marketable securities, trading -- 4,484 --
Foreign currency transaction gains (755) (830) (486)
Loss on early extinguishment of debt -- 908 202
Equity in earnings of unconsolidated affiliates,
net of dividends (2,057) (919) (4,900)
Increase (decrease), net of effects from acquisitions,
from changes in:
Accounts receivable (129,684) (30,660) 90,401
Inventory (4,905) (5,695) 1,712
Other current assets 13,847 (61) (15,855)
Other long-term assets 8,946 (9,435) (29,717)
Trade accounts payable and accrued liabilities 84,646 22,586 (26,443)
Income taxes payable (7,503) 1,454 11,725
Other long-term liabilities (18,889) (11,004) 17,785
--------- ----------- ---------
Net cash provided by operating activities 563,198 395,738 400,876
--------- ----------- ---------
Cash flows from investing activities:
Purchases of marketable securities, available-for-sale (746,403) (1,429,545) (745,383)
Sales and maturities of marketable securities,
available-for-sale 838,816 1,393,638 542,133
Purchases of non-marketable securities (173,533) (47,002) (15,000)
Sales of non-marketable securities 69,793 17,506 --
Cash paid for acquisitions of businesses, net -- -- (135,652)
Capital expenditures (544,429) (353,138) (326,536)
Cash paid for other current assets -- -- (8,725)
Proceeds from sales of assets and insurance claims 6,879 10,476 34,877
Investments in affiliate (200) (175) --
--------- ----------- ---------
Net cash used for investing activities (549,077) (408,240) (654,286)
--------- ----------- ---------
Cash flows from financing activities:
Increase (decrease) in cash overdrafts 9,865 (778) (3,658)
Decrease in restricted cash 109 1,925 210
Decrease in short-term borrowings, net -- -- (844)
Proceeds from long-term debt -- 700,000 495,904
Reduction in long-term debt (302,411) (544,479) (30,831)
Debt issuance costs -- (11,525) (2,945)
Proceeds from issuance of common shares 71,248 26,341 12,850
Repurchase of common shares -- -- (2,486)
Payments related to cash flow hedges -- -- (1,494)
--------- ----------- ---------
Net cash (used for) provided by financing activities (221,189) 171,484 466,706
--------- ----------- ---------
Effect of exchange rate changes on cash and cash
equivalents 12,040 6,704 2,312
--------- ----------- ---------
Net (decrease) increase in cash and cash equivalents (195,028) 165,686 215,608
Cash and cash equivalents, beginning of period 579,737 414,051 198,443
--------- ----------- ---------
Cash and cash equivalents, end of period $ 384,709 $ 579,737 $ 414,051
========= =========== =========

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

-38-

CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY
NABORS INDUSTRIES LTD. AND SUBSIDIARIES

ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
--------------------------------------------------
COMMON UNREALIZED
SHARES GAINS MINIMUM UNREALIZED
------------------ CAPITAL IN (LOSSES) ON PENSION LOSS ON CUMULATIVE
PAR EXCESS OF MARKETABLE LIABILITY CASH FLOW TRANSLATION
SHARES VALUE PAR VALUE SECURITIES ADJUSTMENT HEDGES ADJUSTMENT
------- -------- ---------- ---------- ---------- ---------- -----------

(IN THOUSANDS)
Balances, December 31, 2001 147,711 $ 14,771 $1,091,536 $12,410 $ -- $ -- $(9,150)
------- -------- ---------- ------- ------- ------- -------
Comprehensive income (loss):
Net income
Translation adjustment 3,910
Unrealized losses on
marketable securities, net
of income tax benefit of
$3,118 (5,309)
Less:
reclassification adjustment
for gains included in net
income, net of income taxes
of $855 (1,455)
Minimum pension liability
adjustment, net of income
taxes $1,295 (2,205)
Unrealized loss on and
amortization of loss on
cash flow hedges, net of
income taxes of $848 (1,444)
------- -------- ---------- ------- ------- ------- -------
Total comprehensive
income (loss) -- -- -- (6,764) (2,205) (1,444) 3,910
------- -------- ---------- ------- ------- ------- -------
Issuance of common shares for
stock options exercised 806 64 10,210
Issuance of common shares in
connection with the Bayard
warrants exercised 18 2 (2)
Issuance of common shares in
connection with the Enserco
acquisition 2,638 264 162,497
Issuance of common shares in
connection with the Ryan
acquisition 220 11,636
Nabors Exchangeco shares
exchanged 485 19 (19)
Tax effect of stock
option deductions 842
Repurchase of common shares (91) (799)
Put option on common shares 2,576
Retirement of treasury stock (6,822) (682) (59,172)
Change in par value (14,293) 14,293
------- ------- ---------- ------- ------- ------- -------
Subtotal (2,746) (14,626) 142,062 -- -- -- --
------- -------- ---------- ------- ------- ------- -------
Balances, December 31, 2002 144,965 $ 145 $1,233,598 $ 5,646 $(2,205) $(1,444) $(5,240)
======= ======== ========== ======= ======= ======= =======

TOTAL
RETAINED TREASURY SHAREHOLDERS'
EARNINGS STOCK EQUITY
---------- ---------- -------------

(IN THOUSANDS)
Balances, December 31, 2001 $1,001,079 $(252,780) $ 1,857,866
---------- --------- -----------
Comprehensive income (loss):
Net income 121,489 121,489
Translation adjustment 3,910
Unrealized losses on
marketable securities, net
of income tax benefit of
$3,118 (5,309)
Less:
reclassification adjustment
for gains included in net
income, net of income taxes
of $855 (1,455)
Minimum pension liability
adjustment, net of income
taxes $1,295 (2,205)
Unrealized loss on and
amortization of loss on
cash flow hedges, net of
income taxes of $848 (1,444)
---------- --------- -----------
Total comprehensive
income (loss) 121,489 -- 114,986
---------- --------- -----------
Issuance of common shares for
stock options exercised 10,274
Issuance of common shares in
connection with the Bayard
warrants exercised --
Issuance of common shares in
connection with the Enserco
acquisition 162,761
Issuance of common shares in
connection with the Ryan
acquisition 11,636
Nabors Exchangeco shares
exchanged --
Tax effect of stock
option deductions 842
Repurchase of common shares (1,687) (2,486)
Put option on common shares 2,576
Retirement of treasury stock (192,926) 252,780 --
Change in par value --
---------- --------- -----------
Subtotal (194,613) 252,780 185,603
---------- --------- -----------
Balances, December 31, 2002 $ 927,955 $ -- $ 2,158,455
========== ========= ===========

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

-39-

ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
--------------------------------------------------
COMMON UNREALIZED
SHARES GAINS MINIMUM UNREALIZED
---------------- CAPITAL IN (LOSSES)ON PENSION LOSS ON CUMULATIVE
PAR EXCESS OF MARKETABLE LIABILITY CASH FLOW TRANSLATION
SHARES VALUE PAR VALUE SECURITIES ADJUSTMENT HEDGES ADJUSTMENT
------- ------ ---------- ---------- ---------- ---------- -----------

(IN THOUSANDS)
Balances, December 31, 2002 144,965 $145 $1,233,598 $ 5,646 $(2,205) $(1,444) $ (5,240)
------- ---- ---------- ------- ------- ------- --------
Comprehensive income (loss):
Net income
Translation adjustment 103,963
Unrealized gains on
marketable securities, net
of income taxes of $867 1,476
Less:
reclassification adjustment
for gains included in net
income, net of income taxes
of $1,264 (2,153)
Minimum pension liability
adjustment, net of income
taxes of $358 (610)
Amortization of loss on cash
flow hedges 150
------- ---- ---------- ------- ------- ------- --------
Total comprehensive
income (loss) -- -- -- (677) (610) 150 103,963
------- ---- ---------- ------- ------- ------- --------
Issuance of common shares for
stock options exercised 1,234 2 20,339
Issuance of common shares in
connection with the New
Prospect warrants exercised 200 6,000
Issuance of common shares in
connection with the
Enserco warrants exercised 49
Nabors Exchangeco shares
exchanged 208
Tax effect of stock option
deductions 10,425
------- ---- ---------- ------- ------- -------- --------
Subtotal 1,691 2 36,764 -- -- -- --
------- ---- ---------- ------- ------- -------- --------
Balances, December 31, 2003 146,656 $147 $1,270,362 $ 4,969 $(2,815) $ (1,294) $ 98,723
======= ==== ========== ======= ======= ======== ========

TOTAL
RETAINED TREASURY SHAREHOLDERS'
EARNINGS STOCK EQUITY
---------- ---------- -------------

(IN THOUSANDS)
Balances, December 31, 2002 $ 927,955 $-- $2,158,455
---------- --- ----------
Comprehensive income (loss):
Net income 192,228 192,228
Translation adjustment 103,963
Unrealized gains on
marketable securities, net
of income taxes of $867 1,476
Less:
reclassification adjustment
for gains included in net
income, net of income taxes
of $1,264 (2,153)
Minimum pension liability
adjustment, net of income
taxes of $358 (610)
Amortization of loss on cash
flow hedges 150
---------- --- ----------
Total comprehensive
income (loss) 192,228 -- 295,054
---------- --- ----------
Issuance of common shares for
stock options exercised 20,341
Issuance of common shares in
connection with the New
Prospect warrants exercised 6,000
Issuance of common shares in
connection with the
Enserco warrants exercised --
Nabors Exchangeco shares
exchanged --
Tax effect of stock option
deductions 10,425
---------- --- ----------
Subtotal -- -- 36,766
---------- --- ----------
Balances, December 31, 2003 $1,120,183 $-- $2,490,275
========== === ==========

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

-40-

ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
--------------------------------------------------
COMMON UNREALIZED
SHARES GAINS MINIMUM UNREALIZED
---------------- CAPITAL IN (LOSSES)ON PENSION LOSS ON CUMULATIVE
PAR EXCESS OF MARKETABLE LIABILITY CASH FLOW TRANSLATION
SHARES VALUE PAR VALUE SECURITIES ADJUSTMENT HEDGES ADJUSTMENT
------- ------ ---------- ---------- ---------- ---------- -----------

(IN THOUSANDS)
Balances, December 31, 2003 146,656 $147 $1,270,362 $ 4,969 $(2,815) $(1,294) $ 98,723
------- ---- ---------- ------- ------- ------- --------
Comprehensive income (loss):
Net income
Translation adjustment 52,797
Unrealized gains on
marketable securities, net
of income tax benefit
of $1,138 8,395
Less:
reclassification adjustment
for gains included in net
income, net of income taxes
of $850 (13,093)
Pension liability
amortization, net of income
taxes of $233 396
Amortization of loss on cash
flow hedges 151
------- ---- ---------- ------- ------- ------- --------
Total comprehensive income
(loss) -- -- -- (4,698) 396 151 52,797
------- ---- ---------- ------- ------- ------- --------
Issuance of common shares for
stock options exercised 3,045 3 71,245
Nabors Exchangeco shares
exchanged 160
Tax effect of stock option
deductions 16,767
------- ---- ---------- ------- ------- ------- --------
Subtotal 3,205 3 88,012
------- ---- ---------- ------- ------- ------- --------
Balances, December 31,
2004 149,861 $150 $1,358,374 $ 271 $(2,419) $(1,143) $151,520
======= ==== ========== ======= ======= ======= ========

TOTAL
RETAINED TREASURY SHAREHOLDERS'
EARNINGS STOCK EQUITY
---------- -------- -------------

(IN THOUSANDS)
Balances, December 31, 2003 $1,120,183 $ -- $2,490,275
---------- ---- ----------
Comprehensive income (loss):
Net income 302,457 302,457
Translation adjustment 52,797
Unrealized gains on
marketable securities, net
of income tax benefit
of $1,138 8,395
Less:
reclassification adjustment
for gains included in net
income, net of income taxes
of $850 (13,093)
Pension liability
amortization, net of income
taxes of $233 396
Amortization of loss on cash
flow hedges 151
---------- ---- ----------
Total comprehensive income
(loss) 302,457 -- 351,103
---------- ---- ----------
Issuance of common shares for
stock options exercised 71,248
Nabors Exchangeco shares
exchanged --
Tax effect of stock option
deductions 16,767
---------- ---- ----------
Subtotal 88,015
---------- ---- ----------
Balances, December 31,
2004 $1,422,640 $ -- $2,929,393
========== ==== ==========

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

-41-

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NABORS INDUSTRIES LTD. AND SUBSIDIARIES

1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION

Nabors is the largest land drilling contractor in the world. We conduct
oil, gas and geothermal land drilling operations in the U.S. Lower 48 states,
Alaska, Canada, South and Central America, the Middle East, the Far East and
Africa. Nabors also is one of the largest land well-servicing and workover
contractors in the United States and Canada and is a leading provider of
offshore platform workover and drilling rigs in the United States and multiple
international markets. To further supplement and complement our primary
business, we offer a wide range of ancillary well-site services, including
engineering, transportation, construction, maintenance, well logging,
directional drilling, rig instrumentation, data collection and other support
services, in selected domestic and international markets. We have also made
selective investments in oil and gas exploration, development and production
activities.

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

The accompanying consolidated financial statements and related footnotes
are presented in accordance with accounting principles generally accepted in the
United States of America (GAAP). Certain reclassifications have been made to
prior periods to conform to the current period presentation, with no effect on
our consolidated financial position, results of operations or cash flows.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

Our consolidated financial statements include the accounts of Nabors, all
majority-owned subsidiaries, and all non-majority owned subsidiaries required to
be consolidated under Financial Accounting Standards Board (FASB) Interpretation
No. 46R, which are not material to our financial position, results of operations
or cash flows. All significant intercompany accounts and transactions are
eliminated in consolidation.

Investments in entities where we have the ability to exert significant
influence, but where we do not control their operating and financial policies,
are accounted for using the equity method. Our share of the net income of these
entities is recorded as Earnings from unconsolidated affiliates in our
consolidated statements of income, and our investment in these entities is
carried as a single amount in our consolidated balance sheets. Investments in
net assets of unconsolidated affiliates accounted for using the equity method
totaled $67.1 million and $58.1 million as of December 31, 2004 and 2003,
respectively, and are included in other long-term assets in our consolidated
balance sheets.

CASH AND CASH EQUIVALENTS

Cash and cash equivalents include demand deposits and various other
short-term investments with original maturities of three months or less.

MARKETABLE AND NON-MARKETABLE SECURITIES

Marketable securities consist of equity securities, certificates of
deposit, corporate debt securities, U.S. Government debt securities, Government
agencies debt securities, foreign government debt securities, mortgage-backed
debt securities and asset-backed debt securities. Securities classified as
available-for-sale or trading are stated at fair value. Unrealized holding gains
and temporary losses for available-for-sale securities are excluded from
earnings and, until realized, are reported net of taxes in a separate component
of shareholders' equity. Other than temporary losses are included in earnings.
Unrealized and realized gains and losses on securities classified as trading are
reported in earnings currently.

-42-

In computing realized gains and losses on the sale of equity securities,
the specific identification method is used. In accordance with this method, the
cost of the equity securities sold is determined using the specific cost of the
security when originally purchased.

We are also invested in overseas funds investing primarily in a variety of
public and private U.S. and non-U.S. securities (including asset-backed
securities and mortgage-backed securities, global structured asset
securitizations, whole loan mortgages, and participations in whole loans and
whole loan mortgages). These investments are classified as non-marketable,
because they do not have published fair values, and are recorded at cost in our
consolidated balance sheets as a component of other current assets. Gains or
losses are realized, as other income, when distributions are made from the
funds.

INVENTORY

Inventory is stated at the lower of cost or market. Cost is determined
using the first-in, first-out ("FIFO") method and includes the cost of
materials, labor and manufacturing overhead.

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment, including renewals and betterments, are
stated at cost, while maintenance and repairs are expensed currently. Interest
costs applicable to the construction of qualifying assets are capitalized as a
component of the cost of such assets. We provide for the depreciation of our
drilling and workover rigs using the units-of-production method over an
approximate 4,900-day period, with the exception of our jack-up rigs which are
depreciated over an 8,030-day period, after provision for salvage value. When
our drilling and workover rigs are not operating, a depreciation charge is
provided using the straight-line method over an assumed depreciable life of 20
years, with the exception of our jack-up rigs, where a 30-year depreciable life
is used.

Depreciation on our buildings, well-servicing rigs, oilfield hauling and
mobile equipment, marine transportation and supply vessels, and other machinery
and equipment is computed using the straight-line method over the estimated
useful life of the asset after provision for salvage value (buildings - 10 to 30
years; well-servicing rigs - 3 to 15 years; marine transportation and supply
vessels - 10 to 25 years; oilfield hauling and mobile equipment and other
machinery and equipment - 3 to 10 years). Amortization of capitalized leases is
included in depreciation and amortization expense. Upon retirement or other
disposal of fixed assets, the cost and related accumulated depreciation are
removed from the respective accounts and any gains or losses are included in our
results of operations.

We review our assets for impairment when events or changes in circumstances
indicate that the net book value of property, plant and equipment may not be
recovered over its remaining service life. Provisions for asset impairment are
charged to income when the sum of estimated future cash flows, on an
undiscounted basis, is less than the asset's net book value. Impairment charges
are recorded using discounted cash flows which requires the estimation of
dayrates and utilization, and such estimates can change based on market
conditions, technological advances in the industry or changes in regulations
governing the industry. There were no impairment charges related to assets held
for use recorded by Nabors in 2004, 2003 or 2002. In 2002 we reclassified four
supply vessels to held-for-sale as we intended to sell these vessels in 2003.
Accordingly, we reduced the carrying values of these assets to levels
approximating their respective fair values, resulting in a charge to losses
(gains) on sales of long-lived assets, impairment charges and other expense
(income), net of $3.7 million in 2002. Three of these supply vessels were sold
in 2003 for amounts approximating their current carrying values, resulting in a
gain of $.2 million included in losses (gains) on sales of long-lived assets,
impairment charges and other expense (income), net in our consolidated statement
of income for the year ended December 31, 2003. The fourth supply vessel was
sold in January 2004 for an amount that approximated its carrying value.

OIL AND GAS PROPERTIES

We follow the successful efforts method of accounting for our oil and gas
activities. Under the successful efforts method, lease acquisition costs and all
development costs are capitalized. Proved oil and gas properties are reviewed
when circumstances suggest the need for such a review and, if required, the
proved properties are written down to their estimated fair value. Unproved
properties are reviewed quarterly to determine if there has been impairment of
the carrying value, with any such impairment charged to expense in that period.
Estimated fair value included the estimated present value of all reasonably
expected future production, prices, and costs. Exploratory drilling costs are
capitalized until the results are determined. If proved reserves are not
discovered, the exploratory drilling costs are expensed. Interest costs related
to financing major oil and gas projects in progress are capitalized until the
projects are

-43-

evaluated or until the projects are substantially complete and ready for their
intended use if the projects are evaluated as successful. Other exploratory
costs are expensed as incurred. Our provision for depletion is based on the
capitalized costs as determined above and is determined on a
property-by-property basis using the units-of-production method, with costs
being amortized over proved developed reserves.

GOODWILL

Goodwill represents the cost in excess of fair value of the net assets of
companies acquired. Effective January 1, 2002, we adopted Statement of Financial
Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets."
SFAS 142 supersedes Accounting Principles Board (APB) Opinion No. 17, which
stated that goodwill acquired as a result of a purchase method business
combination and all other intangible assets were subject to amortization. APB 17
also mandated a maximum period of 40 years for that amortization. SFAS 142
presumes that all goodwill and intangible assets that have indefinite useful
lives will not be subject to amortization, but rather will be tested at least
annually for impairment. In addition, the standard provides specific guidance on
how to determine and measure goodwill impairment. Intangible assets that have
finite useful lives will continue to be amortized over their useful lives, but
without the constraint of a 40-year maximum amortization period.

During the second quarter of 2002 we performed our initial goodwill
impairment assessment as required by SFAS 142. As part of that assessment, we
determined that our 11 business units, as of January 1, 2002, represented our
reporting units as defined by SFAS 142. We determined the aggregate carrying
values and fair values of all such reporting units, which were measured as of
the January 1, 2002 adoption date. We calculated the fair value of each
reporting unit based on discounted cash flows and determined there was no
goodwill impairment. In instances where assets acquired and liabilities assumed
in a business combination are assigned solely to one of our business units, the
amount of goodwill resulting from that acquisition is assigned in full to that
business unit. In instances where assets and liabilities are split between more
than one business unit, we assign goodwill to our business units based on the
respective fair values of the fixed assets assigned to each business unit. In
the second quarters of 2003 and 2004 we performed our annual assessments of
goodwill impairment and determined there was no goodwill impairment in either
year.

The change in the carrying amount of goodwill for our various Contract
Drilling segments and our Other Operating Segments for the years ended December
31, 2004 and 2003 is as follows:

ACQUISITIONS BALANCE
AND PURCHASE CUMULATIVE AS OF
BALANCE AS OF PRICE TRANSLATION RECLASSIFICATIONS DECEMBER
JANUARY 1, 2003 ADJUSTMENTS ADJUSTMENT AND OTHER 31, 2003
--------------- ------------ ----------- ----------------- --------

(IN THOUSANDS)
Contract Drilling:
U.S. Lower 48 Land Drilling $ 28,700 $ -- $ -- $ 1,276 $ 29,976
U.S. Land Well-servicing 43,741 -- -- -- 43,741
U.S. Offshore 29,583 -- -- (11,580) 18,003
Alaska 19,995 -- -- -- 19,995
Canada 112,791 1,378 24,398 -- 138,567
International 4,745 -- -- 11,580 16,325
-------- ------ ------- -------- --------
Subtotal Contract Drilling 239,555 1,378 24,398 1,276 266,607
Other Operating Segments 46,807 1,601 612 -- 49,020
-------- ------ ------- -------- --------
Total $286,362 $2,979 $25,010 $ 1,276 $315,627
======== ====== ======= ======== ========

-44-

ACQUISITIONS BALANCE
AND PURCHASE CUMULATIVE AS OF
BALANCE AS OF PRICE TRANSLATION RECLASSIFICATIONS DECEMBER
DECEMBER 31,2003 ADJUSTMENTS ADJUSTMENT AND OTHER 31, 2004
---------------- ------------ ----------- ----------------- --------

(IN THOUSANDS)
Contract Drilling:
U.S. Lower 48 Land Drilling $ 29,976 $-- $ -- $ -- $ 29,976
U.S. Land Well-servicing 43,741 -- -- -- 43,741
U.S. Offshore 18,003 -- -- -- 18,003
Alaska 19,995 -- -- -- 19,995
Canada 138,567 -- 10,930 -- 149,497
International 16,325 -- -- 2,658 18,983
-------- --- ------- ------- --------
Subtotal Contract Drilling 266,607 -- 10,930 2,658 280,195
Other Operating Segments 49,020 -- 226 (2,216) 47,030
-------- --- ------- ------- --------
Total $315,627 $-- $11,156 $ 442 $327,225
======== === ======= ======= ========

Our Oil and Gas segment does not have any goodwill. Goodwill totaling
approximately $6.5 million is expected to be deductible for tax purposes.

DERIVATIVE FINANCIAL INSTRUMENTS

We record derivative financial instruments (including certain derivative
instruments embedded in other contracts) in our consolidated balance sheets at
fair value as either assets or liabilities. The accounting for changes in the
fair value of a derivative instrument depends on the intended use of the
derivative and the resulting designation, which is established at the inception
of a derivative. Accounting for derivatives qualifying as fair value hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the statement of income. For derivative instruments designated as cash
flow hedges, changes in fair value, to the extent the hedge is effective, are
recognized in other comprehensive income until the hedged item is recognized in
earnings. Hedge effectiveness is measured quarterly based on the relative
cumulative changes in fair value between the derivative contract and the hedged
item over time. Any change in fair value resulting from ineffectiveness is
recognized immediately in earnings. Any change in fair value of derivative
financial instruments that are speculative in nature and do not qualify for
hedge accounting treatment is also recognized immediately in earnings.

LITIGATION AND INSURANCE RESERVES

We estimate our reserves related to litigation and insurance based on the
facts and circumstances specific to the litigation and insurance claims and our
past experience with similar claims. We maintain actuarially-determined accruals
in our consolidated balance sheets to cover self-insurance retentions (Note 13).

REVENUE RECOGNITION

We recognize revenues and costs on daywork contracts daily as the work
progresses. For certain contracts, we receive lump-sum payments for the
mobilization of rigs and other drilling equipment. Deferred fees related to
mobilization periods are recognized over the term of the related drilling
contract. Costs incurred to relocate rigs and other drilling equipment to areas
in which a contract has not been secured are expensed as incurred.

We recognize revenue for top drives and instrumentation systems we
manufacture when the earnings process is complete. This generally occurs when
products have been shipped, title and risk of loss have been transferred,
collectibility is probable, and pricing is fixed and determinable.

We recognize, as operating revenue, proceeds from business interruption
insurance claims in the period that the applicable proof of loss documentation
is received. Proceeds from casualty insurance settlements in excess of the
carrying value of damaged assets are recognized in losses (gains) on sales of
long-lived assets, impairment charges and other expense (income), net in the
period that the applicable proof of loss documentation is received.

-45-

We recognize reimbursements received for out-of-pocket expenses incurred as
revenues and account for out-of-pocket expenses as direct costs.

We recognize revenue on our interests in oil and gas properties as
production occurs and title passes.

INCOME TAXES

We are a Bermuda-exempt company and are not subject to income taxes in
Bermuda. Consequently, income taxes have been provided based on the tax laws and
rates in effect in the countries in which our operations are conducted and
income is earned. The income taxes in these jurisdictions vary substantially.
Our effective tax rate for financial statement purposes will continue to
fluctuate from year to year as our operations are conducted in different taxing
jurisdictions.

For U.S. and other foreign jurisdiction income tax purposes, we have net
operating and other loss carryforwards that we are required to assess annually
for potential valuation allowances. We consider the sufficiency of existing
temporary differences and expected future earnings levels in determining the
amount, if any, of valuation allowance required against such carryforwards.

We do not provide for U.S. or foreign income or withholding taxes on
unremitted earnings of all U.S. and certain foreign entities, as these earnings
are considered permanently reinvested. Unremitted earnings, representing tax
basis accumulated earnings and profits, totaled approximately $289.9 million,
$453.2 million and $377.2 million as of December 31, 2004, 2003 and 2002,
respectively. It is not practicable to estimate the amount of deferred income
taxes associated with these unremitted earnings. The level of unremitted
earnings as of December 31, 2004 was impacted by a reorganization of our
international subsidiaries completed in the fourth quarter of 2004.

In circumstances where our drilling rigs and other assets are operating in
certain foreign taxing jurisdictions, and it is expected that we will redeploy
such assets before they give rise to future tax consequences, we do not
recognize any deferred tax liabilities on the earnings from these assets.

Nabors realizes an income tax benefit associated with certain stock options
issued under its stock option plans. This benefit, which is not reflected in our
consolidated income statements, results in a reduction in income taxes payable
and an increase in capital in excess of par value.

FOREIGN CURRENCY TRANSLATION

For certain of our foreign subsidiaries, such as those in Canada and
Argentina, the local currency is the functional currency, and therefore
translation gains or losses associated with foreign-denominated monetary
accounts are accumulated in a separate section of shareholders' equity. For our
other international subsidiaries, the U.S. dollar is the functional currency,
and therefore local currency transaction gains and losses, arising from
remeasurement of payables and receivables denominated in local currency, are
included in our consolidated statements of income.

STOCK-BASED COMPENSATION

We account for stock-based compensation using the intrinsic value method
prescribed by 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. SFAS
No. 148, "Accounting for Stock-Based Compensation - an Amendment to FAS 123,"
requires companies that continue to account for stock-based compensation in
accordance with APB 25 to disclose certain information using a tabular
presentation. The table presented below illustrates the effect on our net income
and earnings per share as if we had applied the fair value recognition
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," to our
stock-based employee compensation. Under the provisions of SFAS 123,
compensation cost for stock-based compensation is determined based on fair
values as of the dates of grant estimated using an option pricing model such as
the Black-Scholes option-pricing model (which we use in our calculations), and
compensation cost is amortized over the applicable option vesting period.

-46-

YEAR ENDED DECEMBER 31,
------------------------------
2004 2003 2002
-------- -------- --------

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net income, as reported $302,457 $192,228 $121,489
Deduct: Total stock-based employee compensation
expense determined under fair value method for
all awards, net of related tax effects (22,530) (13,565) (31,047)
-------- -------- --------
Pro forma net income - basic 279,927 178,663 90,442
-------- -------- --------
Add: Interest expense on assumed conversion of our
zero coupon senior convertible/exchangeable
debentures/notes, net of tax (see Note 14) 12,438 3,639 --
-------- -------- --------
Adjusted pro forma net income-diluted $292,365 $182,302 $ 90,442
======== ======== ========

Earnings per share:
Basic - as reported $ 2.03 $ 1.31 $ .85
Basic - pro forma $ 1.88 $ 1.22 $ .63
Diluted - as reported $ 1.92 $ 1.25 $ .81
Diluted - pro forma $ 1.78 $ 1.16 $ .60

The pro forma amounts above were estimated using the Black-Scholes
option-pricing model with the following weighted average assumptions for grants
during 2004, 2003 and 2002, respectively: risk-free interest rates of 2.49%,
2.23% and 3.79%; volatility of 31.00%, 47.58% and 48.19%; dividend yield of 0.0%
for all periods; and expected life of 4.0 years for 2004 and 3.5 years for 2003
and 2002.

USE OF ESTIMATES

The preparation of financial statements in conformity with GAAP requires
management to make certain estimates and assumptions. These estimates and
assumptions affect the reported amounts of assets and liabilities, the
disclosures of contingent assets and liabilities at the balance sheet date and
the amounts of revenues and expenses recognized during the reporting period.
Actual results could differ from such estimates. Areas where critical accounting
estimates are made by management include:

- depreciation and amortization of property, plant and equipment

- impairment of long-lived assets

- income taxes

- insurance reserves

- fair value of assets acquired and liabilities assumed

RECENT ACCOUNTING PRONOUNCEMENTS

As discussed under Stock-Based Compensation above, we currently account for
stock-based compensation as prescribed by APB 25, and because we grant options
at prices equal to the market price of our shares on the date of the grant we do
not record compensation expense related to these grants. On December 16, 2004,
the FASB issued a revision to SFAS No. 123, "Share-Based Payment," which will
eliminate our ability to account for stock-based compensation using APB 25 and
instead would require us to account for stock option awards using a fair-value
based method resulting in compensation expense for stock option awards. The
statement will be effective for stock options granted, modified, or settled in
cash in interim and annual periods beginning after June 15, 2005. Additionally,
for stock options granted or modified after December 15, 1994 that have not
vested as of the effective date of the statement, compensation cost will be
measured and recorded based on the same estimates of fair value calculated as of
the date of grant as currently disclosed within the table required by SFAS No.
148, "Accounting for Stock-Based Compensation - an Amendment to FAS 123,"
presented above. The statement may have a material adverse effect on our results
of operations during the periods of adoption and annual and interim periods
thereafter. If this statement had been adopted in its current form as of January
1, 2004, we would have recorded additional compensation expense, net of related
tax effects, of approximately $22.5 million during 2004 and our diluted earnings
per share for 2004 would have been reduced by $.14 per share.

In October 2004 the FASB ratified the consensus reached by the Emerging
Issues Task Force (EITF) in EITF 04-8, which addresses the issue of when the
dilutive effect of contingently convertible debt instruments should be

-47-

included in diluted earnings per share computations. Based on the concepts
described in EITF 04-8, we will be required to treat our $700 million zero
coupon senior exchangeable notes as converted for purposes of computing diluted
earnings per share, regardless of whether any triggering contingency has been
met or is likely to be met. The provisions in EITF 04-8 are effective for
periods ending after December 15, 2004, including the year ended December 31,
2004. As a result of this accounting change, we are required to include
additional common shares in the denominator of our diluted earnings per share
calculation in all periods where the price for our shares exceeds $70.10. These
additional shares represent the value in excess of the principal amount of the
notes and would be calculated using the treasury stock method. We do not expect
this accounting change to have a material effect on our financial position,
results of operations or cash flows.

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

3. ACQUISITIONS

On August 12, 2002, Nabors entered into an arrangement agreement to acquire
Ryan Energy Technologies, Inc., a corporation incorporated under the laws of
Alberta, Canada. Nabors' acquisition of Ryan was completed on October 9, 2002,
and became effective pursuant to a plan of arrangement approved by the
securityholders of Ryan and the Court of Queen's Bench of Alberta.

Pursuant to the arrangement, Nabors Exchangeco (Canada) Inc., an indirect
wholly-owned Canadian subsidiary of Nabors, acquired all of the issued and
outstanding common shares of Ryan in exchange for approximately Cdn. $22.6
million (U.S. $14.2 million) in cash and 380,264 exchangeable shares of Nabors
Exchangeco, of which 219,493 exchangeable shares were immediately exchanged for
common shares of Nabors in accordance with the instructions of the holders of
those shares. The Nabors Exchangeco shares are exchangeable for Nabors common
shares, at each holder's option, on a one-for-one basis and are listed on the
Toronto Stock Exchange. Additionally, these exchangeable shares have essentially
identical rights as Nabors common shares, including but not limited to voting
rights and the right to receive dividends, if any, and will be automatically
exchanged upon the occurrence of certain events. The value of the Nabors
Exchangeco shares issued totaled Cdn. $18.5 million (U.S. $11.6 million). In
addition, we assumed Ryan debt totaling Cdn. $14.5 million (U.S. $9.1 million).
Ryan's results of operations were consolidated into ours commencing on October
9, 2002. The Ryan purchase price was allocated based on estimates of the fair
market value of assets acquired and liabilities assumed as of the acquisition
date and resulted in goodwill of approximately Cdn $7.2 million (U.S. $4.8
million). Ryan manufactures and sells directional drilling and rig
instrumentation systems and provides directional drilling, rig instrumentation
and data collection services to oil and gas exploration and service companies in
the United States, Canada and Venezuela.

On March 18, 2002, we acquired, for cash, 20.5% of the issued and
outstanding shares of Enserco Energy Service Company Inc., a Canadian
publicly-held corporation, for Cdn. $15.50 per share for a total price of Cdn.
$83.2 million (U.S. $52.6 million). On April 26, 2002, Nabors Exchangeco
acquired all of the remaining issued and outstanding common shares of Enserco in
exchange for approximately Cdn. $100.1 million (U.S. $64.1 million) in cash and
3,549,082 exchangeable shares of Nabors Exchangeco, of which 2,638,526
exchangeable shares were immediately exchanged for Nabors Industries, Inc.
(Nabors Delaware) common stock in accordance with the instructions of the
holders of those shares (which common stock was converted into our common shares
pursuant to our corporate reorganization on June 24, 2002). The value of the
Nabors Exchangeco shares issued totaled Cdn. $254.2 million (U.S. $162.8
million). In addition, we assumed Enserco debt totaling Cdn. $33.4 million (U.S.
$21.4 million). Enserco's results of operations were consolidated into ours
commencing on April 26, 2002. The Enserco purchase price was allocated based on
estimates of the fair market value of assets acquired and liabilities assumed as
of the acquisition date and resulted in goodwill of approximately Cdn. $164.7
million (U.S. $105.2 million). Enserco provided land drilling, well-servicing
and workover services in Canada and operated a fleet of 193 well-servicing rigs
and 30 drilling rigs as of our acquisition date.

-48-

4. CASH AND CASH EQUIVALENTS AND MARKETABLE SECURITIES

Our cash and cash equivalents, short-term and long-term marketable
securities consist of the following:

DECEMBER 31,
----------------------------------------------------------------------------
2004 2003
------------------------------------ -------------------------------------
GROSS GROSS GROSS GROSS
UNREALIZED UNREALIZED UNREALIZED UNREALIZED
FAIR HOLDING HOLDING FAIR HOLDING HOLDING
VALUE GAINS LOSSES VALUE GAINS LOSSES
---------- ---------- ---------- ---------- ----------- ----------

(IN THOUSANDS)
Cash and cash equivalents $ 384,709 $ -- $ -- $ 579,737 $ -- $ --
Available-for-sale 40,723 4,508 (1,247) 48,843 9,379 (2,016)
marketable equity securities
Marketable debt securities:
Commercial paper and CDs 6,970 1 -- 50,743 -- --
Corporate debt securities 384,569 -- (1,094) 319,327 2,392 --
U.S. Government debt securities -- -- -- 7,103 -- --
Government agencies debt
securities 97,515 -- (151) 285,358 -- (677)
Mortgage-backed debt securities -- -- -- 119 -- --
Mortgage-CMO debt securities 26,326 -- (62) 29,275 31 --
Asset-backed debt securities 311,701 -- (761) 211,585 767 --
---------- ------ ------- ---------- -------- -------
Total marketable debt securities 827,081 1 (2,068) 903,510 3,190 (677)
---------- ------ ------- ---------- -------- -------
$1,252,513 $4,509 $(3,315) $1,532,090 $ 12,569 $(2,693)
========== ====== ======= ========== ======== =======

The estimated fair values of our corporate, U.S. Government, Government
agencies, mortgage-backed, mortgage-CMO and asset-backed debt securities at
December 31, 2004, by contractual maturity, are shown below. Expected maturities
will differ from contractual maturities because the issuers of the securities
may have the right to repay obligations without prepayment penalties and we may
elect to sell the securities prior to the maturity date.

ESTIMATED
FAIR VALUE
2004
----------

(IN THOUSANDS)
Marketable debt securities:
Due in one year or less $387,619
Due after one year through five years 439,462
--------
$827,081
========

-49-

Certain information regarding our marketable debt and equity securities is
presented below:

YEAR ENDED DECEMBER 31,
--------------------------------
2004 2003 2002
-------- ---------- --------

(IN THOUSANDS)
Available-for-sale:
Proceeds from sales and maturities $838,816 $1,393,638 $542,133
Realized gains, net of realized losses 13,943 3,417 2,310

5. PROPERTY, PLANT AND EQUIPMENT

The major components of our property, plant and equipment are as follows:

DECEMBER 31,
-------------------------
2004 2003
----------- -----------

(IN THOUSANDS)
Land $ 15,821 $ 12,037
Buildings 31,394 26,703
Drilling, workover and well-servicing rigs, and related
equipment 4,128,169 3,637,296
Marine transportation and supply vessels 161,567 159,530
Oilfield hauling and mobile equipment 166,663 143,279
Other machinery and equipment 31,608 33,358
Net profits interests in oil and gas properties 140,110 84,807
----------- -----------
4,675,332 4,097,010

Less: accumulated depreciation and amortization (1,329,951) (1,081,826)
accumulated depletion on oil and gas properties (69,886) (24,392)
----------- -----------
$ 3,275,495 $ 2,990,792
=========== ===========

Repair and maintenance expense included in direct costs in our consolidated
statements of income totaled $253.0 million, $195.7 million and $138.5 million
for the years ended December 31, 2004, 2003 and 2002, respectively.

Interest costs of $1.9 million, $.9 million and $1.1 million were
capitalized during the years ended December 31, 2004, 2003 and 2002,
respectively.

6. INVESTMENTS IN UNCONSOLIDATED AFFILIATES

Our principal operations accounted for using the equity method include a
construction operation (40% ownership) and a logistics operation (50% ownership)
in Alaska, and drilling and workover operations located in Saudi Arabia (50%
ownership). These unconsolidated affiliates are integral to our operations in
those locations. See Note 12 for a discussion of transactions with these related
parties.

Combined condensed financial data for investments in unconsolidated
affiliates accounted for using the equity method of accounting is summarized as
follows:

DECEMBER 31,
-------------------
2004 2003
-------- --------

(IN THOUSANDS)
Current assets $ 89,097 $ 78,020
Long-term assets 143,051 135,073
Current liabilities 48,977 48,312
Long-term liabilities 40,201 40,201

-50-

YEAR ENDED DECEMBER 31,
------------------------------
2004 2003 2002
-------- -------- --------

(IN THOUSANDS)
Gross revenues $256,303 $312,008 $334,000
Gross margin 33,911 41,809 52,861
Net income 14,184 21,689 29,400
Nabors' Earnings from
unconsolidated affiliates 4,057 10,183 14,775

The financial data presented above as of and for the year ended December
31, 2004 does not include Sea Mar Management LLC, as this entity was
consolidated beginning in 2004 under the requirements of FIN 46R.

Cumulative undistributed earnings of our unconsolidated affiliates included
in our retained earnings as of December 31, 2004 and 2003 totaled approximately
$44.0 million and $42.0 million, respectively.

7. FINANCIAL INSTRUMENTS AND RISK CONCENTRATION

We may be exposed to certain market risks arising from the use of financial
instruments in the ordinary course of business. This risk arises primarily as a
result of potential changes in the fair market value of financial instruments
that would result from adverse fluctuations in foreign currency exchange rates,
credit risk, interest rates, and marketable and non-marketable security prices
as discussed below.

FOREIGN CURRENCY RISK

We operate in a number of international areas and are involved in
transactions denominated in currencies other than U.S. dollars, which exposes us
to foreign exchange rate risk. The most significant exposures arise in
connection with our operations in Canada, which usually are substantially
unhedged.

At various times, we utilize local currency borrowings (foreign
currency-denominated debt), the payment structure of customer contracts and
foreign exchange contracts to selectively hedge our exposure to exchange rate
fluctuations in connection with monetary assets, liabilities, cash flows and
commitments denominated in certain foreign currencies. A foreign exchange
contract is a foreign currency transaction, defined as an agreement to exchange
different currencies at a given future date and at a specified rate.

CREDIT RISK

Our financial instruments that potentially subject us to concentrations of
credit risk consist primarily of cash equivalents, investments in marketable and
non-marketable securities, accounts receivable, and our interest rate swap and
range cap and floor transactions. Cash equivalents such as deposits and
temporary cash investments are held by major banks or investment firms. Our
investments in marketable and non-marketable securities are managed within
established guidelines which limit the amounts that may be invested with any one
issuer and which provide guidance as to issuer credit quality. We believe that
the credit risk in such instruments is minimal. In addition, our trade
receivables are with a variety of U.S., international and foreign-country
national oil and gas companies. Management considers this credit risk to be
limited due to the financial resources of these companies. We perform ongoing
credit evaluations of our customers and we generally do not require material
collateral. We maintain reserves for potential credit losses, and such losses
have been within management's expectations.

INTEREST RATE AND MARKETABLE AND NON-MARKETABLE SECURITY PRICE RISK

Our financial instruments that are potentially sensitive to changes in
interest rates include our $1.381 billion zero coupon convertible senior
debentures, our $700 million zero coupon senior exchangeable notes, our 4.875%
and 5.375% senior notes, our interest rate swap and range cap and floor
transactions, our investments in debt securities (including corporate,
asset-backed, U.S. Government, Government agencies, foreign government,
mortgage-backed debt and mortgage-CMO debt securities) and our investments in
overseas funds investing primarily in a variety of public and private U.S. and
non-U.S. securities (including asset-backed securities and mortgage-backed
securities, global structured asset securitizations, whole loan mortgages, and
participations in whole loans and whole loan mortgages), which are classified as
non-marketable securities.

We may utilize derivative financial instruments that are intended to manage
our exposure to interest rate risks. The use of derivative financial instruments
could expose us to further credit risk and market risk. Credit risk in this

-51-

context is the failure of a counterparty to perform under the terms of the
derivative contract. When the fair value of a derivative contract is positive,
the counterparty would owe us, which can create credit risk for us. When the
fair value of a derivative contract is negative, we would owe the counterparty,
and therefore, we would not be exposed to credit risk. We attempt to minimize
credit risk in derivative instruments by entering into transactions with major
financial institutions that have a significant asset base. Market risk related
to derivatives is the adverse effect to the value of a financial instrument that
results from changes in interest rates. We try to manage market risk associated
with interest-rate contracts by establishing and monitoring parameters that
limit the type and degree of market risk that we undertake.

Our $700 million zero coupon senior exchangeable notes include a contingent
interest provision, discussed in Note 8 below, which qualifies as an embedded
derivative under SFAS 133, as amended by SFAS 149. 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 of this
embedded derivative would be recorded in our consolidated statements of income.
The fair value of the contingent interest provision at inception of the note
indenture was nominal. In addition, there was no significant change in the fair
value of this embedded derivative through December 31, 2004, resulting in no
impact on our consolidated statements of income for the year ended December 31,
2004.

On October 21, 2002, we entered into an interest rate swap transaction with
a third-party financial institution to hedge our exposure to changes in the fair
value of $200 million of our fixed rate 5.375% senior notes due 2012, which has
been designated as a fair value hedge under SFAS 133, as amended by SFAS 149.
Additionally, on October 21, 2002, we purchased a LIBOR range cap and sold a
LIBOR floor, in the form of a cashless collar, with the same third-party
financial institution with the intention of mitigating and managing our exposure
to changes in the three-month U.S. dollar LIBOR rate. This transaction does not
qualify for hedge accounting treatment under SFAS 133, as amended by SFAS 149,
and any change in the cumulative fair value of this transaction will be
reflected as a gain or loss in our consolidated statements of income.

During the years ended December 31, 2004, 2003 and 2002, we recorded
interest savings related to our interest rate swap agreement accounted for as a
fair value hedge of $6.5 million, $6.8 million and $1.2 million, respectively,
which served to reduce interest expense. The fair value of our interest rate
swap agreement is recorded as a derivative asset, included in other long-term
assets, and totaled approximately $4.6 million and $4.2 million as of December
31, 2004 and 2003, respectively. The carrying value of our 5.375% senior notes
has been increased by the same amount as of December 31, 2004 and 2003.

The fair value of our range cap and floor transaction is recorded as a
derivative asset, included in other long-term assets, and totaled approximately
$.3 million as of December 31, 2004, and is recorded as a derivative liability,
included in other long-term liabilities, and totaled approximately $3.7 million
and $3.8 million as of December 31, 2003 and 2002, respectively. In June 2004 we
unwound $100 million of the $200 million range cap and floor derivative
instrument. We recorded gains of approximately $2.4 million and losses of
approximately $1.1 million and $3.8 million for the years ended December 31,
2004, 2003 and 2002, respectively, related to this derivative instrument; such
amounts are included in losses (gains) on sales of long-lived assets, impairment
charges and other expense (income), net in our consolidated statements of
income.

On July 25, 2002, we entered into an interest rate hedge transaction with a
third-party financial institution to manage and mitigate interest rate risk
exposure relative to our August 2002 debt financing. Under the agreement, we
agreed to receive (pay) cash from (to) the counterparty based on the difference
between 4.43% and the ten-year Treasury rate on August 23, 2002, assuming a
$100.0 million notional amount with semi-annual interest payments over a
ten-year maturity. We accounted for this transaction as a cash flow hedge.
During August 2002 we paid approximately $1.5 million related to the termination
of this agreement. This payment was recorded as a reduction to accumulated other
comprehensive income in our consolidated balance sheet and is being amortized
into earnings as additional interest expense, using the effective interest
method, over the term of the 5.375% senior notes due 2012 as discussed in Note 8
below.

On March 26, 2002, in anticipation of closing the Enserco acquisition
discussed in Note 3, we entered into two foreign exchange contracts with a total
notional value of Cdn. $115.9 million and maturity dates of April 29, 2002.
Additionally, on April 9, 2002, we entered into a third foreign exchange
contract with a notional value of Cdn. $50.0 million maturing April 29, 2002.
The notional amounts of these contracts were used to fund the cash portion of
the Enserco acquisition purchase price. The notional amounts of these contracts
represented the amount of foreign currency purchased at maturity and did not
represent our exposure under these contracts. Although such contracts served as
an economic hedge against our foreign currency risk related to the cash portion
of the acquisition cost, these contracts did not qualify for hedge accounting
treatment under SFAS 133, as amended by SFAS 149. We recognized a gain on these

-52-

foreign exchange contracts of approximately U.S. $1.8 million included in losses
(gains) on sales of long-lived assets, impairment charges and other expense
(income), net in our consolidated statement of income for the year ended
December 31, 2002.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The fair value of our fixed rate long-term debt is estimated based on
quoted market prices or prices quoted from third-party financial institutions.
The carrying and fair values of our long-term debt, including the current
portion, are as follows:

DECEMBER 31,
---------------------------------------------------------
2004 2003
--------------------------- ---------------------------
CARRYING CARRYING
VALUE FAIR VALUE VALUE FAIR VALUE
------------ ------------ ------------ ------------

(IN THOUSANDS)
4.875% senior notes due
August 2009 $ 223,764 $ 232,058 $ 223,499 $ 234,585
5.375% senior notes due
August 2012 277,922(1) 292,454(1) 277,248(1) 290,813(1)
$700 million zero coupon
senior exchangeable notes
due June 2023 700,000 668,581 700,000 643,651
$1.381 billion zero coupon
convertible senior debentures
due February 2021 804,550 797,233 784,807 780,880
6.8% senior notes due
April 2004 -- -- 295,267 299,681
Other long-term debt -- -- 4,117 4,117
---------- ---------- ---------- ----------
$2,006,236 $1,990,326 $2,284,938 $2,253,727
========== ========== ========== ==========

(1) The amounts presented for the years ended December 31, 2004 and 2003
include $4.6 million and $4.2 million, respectively, related to the fair
value of the interest rate swap executed on October 21, 2002.

The fair values of our cash equivalents, trade receivables and trade
payables approximate their carrying values due to the short-term nature of these
instruments.

We maintain an investment portfolio of marketable and non-marketable debt
and equity securities that exposes us to price risk (Note 4). The marketable
securities are carried at fair market value and include $867.8 million and
$952.4 million in securities classified as available-for-sale as of December 31,
2004 and 2003, respectively. We had no securities classified as trading as of
December 31, 2004.

8. DEBT

Long-term debt consists of the following:

DECEMBER 31,
-----------------------
2004 2003
---------- ----------

(IN THOUSANDS)
4.875% senior notes due August 2009 (1) $ 223,764 $ 223,499
5.375% senior notes due August 2012 (1) (2) 277,922 277,248
$700 million zero coupon senior exchangeable
notes due June 2023 700,000 700,000
$1.381 billion zero coupon convertible senior
debentures due February 2021 (1) 804,550 784,807
6.8% senior notes due April 2004 -- 295,267
Other long-term debt -- 4,117
---------- ----------
2,006,236 2,284,938
Less: current portion 804,550 299,385
---------- ----------
$1,201,686 $1,985,553
========== ==========

-53-

(1) The carrying amount of our 4.875% and 5.375% senior notes, and our $1.381
billion zero coupon convertible senior debentures as of December 31, 2004,
included in the table above, are net of unamortized discounts of
approximately $1.2 million, $1.7 million and $395.7 million, respectively.

(2) The amounts presented for the years ended December 31, 2004 and 2003
include $4.6 million and $4.2 million, respectively, related to the fair
value of the interest rate swap executed on October 21, 2002 (Note 7).

As of December 31, 2004, the maturities of our long-term debt for each of
the five years after 2004 and thereafter are as follows:

ASSUMING ZERO COUPON CONVERTIBLE
DEBENTURES ARE
--------------------------------
PAID AT PAID AT FIRST
MATURITY PUT DATE
---------- -------------

(IN THOUSANDS)
2005 $ -- $ --
2006 -- 826,800(1)
2007 -- --
2008 -- 700,000(2)
2009 225,000 225,000
Thereafter 2,175,200(3) 275,000
---------- ----------
$2,400,200 $2,026,800
========== ==========

(1) Represents our $1.381 billion zero coupon convertible senior debentures due
2021 which can be put to us on February 5, 2006. The principal amount of
these debentures of $804.6 million is classified in current liabilities as
of December 31, 2004. However, we do not expect these debentures to be
converted for cash within the next 12 months based on the current market
value of our common shares.

(2) Represents our $700 million zero coupon senior exchangeable notes due 2023
which can be put to us on June 15, 2008.

(3) Includes $1.2 billion of our zero coupon convertible senior debentures due
2021, $700 million of our zero coupon senior exchangeable notes due 2023,
and $275 million of our senior notes due 2012.

4.875% SENIOR NOTES DUE AUGUST 2009 AND 5.375% SENIOR NOTES DUE AUGUST 2012

On August 22, 2002, Nabors Holdings 1, ULC, one of our indirect,
wholly-owned subsidiaries, issued $225 million aggregate principal amount of
4.875% senior notes due 2009 that are fully and unconditionally guaranteed by
Nabors and Nabors Delaware. Concurrently with this offering by Nabors Holdings,
Nabors Delaware issued $275 million aggregate principal amount of 5.375% senior
notes due 2012, which are fully and unconditionally guaranteed by Nabors. Both
issues of senior notes were resold by a placement agent to qualified
institutional buyers under Rule 144A of the Securities Act of 1933, as amended.
Interest on each issue of senior notes is payable semi-annually on February 15
and August 15 of each year, beginning on February 15, 2003.

Both issues are unsecured and are effectively junior in right of payment to
any of their respective issuers' future secured debt. The senior notes will rank
equally in right of payment with any of their respective issuers' future
unsubordinated debt and will be senior in right of payment to any of such
issuers' subordinated debt. The guarantees of Nabors Delaware and Nabors with
respect to the senior notes issued by Nabors Holdings, and the guarantee of
Nabors with respect to the senior notes issued by Nabors Delaware, are similarly
unsecured and have a similar ranking to the series of senior notes so
guaranteed.

Subject to certain qualifications and limitations, the indentures governing
the senior notes issued by Nabors Holdings and Nabors Delaware limit the ability
of Nabors and its subsidiaries to incur liens and to enter into sale and
lease-back transactions. In addition, such indentures limit the ability of
Nabors, Nabors Delaware and Nabors Holdings to enter into mergers,
consolidations or transfers of all or substantially all of such entity's assets
unless the successor company assumes the obligations of such entity under the
applicable indenture.

-54-

$700 MILLION ZERO COUPON SENIOR EXCHANGEABLE NOTES DUE JUNE 2023

On June 10, 2003, 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, and outside the United States in accordance with Regulation S under the
Securities Act. Nabors and Nabors Delaware filed a registration statement on
Form S-3 pursuant to the Securities Act with respect to the notes on August 8,
2003. 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 related note indenture.

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 (see discussion below under the caption "Other Debt
Transactions"). The remainder of the proceeds of the notes were invested in cash
and marketable securities.

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 related note indenture.

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 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.

The notes are exchangeable at the option of the holders into the equivalent
value of 14.2653 common shares of Nabors per $1,000 principal amount of notes
(subject to adjustment for certain events) if any of the following circumstances
occur: (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 (the initial exchange price per share is
$70.10 and is subject to adjustment for certain events detailed in the note
indenture; 120% of this initial price per share is $84.12 and 110% of this
initial price per share is $77.11), (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
such ten trading day period was less than 95% of the product of the closing sale
price of Nabors' common shares and the exchange rate of such note, (3) if Nabors
Delaware calls the notes for redemption, or (4) upon the occurrence of specified
corporate transactions described in the note indenture. See the discussion below
related to the method of settlement required upon exchange of these notes. The
$700 million notes can be put to us on June 15, 2008, June 15, 2013 and June 15,
2018, for a purchase price equal to 100% of the principal amount of the notes
plus contingent interest and additional amounts, if any.

In October 2004 we executed a supplemental indenture relating to our $700
million zero coupon senior exchangeable notes providing that upon an exchange of
these notes, we will in all circumstances, except when we are in default under
the indenture, elect to pay holders of these debt instruments, in lieu of common
shares, cash up to the principal amount of the instruments and, at our option,
consideration in the form of either cash or our common shares for any amount
above the principal amount of the instruments required to be paid pursuant to
the terms of the indenture. Additionally, the supplemental indenture provides
that if the instruments are put to us at various dates commencing June 15, 2008,
we will in all circumstances elect to pay holders of these debt instruments cash
upon such repurchase.

-55-

In November 2004, we commenced an offer to exchange Series B of our $700
million zero coupon senior exchangeable notes due 2023 for our existing $700
million zero coupon senior exchangeable notes. This exchange of shares removed
the obligation under these notes where we would be required to issue shares upon
conversion when we are in default under the indenture related to the notes.
Series B of our $700 million zero coupon senior exchangeable notes have
substantially similar terms to our existing $700 million zero coupon senior
exchangeable notes as supplemented, except that, in addition to the elimination
of the default language discussed above, the Series B exchanged notes contain
additional anti-dilution protection for cash dividends and tender or exchange
offers for our common shares at above-market prices, and provide for payment of
a make-whole premium in certain circumstances upon exchange in connection with
certain fundamental changes involving Nabors. The exchange offer expired on
December 10, 2004 and as a result of the exchange offer and subsequent
exchanges, as of December 31, 2004, an aggregate principal amount of $697.8
million of Series B of our $700 million zero coupon senior exchangeable notes
had been issued to those holders of the original series of $700 million zero
coupon senior exchangeable notes, leaving $2.2 million of the original series of
notes outstanding as of December 31, 2004.

$1.381 BILLION ZERO COUPON CONVERTIBLE SENIOR DEBENTURES DUE FEBRUARY 2021

Our $1.381 billion zero coupon convertible senior debentures due 2021 can
be put to us on February 5, 2006, February 5, 2011 and February 5, 2016, for a
purchase price equal to the issue price plus accrued original issue discount to
the date of repurchase. The original issue price of these debentures was $608.41
per $1,000 principal amount at maturity. The yield to maturity is 2.5%
compounded semi-annually with no periodic cash payments of interest. At the
holder's option, the $1.381 billion debentures can be converted, at any time
prior to maturity or their earlier redemption, into the equivalent value of
7.0745 common shares per $1,000 principal amount at maturity. The conversion
rate is subject to adjustment under formulae set forth in the indenture in
certain events, including: (1) the issuance of Nabors common shares as a
dividend or distribution of common shares; (2) certain subdivisions and
combinations of the common shares; (3) the issuance to all holders of common
shares of certain rights or warrants to purchase common shares; (4) the
distribution of common shares, other than Nabors common shares to Nabors'
shareholders, or evidences of Nabors' indebtedness or of assets; and (5)
distribution consisting of cash, excluding any quarterly cash dividend on the
common shares to the extent that the aggregate cash dividend per common share in
any quarter does not exceed certain amounts. See the discussion below related to
the method of settlement required upon conversion of these debentures. We cannot
redeem the $1.381 billion debentures before February 5, 2006, after which time
we may redeem all or a portion of the debentures for cash at any time at their
accreted value.

In October 2004 we executed a supplemental indenture (similar to the
supplemental indenture for our $700 million zero coupon senior exchangeable
notes discussed above) relating to our $1.381 billion zero coupon convertible
senior debentures providing that upon a conversion of these convertible debt
instruments, we will in all circumstances, except when we are in default under
the indenture, elect to pay holders of these debt instruments, in lieu of common
shares, cash up to the principal amount of the instruments and, at our option,
consideration in the form of either cash or our common shares for any amount
above the principal amount of the instruments required to be paid pursuant to
the terms of the indenture. Additionally, the supplemental indenture provides
that if the instruments are put to us at various dates commencing February 5,
2006, we will in all circumstances elect to pay holders of these debt
instruments cash upon such repurchase.

As our $1.381 billion zero coupon convertible senior debentures can be
converted at any time resulting in our payment of cash, the outstanding
principal amount of these debentures of $804.6 million is included in current
liabilities in our balance sheet as of December 31, 2004. These debentures
previously would have been classified in current liabilities beginning in the
first quarter of 2005 as a result of the holders having the option to put the
debentures to us on February 5, 2006. If the $1.381 billion debentures were
converted, our cash obligation would be an amount equal to the lesser of 8.5
million multiplied by the sale price of our common shares on the trading day
immediately prior to the related conversion date or the principal amount of the
debentures on the date of conversion. If these debentures had been converted on
December 31, 2004, we would have been required to pay cash totaling
approximately $435.0 million to the holders of the debentures (based on the
closing price for our common shares on December 30, 2004 of $51.18).

6.8% SENIOR NOTES DUE APRIL 2004

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

-56-

OTHER DEBT TRANSACTIONS

On June 20, 2003, we redeemed the remaining outstanding principal amount of
Nabors Delaware's $825 million zero coupon convertible senior debentures due
2020 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.

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 aggregate 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 losses (gains) on sales of
long-lived assets, impairment charges and other expense (income), net in our
consolidated statements of income during 2003.

During 2002 we purchased $.6 million face value of our 8.625% senior
subordinated notes due April 2008 in the open market at a price of 108%. In
addition, we purchased $4.7 million face value of our 6.8% senior notes due
April 2004 in the open market at a price of 104%. Upon settlement of these
transactions, we paid $5.7 million and recognized a pretax loss of approximately
$.2 million, resulting from the repurchases of these notes at prices higher than
their carrying value. Additionally, we repaid Cdn. $12.9 million (U.S. $8.3
million) and Cdn. $22.3 million (U.S. $14.3 million) of the debt assumed in the
Ryan and Enserco acquisitions, respectively. We also made a $2.5 million
scheduled principal payment relating to certain of our medium-term notes.

SHORT-TERM BORROWINGS

We have three letter of credit facilities with various banks as of December
31, 2004. We did not have any short-term borrowings outstanding at December 31,
2004 and 2003. Availability and borrowings under our credit facilities are as
follows:

DECEMBER 31,
-------------------
2004 2003
-------- --------

(IN THOUSANDS)
Credit available $110,000 $ 96,825
Letters of credit outstanding (77,876) (56,288)
-------- --------
Remaining availability $ 32,124 $ 40,537
======== ========

-57-

9. INCOME TAXES

Income (loss) before income taxes was comprised of the following:

YEAR ENDED DECEMBER 31,
--------------------------------
2004 2003 2002
-------- --------- ---------

(IN THOUSANDS)
United States $ 25,709 $(160,130) $ (19,622)
Foreign 310,129 334,753 160,396
-------- --------- ---------
Income before income taxes $335,838 $ 174,623 $ 140,774
======== ========= =========

Income taxes have been provided based upon the tax laws and rates in the
countries in which operations are conducted and income is earned. We are a
Bermuda-exempt company. Bermuda does not impose corporate income taxes. Our U.S.
subsidiaries are subject to a U.S. federal tax rate of 35%.

Income tax expense (benefit) consisted of the following:

YEAR ENDED DECEMBER 31,
-----------------------------
2004 2003 2002
-------- -------- -------

(IN THOUSANDS)
Current:
U.S. federal $ 4,955 $ 9,085 $ 4,458
Foreign 15,868 (680) 5,113
State 44 89 614
-------- -------- -------
20,867 8,494 10,185
-------- -------- -------
Deferred:
U.S. federal (20,300) (53,121) 4,669
Foreign 32,471 29,051 2,274
State 343 (2,029) 2,157
-------- -------- -------
12,514 (26,099) 9,100
-------- -------- -------
Income tax expense (benefit) $ 33,381 $(17,605) $19,285
======== ======== =======

Nabors is not subject to tax in Bermuda. A reconciliation of the
differences between taxes on income before income taxes computed at the
appropriate statutory rate and our reported provision for income taxes follows:

YEAR ENDED DECEMBER 31,
-----------------------------
2004 2003 2002
------- -------- -------

(IN THOUSANDS)
Income tax provision at statutory rate (Bermuda
rate of 0%) $ -- $ -- $ --
Taxes (benefit) on U.S. and foreign earnings
(losses) at greater than the Bermuda rate 32,528 (17,281) 10,944
Increase in valuation allowance 2,805 5,163 6,540
Effect of change in tax rate (Canada) (2,204) (4,226) --
State income taxes (benefit) 252 (1,261) 1,801
------- -------- -------
Income tax (benefit) expense $33,381 $(17,605) $19,285
======= ======== =======
Effective tax (benefit) rate 10% (10)% 14%
======= ======== =======

In 2002, 2003 and 2004 we provided a valuation allowance against net
operating loss (NOL) carryforwards in various foreign tax jurisdictions based on
our consideration of existing temporary differences and expected future earnings
levels in those jurisdictions. Our effective tax rate for 2004 was positively
impacted by the release of certain tax reserves, which were determined to no
longer be necessary, resulting in a reduction in deferred income tax expense
(non-cash) totaling approximately $16.0 million ($.10 per diluted share).

-58-

The significant components of our deferred tax assets and liabilities were
as follows:

DECEMBER 31,
---------------------
2004 2003
--------- ---------

(IN THOUSANDS)
Deferred tax assets:
Net operating loss carryforwards $ 326,176 $ 239,291
Tax credit carryforwards 5,969 5,796
Accrued expenses not currently deductible for
tax and other 30,233 36,194
Less: Valuation allowance (14,508) (11,703)
--------- ---------
Deferred tax assets, net of valuation
allowance 347,870 269,578
--------- ---------
Deferred tax liabilities:
Depreciation and depletion for tax in excess
of book expense (668,731) (594,589)
Tax deductible items not expensed for book
purposes (24,143) (8,457)
Unrealized gain on marketable securities (917) (2,914)
--------- ---------
Total deferred tax liabilities (693,791) (605,960)
--------- ---------
Net deferred tax liabilities (345,921) (336,382)
Less: net current asset portion 39,599 36,442
net long-term asset portion 357 --
--------- ---------
Net long-term deferred tax liability $(385,877) $(372,824)
========= =========

For U.S. federal income tax purposes, we have NOL carryforwards of
approximately $841.9 million that, if not utilized, will expire at various times
from 2009 to 2024. The NOL carryforwards for alternative minimum tax purposes
are approximately $728.3 million. There are alternative minimum tax credit
carryforwards of $5.4 million available to offset future regular tax
liabilities. Additionally, we have foreign NOL carryforwards of approximately
$51.7 million that, if not utilized, will expire at various times from 2005 to
2014.

The NOL carryforwards subject to expiration expire as follows:

(IN THOUSANDS) U.S.
Year ended December 31, TOTAL FEDERAL FOREIGN
- ----------------------- -------- -------- -------

2005 $ 3,463 $ -- $ 3,463
2006 11,540 -- 11,540
2007 7,394 -- 7,394
2008 12,149 -- 12,149
2009 10,231 779 9,452
2010 1,641 482 1,159
2011 12,596 11,598 998
2013 5,115 -- 5,115
2014 458 -- 458
2017 38,751 38,751 --
2018 23,119 23,119 --
2019 737 737 --
2020 737 737 --
2021 738 738 --
2022 225,842 225,842 --
2023 371,600 371,600 --
2024 167,476 167,476 --
-------- -------- -------
Total $893,587 $841,859 $51,728
======== ======== =======

-59-

In addition, for state income tax purposes, we have net operating loss
carryforwards of approximately $486.6 million that, if not utilized, will expire
at various times from 2005 to 2024 and foreign NOL carryforwards that are not
subject to expiration totaling $52.4 million.

Under U.S. federal tax law, the amount and availability of loss
carryforwards (and certain other tax attributes) are subject to a variety of
interpretations and restrictive tests applicable to Nabors and our subsidiaries.
The utilization of such carryforwards could be limited or effectively lost upon
certain changes in ownership. Accordingly, although we believe substantial loss
carryforwards are available to us, no assurance can be given concerning such
loss carryforwards, or whether or not such loss carryforwards will be available
in the future.

10. COMMON SHARES AND STOCK OPTIONS

COMMON SHARES

During 2004, 2003 and 2002, our employees exercised options to acquire
3,045,000, 1,234,000 and 806,000 of our common shares, respectively.

During 2003 warrants issued in conjunction with our acquisitions of Enserco
(April 2002) and New Prospect Drilling Company (May 1998) were exercised
resulting in the issuance of 49,000 and 200,000 of our common shares,
respectively.

In conjunction with our acquisition of Ryan in October 2002 and our
acquisition of Enserco in April 2002, we issued 380,264 and 3,549,082
exchangeable shares of Nabors Exchangeco, respectively, of which 219,493 and
2,638,526 exchangeable shares were immediately exchanged for our common shares,
respectively. Subsequent to these acquisitions, during 2002, 2003 and 2004,
respectively, an additional 484,756, 208,315 and 159,869 exchangeable shares
were exchanged for our common shares leaving a total of 218,387 exchangeable
shares outstanding as of December 31, 2004.

The exchangeable shares of Nabors Exchangeco are exchangeable for Nabors
common shares on a one-for-one basis. The exchangeable shares are included in
capital in excess of par value.

During 2002 warrants issued in conjunction with our acquisition of Bayard
Drilling Technologies, Inc. (April 1999) were exercised, resulting in the
issuance of 18,000 of our common shares.

As a result of our corporate reorganization on June 24, 2002, the
authorized share capital of Nabors consists of 400 million common shares, par
value $.001 per share, and 25 million preferred shares, par value $.001 per
share. Common shares issued were 149,860,747 and 146,656,432 at $.001 par value
as of December 31, 2004 and 2003, respectively, compared to 144,368,390 at $.10
par value immediately preceding the reorganization. The decrease in par value of
common stock from $.10 to $.001 was recorded as an increase to capital in excess
of par value and a decrease in common shares in our Consolidated Financial
Statements. In conjunction with the reorganization, 6.8 million shares of
outstanding treasury stock were retired, as Bermuda law does not recognize the
concept of treasury stock. The effect of this retirement reduced common shares
by $.7 million, capital in excess of par value by $59.2 million and retained
earnings by $192.9 million.

On July 23, 2002, we entered into a private transaction with a counterparty
in which we sold 1.0 million European-style put options for $2.6 million with a
maturity date of October 23, 2002. Under the arrangement, if the price of our
common shares was less than $26.5698 on the maturity date, the counterparty
could have exercised the put option resulting in, at our option (1) our purchase
of 1.0 million of our common shares at a price of $26.5698 per share or (2) our
payment, in cash or Nabors common shares, of an amount equal to the difference
between $26.5698 and our share price on October 23, 2002 multiplied by 1.0
million. These put options expired on October 23, 2002 and we retained the $2.6
million in proceeds, which was recorded as an increase in capital in excess of
par value in our consolidated balance sheet.

On July 17, 2002, the Board of Directors of Nabors authorized the
continuation of the share repurchase program that had begun under Nabors
Delaware, and provided that the amount of Nabors common shares authorized for
purchase by Nabors going forward be increased to $400 million. Under the Nabors
Delaware program, Nabors Delaware had acquired an aggregate of approximately
$248.0 million of Nabors Delaware common stock, or 6.2 million shares, during
2001. During 2002 Nabors also acquired, through a subsidiary, 91,000 of its
common shares in the open market for $27.30 per share for an aggregate price of
$2.5 million. Immediately thereafter these shares were transferred to Nabors.

-60-

Pursuant to Bermuda law, any shares, when purchased, will be treated as
cancelled. Therefore, a repurchase of shares will not have the effect of
reducing the amount of Nabors' authorized share capital.

STOCK OPTION PLANS

As of December 31, 2004, we have several stock option plans under which
options to purchase Nabors common shares may be granted to key officers,
directors and managerial employees of Nabors and its subsidiaries. Options
granted under the plans are at prices equal to the fair market value of the
shares on the date of the grant. Options granted under the plans generally are
exercisable in varying cumulative periodic installments after one year. In the
case of certain key executives, options granted under the plans are subject to
accelerated vesting related to targeted common share prices, or may vest
immediately on the grant date. Options granted under the plans cannot be
exercised more than ten years from the date of grant. Options to purchase 7.4
million and 8.1 million Nabors common shares remained available for grant as of
December 31, 2004 and 2003, respectively.

A summary of stock option transactions is as follows:

WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
------ --------

(IN THOUSANDS, EXCEPT EXERCISE PRICE)

Options outstanding as of December 31, 2001 19,257 $27.21
Granted 5,495 27.35
Exercised (806) 12.68
Forfeited (277) 33.81
------ ------
Options outstanding as of December 31, 2002 23,669 $27.66
Granted 2,969 38.68
Exercised (1,234) 16.48
Forfeited (450) 41.45
------ ------
Options outstanding as of December 31, 2003 24,954 $29.27
Granted 3,430 45.92
Exercised (3,045) 23.40
Forfeited (313) 41.05
------ ------
Options outstanding as of December 31, 2004 25,026 $32.12
====== ======

Of the options outstanding, 19.0 million, 20.7 million and 20.6 million
were exercisable at weighted average exercise prices of $29.05, $27.65 and
$27.13, as of December 31, 2004, 2003 and 2002, respectively. The weighted
average fair value of options granted during the years ended December 31, 2004,
2003 and 2002 was $12.93, $14.29 and $10.69, respectively.

A summary of stock options outstanding as of December 31, 2004 is as
follows:

OPTIONS OUTSTANDING
------------------------------------
WEIGHTED
AVERAGE WEIGHTED
REMAINING AVERAGE
NUMBER CONTRACTUAL EXERCISE
OUTSTANDING LIFE PRICE
----------- ----------- --------

(IN THOUSANDS, EXCEPT CONTRACTUAL LIFE
AND EXERCISE PRICE)

Range of exercise prices:
$ 7.00 - $10.50 8 1.5 $ 7.33
11.50 - 17.25 5,863 2.8 12.49
18.94 - 28.41 6,727 6.2 26.17
28.44 - 42.66 3,006 7.9 38.38
42.94 - 64.41 9,422 5.8 46.62
------ --- ------
25,026 5.5 $32.12
====== === ======

-61-

A summary of stock options exercisable as of December 31, 2004 is as
follows:

OPTIONS EXERCISABLE
----------------------
WEIGHTED
AVERAGE
NUMBER EXERCISE
EXERCISABLE PRICE
----------- --------

(IN THOUSANDS, EXCEPT
EXERCISE PRICE)

Range of exercise prices:
$ 7.00 - $10.50 8 $ 7.33
11.50 - 17.25 5,863 12.49
18.94 - 28.41 6,141 26.09
28.44 - 42.66 1,011 38.31
42.94 - 64.41 5,981 46.80
------ ------
19,004 $29.05
====== ======

11. PENSION, POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS

PENSION PLANS

In conjunction with our acquisition of Pool Energy Services Co. in November
1999, we acquired the assets and liabilities of a defined benefit pension plan,
the Pool Company Retirement Income Plan. Benefits under the plan are frozen and
participants were fully vested in their accrued retirement benefit on December
31, 1998.

Summarized information on the Pool pension plan is as follows:

PENSION BENEFITS
-----------------
2004 2003
------- -------

(IN THOUSANDS)

CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year $15,401 $13,631
Interest cost 909 891
Actuarial (loss) gain (49) 1,417
Benefit payments (511) (538)
------- -------
Benefit obligation at end of year 15,750 15,401
======= =======
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of year 9,686 8,835
Actual return on plan assets 633 1,389
Employer contribution 1,304 --
Benefit payments (511) (538)
------- -------
Fair value of plan assets at end of year 11,112 9,686
======= =======
FUNDED STATUS:
Funded status at end of year (4,638) (5,715)
Unrecognized net actuarial loss 3,713 3,942
------- -------
Net liability recognized $ (925) $(1,773)
======= =======
AMOUNTS RECOGNIZED IN CONSOLIDATED BALANCE
SHEETS:
Accrued benefit liability 4,638 5,715
Accumulated other comprehensive income 2,419 2,815

COMPONENTS OF NET PERIODIC BENEFIT COST:
Interest cost $ 909 $ 891
Expected return on plan assets (647) (563)
Recognized net actuarial loss 195 198
------- -------
Net periodic benefit cost $ 457 $ 526
======= =======
ADDITIONAL INFORMATION:
Increase in minimum pension liability included in
other comprehensive income $ 227 $ 610
------- -------
WEIGHTED AVERAGE ASSUMPTIONS:
Weighted average discount rate 6.00% 6.00%
Expected long-term rate of return on plan assets 6.50% 6.50%
------- -------

-62-

We analyze the historical performance of investments in equity and debt
securities, together with current market factors such as inflation and interest
rates to help us make assumptions necessary to estimate a long-term rate of
return on plan assets. Once this estimate is made, we review the portfolio of
plan assets and make adjustments thereto that we believe are necessary to
reflect a diversified blend of investments in equity and debt securities that is
capable of achieving the estimated long-term rate of return without assuming an
unreasonable level of investment risk.

The measurement date used to determine pension measurements for the plan is
December 31.

Our weighted-average asset allocations as of December 31, 2004 and 2003, by
asset category are as follows:

PENSION BENEFITS
----------------
2004 2003
---- ----

(IN THOUSANDS)

Equity securities 57% 56%
Debt securities 42% 43%
Other 1% 1%
--- ---
Total 100% 100%
=== ===

We invest plan assets based on a total return on investment approach,
pursuant to which the plan assets include a diversified blend of investments in
equity and debt securities toward a goal of maximizing the long-term rate of
return without assuming an unreasonable level of investment risk. We determine
the level of risk based on an analysis of plan liabilities, the extent to which
the value of the plan assets satisfies the plan liabilities and our financial
condition. Our investment policy includes target allocations approximating 55%
investment in equity securities and 45% investment in debt securities. The
equity portion of the plan assets represents growth and value stocks of small,
medium and large companies. We measure and monitor the investment risk of the
plan assets both on a quarterly basis and annually when we assess plan
liabilities.

We expect to contribute approximately $1.0 million to the Pool pension plan
in 2005. This is based on the sum of (1) the minimum contribution for the 2004
plan year that will be made in 2005 and (2) the estimated minimum required
quarterly contributions for the 2005 plan year. We made contributions to the
Pool pension plan in 2004 totaling $1.3 million. There were no contributions
made to the Pool pension plan in 2003.

As of December 31, 2004, we expect that benefits to be paid in each of the
next five fiscal years after 2004 and in the aggregate for the five fiscal years
thereafter will be as follows:

(IN THOUSANDS)
2005 $ 405
2006 442
2007 503
2008 559
2009 609
2010 - 2014 4,052

Certain of Nabors' employees are covered by defined contribution plans. Our
contributions to the plans are based on employee contributions and totaled $14.8
million and $13.1 million for the years ended December 31, 2004 and 2003,
respectively. Nabors does not provide postemployment benefits to its employees.

POSTRETIREMENT BENEFITS OTHER THAN PENSIONS

Prior to the date of our acquisition, Pool provided certain postretirement
healthcare and life insurance benefits to eligible retirees who had attained
specific age and years of service requirements. Nabors terminated this plan at
the date of acquisition (November 24, 1999). A liability of approximately $.5
million is recorded in our consolidated

-63-

balance sheets as of December 31, 2004 and 2003 to cover the estimated costs of
beneficiaries covered by the plan at the date of acquisition.

12. RELATED PARTY TRANSACTIONS

Pursuant to his employment agreement entered into in October 1996, we
provided an unsecured, non-interest bearing loan of approximately $2.9 million
to Nabors' Deputy Chairman, President and Chief Operating Officer. This loan is
due on September 30, 2006.

Pursuant to their employment agreements, Nabors and its Chairman and Chief
Executive Officer, Deputy Chairman, President and Chief Operating Officer, 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 $13.2 million related to these policies. The cash surrender value of
these policies of approximately $11.8 million and $11.4 million is included in
other long-term assets in our consolidated balance sheets as of December 31,
2004 and 2003, respectively.

In the ordinary course of business, we enter into various rig leases, rig
transportation and related oilfield services agreements with our Alaskan and
Saudi Arabian unconsolidated affiliates at market prices. Revenues from business
transactions with these affiliated entities totaled $63.2 million, $51.3 million
and $46.8 million for the years ended December 31, 2004, 2003 and 2002,
respectively. Expenses from business transactions with these affiliated entities
totaled $3.3 million, $3.3 million and $3.0 million for the years ended December
31, 2004, 2003 and 2002, respectively. Additionally, we had accounts receivable
from these affiliated entities of $20.7 million and $20.9 million as of December
31, 2004 and 2003, respectively. We had accounts payable to these affiliated
entities of $1.8 million and $.5 million as of December 31, 2004 and 2003,
respectively, and a note payable with one of these affiliated entities of $4.1
million and $4.3 million as of December 31, 2004 and 2003, respectively, which
is included in other long-term liabilities.

Additionally, we own certain marine vessels that are chartered under a
bareboat charter arrangement to Sea Mar Management LLC, an entity in which we
own a 25% interest. Under the requirements of FIN 46R this entity was
consolidated by Nabors beginning in 2004. Revenues from business transactions
with Sea Mar totaled $29.5 million and $18.0 million for the years ended
December 31, 2003 and 2002, respectively. Expenses from business transactions
with Sea Mar totaled $47.9 million and $28.1 million for the years ended
December 31, 2003 and 2002, respectively. Accounts receivable from and accounts
payable to Sea Mar as of December 31, 2003 totaled $3.0 million and $3.2
million, respectively.

13. COMMITMENTS AND CONTINGENCIES

OPERATING LEASES

Nabors and its subsidiaries occupy various facilities and lease certain
equipment under various lease agreements. The minimum rental commitments under
non-cancelable operating leases, with lease terms in excess of one year
subsequent to December 31, 2004, are as follows:

(IN THOUSANDS)
2005 $11,462
2006 7,575
2007 6,102
2008 1,345
2009 1,230
Thereafter 1,311
-------
$29,025
=======

The above amounts do not include property taxes, insurance or normal
maintenance that the lessees are required to pay. Rental expense relating to
operating leases with terms greater than 30 days amounted to $19.2 million,
$22.4 million and $21.8 million for the years ended December 31, 2004, 2003 and
2002, respectively.

-64-

EMPLOYMENT CONTRACTS

We have entered into employment contracts with certain of our employees.
Our minimum salary and bonus obligations under these contracts as of December
31, 2004 are as follows:

(IN THOUSANDS)
2005 $2,440
2006 2,225
2007 2,225
2008 1,669
2009 and thereafter --
------
$8,559
======

CONTINGENCIES

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, 2004, with our insurance
renewal, certain changes have been made to our insurance coverage. Effective for
the period from April 1, 2004 to March 31, 2005, our exposure (that is, our
deductible) per occurrence is $1.0 million for workers' compensation, employers'
liability and marine employers' liability (Jones Act). In addition, we assume an
excess, aggregate deductible for domestic workers' compensation claims. Through
this additional deductible, we assume the first $2.4 million in losses above the
deductible for domestic workers' compensation claims. This additional deductible
is exhausted when the excess loss above the $1.0 million reaches $2.4 million in
the annual aggregate. We continue to assume a $5.0 million deductible for
general liability losses. Our self-insurance for automobile liability loss is
$0.5 million per occurrence. We maintain actuarially-determined 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, 2004, 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 our Alaska and offshore fleet is subject to a
$5.0 million self-insurance retention. All other land rigs are subject to a $1.0
million deductible.

Political risk insurance is procured for select operations in South
America, Africa, the Middle East and Asia. Losses are subject to a $0.25 million
deductible, except for Colombia, which is subject to a $1.5 million deductible.
There is no assurance that such coverage will adequately protect Nabors against
liability from all potential consequences.

As of December 31, 2004 and 2003, our self-insurance accruals totaled $98.1
million and $106.2 million, respectively, and our related insurance
recoveries/receivables were $14.3 million and $31.8 million, respectively.

LITIGATION

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

GUARANTEES

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

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

-65-

MAXIMUM AMOUNT
--------------------------------------------
2005 2006 2007 THEREAFTER TOTAL
------- ---- ---- ---------- -------

(IN THOUSANDS)
Financial standby letters of
credit and other financial
surety instruments $81,067 $ -- $-- $302 $81,369
Guarantee of residual value in
lease agreements 684 65 -- -- 749
Contingent consideration in
acquisition 2,000 500 -- -- 2,500
------- ---- --- ---- -------
Total $83,751 $565 $-- $302 $84,618
======= ==== === ==== =======

14. EARNINGS PER SHARE

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

YEAR ENDED DECEMBER 31,
------------------------------
2004 2003 2002
-------- -------- --------

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net income (numerator):
Net income - basic $302,457 $192,228 $121,489
Add interest expense on assumed
conversion of our zero coupon
senior convertible/exchangeable
debentures/notes, net
of tax:
$825 million due 2020 (1) -- 3,639 --
$1.381 billion due 2021 (2) 12,438 -- --
$700 million due 2023 (3) -- -- --
-------- -------- --------
Adjusted net income - diluted $314,895 $195,867 $121,489
======== ======== ========

Earnings per share:
Basic $ 2.03 $ 1.31 $ .85
Diluted $ 1.92 $ 1.25 $ .81

Shares (denominator):
Weighted average number of shares
outstanding - basic (4) 148,936 146,495 143,655
Net effect of dilutive stock options
and warrants based on the treasury
stock method 6,603 6,604 6,342
Assumed conversion of our zero
coupon senior convertible/exchangeable
debentures/notes:
$825 million due 2020 (1) -- 3,798 --
$1.381 billion due 2021 (2) 8,491 -- --
$700 million due 2023 (3) -- -- --
-------- -------- --------
Weighted average number of shares
outstanding - diluted 164,030 156,897 149,997
======== ======== ========

(1) Diluted earnings per share for the year ended December 31, 2003 reflects
the assumed conversion of our $825 million zero coupon convertible senior
debentures, as the conversion in that year would have been dilutive. For
the year ended December 31, 2002, the weighted average number of shares
outstanding-diluted excludes 8.1 million potentially dilutive shares
issuable upon the conversion of our $825 million zero coupon convertible
senior debentures because the inclusion of such shares would have been
anti-dilutive, given the level of net income for that year. Net income for
the year ended December 31, 2002 also excludes the related add-back of
interest expense, net

-66-

of tax, of $7.6 million 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 $.93 for the year ended December 31, 2002. We redeemed for cash
the remaining outstanding principal amount of our $825 million zero coupon
convertible senior debentures on June 20, 2003 and therefore these
debentures did not impact the calculation of diluted earnings per share for
the year ended December 31, 2004.

(2) For the years ended December 31, 2003 and 2002, the weighted average number
of shares outstanding-diluted excludes 8.5 million potentially dilutive
shares issuable upon the conversion of our $1.381 billion zero coupon
convertible senior debentures because the inclusion of such shares would
have been anti-dilutive, given the level of net income for those years. Net
income for the years ended December 31, 2003 and 2002, excludes the related
add-back of interest expense, net of tax, of $12.1 million and $11.8
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 $1.43 and $1.39 for the years ended December 31, 2003 and 2002,
respectively.

(3) Diluted earnings per share for the years ended December 31, 2004 and 2003,
respectively, excludes approximately 10.0 million and 5.6 million
potentially dilutive shares initially issuable upon the exchange of our
$700 million zero coupon senior exchangeable notes due 2023. Such shares
did not impact our calculation of diluted earnings per share for these
years as we are required to pay cash up to the principal amount of any
notes exchanged. We would only issue an incremental number of shares upon
exchange of these notes, and such shares would only be included in the
calculation of the weighted-average number of shares outstanding in our
diluted earnings per share calculation, if the price of our shares exceeded
$70.10. These notes were issued in June 2003 and therefore did not impact
the calculation of diluted earnings per share for the year ended December
31, 2002.

(4) Includes the following weighted average number of common shares of Nabors
and weighted average number of exchangeable shares of Nabors Exchangeco,
respectively: 148.7 million and .3 million shares for the year ended
December 31, 2004; 146.0 million and .5 million shares for the year ended
December 31, 2003; and 143.2 million and .4 million shares for the year
ended December 31, 2002. The exchangeable shares of Nabors Exchangeco are
exchangeable for Nabors common shares on a one-for-one basis, and have
essentially identical rights as Nabors Industries Ltd. common shares,
including but not limited to voting rights and the right to receive
dividends, if any.

For all periods presented, the computation of diluted earnings per share
excludes outstanding stock options and warrants with exercise prices greater
than the average market price of Nabors' common shares, because the inclusion of
such options and warrants would be anti-dilutive. The number of options and
warrants that were excluded from diluted earnings per share that would
potentially dilute earnings per share in the future were 6,951,237 shares in
2004, 8,354,070 shares in 2003, and 8,264,768 shares in 2002. In any period
during which the average market price of Nabors' common shares exceeds the
exercise prices of these stock options and warrants, such stock options and
warrants will be included in our diluted earnings per share computation using
the treasury stock method of accounting.

15. SUPPLEMENTAL BALANCE SHEET, INCOME STATEMENT AND CASH FLOW INFORMATION

Accounts receivable is net of an allowance for doubtful accounts of $11.0
million as of December 31, 2004 and 2003.

Accrued liabilities include the following:

DECEMBER 31,
-------------------
(IN THOUSANDS) 2004 2003
-------- --------

Accrued compensation $ 67,648 $ 55,137
Deferred revenue 25,304 26,611
Workers' compensation liabilities 28,994 30,180
Interest payable 10,442 15,888
Other accrued liabilities 38,846 32,929
-------- --------
$171,234 $160,745
======== ========

-67-

Investment income includes the following:

YEAR ENDED DECEMBER 31,
---------------------------
2004 2003 2002
------- ------- -------

(IN THOUSANDS)
Interest income $22,572 $27,238 $33,600
Gains on marketable and
non-marketable securities, net 20,638 6,145 2,877
Dividend and other investment
income 6,854 430 484
------- ------- -------
$50,064 $33,813 $36,961
======= ======= =======

Losses (gains) on sales of long-lived assets, impairment charges and other
expense (income), net includes the following:

YEAR ENDED DECEMBER 31,
---------------------------
2004 2003 2002
------- ------- -------

(IN THOUSANDS)
Losses (gains) on sales of long-
lived assets $ 874 $(2,476) $(8,308)
Impairment charges -- -- 3,738
Foreign currency transaction gains (755) (830) (486)
Corporate reorganization expense -- -- 3,769
(Gains) losses on derivative
instruments (2,363) 1,140 1,983
Loss on extinguishment of debt -- 908 202
Other (2,385) 2,411 (1,731)
------- ------- -------
$(4,629) $ 1,153 $ (833)
======= ======= =======

Supplemental cash flow information for the years ended December 31, 2004,
2003 and 2002 is as follows:

YEAR ENDED DECEMBER 31,
-----------------------------
2004 2003 2002
------- ------- ---------

(IN THOUSANDS)
Cash paid for income taxes $29,306 $16,542 $ 22,831
Cash paid for interest, net of capitalized interest 27,899 41,033 22,653
Acquisitions of businesses:
Fair value of assets acquired -- -- 305,399
Goodwill -- -- 110,636
Liabilities assumed or created -- -- (105,986)
Common stock of acquired company previously owned -- -- (282)
Equity consideration issued -- -- (174,115)
------- ------- ---------
Cash paid for acquisitions of businesses -- -- 135,652
Cash acquired in acquisitions of businesses -- -- --
------- ------- ---------
Cash paid for acquisitions of businesses, net $ -- $ -- $ 135,652
======= ======= =========

-68-

16. UNAUDITED QUARTERLY FINANCIAL INFORMATION

YEAR ENDED DECEMBER 31, 2004
QUARTER ENDED
---------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
--------- -------- ------------- ------------

(IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
Operating revenues and
Earnings from
unconsolidated affiliates (1) $596,803 $531,868 $585,360 $684,057
Net income 71,717 46,348 75,626 108,766
Earnings per share: (2)
Basic $ .48 $ .31 $ .51 $ .73
Diluted $ .46 $ .30 $ .48 $ .68

YEAR ENDED DECEMBER 31, 2003
QUARTER ENDED
---------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
--------- -------- ------------- ------------

(IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
Operating revenues and
Earnings from
unconsolidated affiliates (3) $455,740 $433,911 $475,979 $524,556
Net income 48,057 29,019 50,281 64,871
Earnings per share: (2)
Basic $ .33 $ .20 $ .34 $ .44
Diluted $ .31 $ .19 $ .33 $ .42

(1) Includes Earnings (losses) from unconsolidated affiliates, accounted for by
the equity method, of $3.8 million, $1.2 million, $(.3) million and $(.6)
million, respectively.

(2) Earnings per share is computed independently for each of the quarters
presented. Therefore, the sum of the quarterly earnings per share may not
equal the total computed for the year.

(3) Includes Earnings from unconsolidated affiliates, accounted for by the
equity method, of $5.9 million, $1.4 million, $2.5 million and $.4 million,
respectively.

17. SEGMENT INFORMATION

As of December 31, 2004, we operate our business out of 13 operating
segments. Our six Contract Drilling operating segments are engaged in drilling,
workover and well-servicing operations, on land and offshore, and represent
reportable segments. These operating segments consist of our Alaska, U.S. Lower
48 Land Drilling, U.S. Land Well-servicing, U.S. Offshore, Canada and
International business units. Our oil and gas operating segment, Ramshorn
Investments, Inc., is engaged in the exploration for, development of and
production of oil and gas and is included in our Oil and Gas reportable segment.
Our Other Operating Segments, consisting of Canrig Drilling Technology Ltd.,
Epoch Well Services, Inc., Peak Oilfield Service Company, Peak USA Energy
Services, Ltd., Ryan Energy Technologies, and Sea Mar, a division of Pool Well
Services Co., are engaged in the manufacturing of top drives, manufacturing of
drilling instrumentation systems, construction and logistics services, trucking
and logistics services, manufacturing and marketing of directional drilling and
rig instrumentation systems, directional drilling, rig instrumentation and data
collection services, and marine transportation and supply services,
respectively. These Other Operating Segments do not meet the criteria included
in SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" for disclosure, individually or in the aggregate, as reportable
segments.

The accounting policies of the segments are the same as those described in
the Summary of Significant Accounting Policies (Note 2). Inter-segment sales are
recorded at cost or cost plus a profit margin. We evaluate the performance of
our segments based on adjusted income derived from operating activities.

-69-

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

YEAR ENDED DECEMBER 31,
-------------------------------------
2004 2003 2002
----------- ---------- ----------

(IN THOUSANDS)
Operating revenues and Earnings
from unconsolidated affiliates:
Contract Drilling:
U.S. Lower 48 Land Drilling $ 748,999 $ 476,258 $ 374,659
U.S. Land Well-servicing 360,010 312,279 294,428
U.S. Offshore 132,778 101,566 105,717
Alaska 83,835 112,092 118,199
Canada 426,675 322,303 141,497
International 444,289 396,884 320,160
---------- ---------- ----------
Subtotal Contract Drilling (1) 2,196,586 1,721,382 1,354,660
Oil and Gas 65,303 16,919 7,223
Other Operating Segments (2) 205,615 201,660 174,775
Other reconciling items (3) (69,416) (49,775) (55,440)
---------- ---------- ----------
Total $2,398,088 $1,890,186 $1,481,218
========== ========== ==========
Depreciation and amortization, and
depletion:
Contract Drilling:
U.S. Lower 48 Land Drilling $ 77,498 $ 69,190 $ 61,022
U.S. Land Well-servicing 21,940 22,163 19,600
U.S. Offshore 21,650 19,794 20,491
Alaska 11,954 11,969 12,000
Canada 36,802 29,840 20,713
International 62,776 53,374 37,521
---------- ---------- ----------
Subtotal Contract Drilling 232,620 206,330 171,347
Oil and Gas 45,460 8,599 7,700
Other Operating Segments 22,945 21,597 18,044
Other reconciling items (3) (626) (1,399) (1,726)
---------- ---------- ----------
Total depreciation and amortization,
and depletion $ 300,399 $ 235,127 $ 195,365
========== ========== ==========
Adjusted income (loss) derived from
operating activities: (4)
Contract Drilling:
U.S. Lower 48 Land Drilling $ 93,573 $ 16,800 $ 23,415
U.S. Land Well-servicing 57,712 47,082 38,631
U.S. Offshore 20,611 1,649 (1,397)
Alaska 16,052 37,847 31,387
Canada 91,421 59,856 17,413
International 89,211 77,964 76,121
---------- ---------- ----------
Subtotal Contract Drilling 368,580 241,198 185,570
Oil and Gas 13,736 5,850 (1,058)
Other Operating Segments (2) (5,333) 3,266 24,660
---------- ---------- ----------
Total segment adjusted income derived
from operating activities 376,983 250,314 209,172
Other reconciling items (5) (47,331) (37,611) (39,124)
Interest expense (48,507) (70,740) (67,068)
Investment income 50,064 33,813 36,961
Gains (losses) on sales of long-lived
assets, impairment charges and other
income (expense), net 4,629 (1,153) 833
---------- ---------- ----------
Income before income taxes $ 335,838 $ 174,623 $ 140,774
========== ========== ==========

-70-

YEAR ENDED DECEMBER 31,
------------------------------
2004 2003 2002
-------- -------- --------

(IN THOUSANDS)
Capital expenditures and acquisitions
of businesses:
Contract Drilling:
U.S Lower 48 Land Drilling $155,612 $ 71,252 $ 7,488
U.S. Land Well-servicing 35,335 25,052 35,901
U.S. Offshore 46,622 48,365 32,585
Alaska 4,293 3,940 21,018
Canada 76,635 29,690 370,500
International 161,115 116,667 194,739
-------- -------- --------
Subtotal Contract Drilling 479,612 294,966 662,231
Oil and Gas 55,303 53,716 9,733
Other Operating Segments 13,824 4,226 32,076
Other reconciling items (5) (4,310) 230 (1,197)
-------- -------- --------
Total capital expenditures $544,429 $353,138 $702,843
======== ======== ========

DECEMBER 31,
------------------------------------
2004 2003 2002
---------- ---------- ----------

(IN THOUSANDS)
Total assets:
Contract Drilling: (6)
U.S. Lower 48 Land Drilling $1,119,280 $ 987,903 $ 972,495
U.S. Land Well-servicing 274,734 246,312 237,594
U.S. Offshore 409,687 386,196 368,267
Alaska 204,614 218,222 215,706
Canada 945,226 767,400 565,458
International 1,121,749 1,001,058 883,255
---------- ---------- ----------
Subtotal Contract Drilling 4,075,290 3,607,091 3,242,775
Oil and Gas 93,169 67,898 23,517
Other Operating Segments (7) 321,979 337,622 343,365
Other reconciling items (5) 1,372,171 1,590,081 1,454,215
---------- ---------- ----------
Total assets $5,862,609 $5,602,692 $5,063,872
========== ========== ==========

(1) Includes Earnings from unconsolidated affiliates, accounted for by the
equity method, of $1.6 million, $2.8 million and $3.9 million for the years
ended December 31, 2004, 2003 and 2002, respectively.

(2) Includes Earnings from unconsolidated affiliates, accounted for by the
equity method, of $2.5 million, $7.4 million and $10.9 million for the
years ended December 31, 2004, 2003 and 2002, respectively.

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

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

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

(6) Includes $35.2 million, $26.5 million and $25.3 million of investments in
unconsolidated affiliates accounted for by the equity method as of December
31, 2004, 2003 and 2002, respectively.

(7) Includes $31.9 million, $31.6 million and $33.3 million of investments in
unconsolidated affiliates accounted for by the equity method as of December
31, 2004, 2003 and 2002, respectively.

-71-

The following table sets forth financial information with respect to
Nabors' operations by geographic area:

YEAR ENDED DECEMBER 31,
------------------------------------
2004 2003 2002
---------- ---------- ----------

(IN THOUSANDS)
Operating revenues and Earnings from
unconsolidated affiliates:
United States $1,505,082 $1,152,272 $1,012,503
Foreign 893,006 737,914 468,715
---------- ---------- ----------
$2,398,088 $1,890,186 $1,481,218
========== ========== ==========

Property, plant and equipment, net:
United States $1,854,674 $1,823,281 $1,759,199
Foreign 1,420,821 1,167,511 1,041,868
---------- ---------- ----------
$3,275,495 $2,990,792 $2,801,067
========== ========== ==========
Goodwill, net:
United States $ 155,656 $ 157,873 $ 165,609
Foreign 171,569 157,754 120,753
---------- ---------- ----------
$ 327,225 $ 315,627 $ 286,362
========== ========== ==========

18. CONDENSED CONSOLIDATING FINANCIAL INFORMATION

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

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

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

-72-

CONDENSED CONSOLIDATING BALANCE SHEETS

DECEMBER 31, 2004
---------------------------------------------------------------------------------
NABORS OTHER
NABORS DELAWARE NABORS SUBSIDIARIES
(PARENT/ (ISSUER/ HOLDINGS (NON- CONSOLIDATING CONSOLIDATED
GUARANTOR) GUARANTOR) (ISSUER) GUARANTORS) ADJUSTMENTS TOTAL
---------- ----------- -------- ------------ ------------- ------------

(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents $ 67,584 $ -- $ 18 $ 317,107 $ -- $ 384,709
Marketable securities 376,393 -- -- 51,949 -- 428,342
Accounts receivable, net -- -- -- 540,103 -- 540,103
Inventory -- -- -- 28,653 -- 28,653
Deferred income taxes -- -- -- 39,599 -- 39,599
Non-marketable securities 45,000 -- -- 42,500 -- 87,500
Other current assets 3,952 4,031 376 63,709 -- 72,068
---------- ---------- -------- ---------- ----------- ----------
Total current assets 492,929 4,031 394 1,083,620 -- 1,580,974

Marketable securities 388,380 -- -- 51,082 -- 439,462
Property, plant and
equipment, net -- -- -- 3,275,495 -- 3,275,495
Goodwill, net -- -- -- 327,225 -- 327,225
Intercompany receivables 488,101 806,293 -- 522 (1,294,916) --
Investments in affiliates 1,561,019 2,138,488 254,974 1,181,632 (5,069,024) 67,089
Other long-term assets -- 19,080 1,009 152,275 -- 172,364
---------- ---------- -------- ---------- ----------- ----------
Total assets $2,930,429 $2,967,892 $256,377 $6,071,851 $(6,363,940) $5,862,609
========== ========== ======== ========== =========== ==========

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-
term debt $ -- $ 804,550 $ -- $ -- $ -- $ 804,550
Trade accounts payable -- 23 -- 211,577 -- 211,600
Accrued liabilities 524 6,354 4,152 160,204 -- 171,234
Income taxes payable 480 -- -- 11,452 -- 11,932
---------- ---------- -------- ---------- ----------- ----------
Total current liabilities 1,004 810,927 4,152 383,233 -- 1,199,316

Long-term debt -- 977,922 223,764 -- -- 1,201,686
Other long-term liabilities -- -- -- 146,337 -- 146,337
Deferred income taxes 32 56,952 -- 328,893 -- 385,877
Intercompany payable -- -- 2,522 1,292,394 (1,294,916) --
---------- ---------- -------- ---------- ----------- ----------
Total liabilities 1,036 1,845,801 230,438 2,150,857 (1,294,916) 2,933,216
---------- ---------- -------- ---------- ----------- ----------
Shareholders' equity 2,929,393 1,122,091 25,939 3,920,994 (5,069,024) 2,929,393
---------- ---------- -------- ---------- ----------- ----------
Total liabilities and
shareholders' equity $2,930,429 $2,967,892 $256,377 $6,071,851 $(6,363,940) $5,862,609
========== ========== ======== ========== =========== ==========

-73-

DECEMBER 31, 2003
--------------------------------------------------------------------------------
NABORS OTHER
NABORS DELAWARE NABORS SUBSIDIARIES
(PARENT/ (ISSUER/ HOLDINGS (NON- CONSOLIDATING CONSOLIDATED
GUARANTOR) GUARANTOR) (ISSUER) GUARANTORS) ADJUSTMENTS TOTAL
---------- ---------- -------- ------------ ------------- ------------

(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents $ 403,693 $ 1 $ 17 $ 176,026 $ -- $ 579,737
Marketable securities 285,353 -- -- 54,583 -- 339,936
Accounts receivable, net -- -- -- 410,487 -- 410,487
Inventory -- -- -- 23,289 -- 23,289
Deferred income taxes -- -- -- 36,442 -- 36,442
Non-marketable securities -- -- -- 47,000 -- 47,000
Other current assets 6,806 4,229 -- 67,721 -- 78,756
---------- ---------- -------- ---------- ----------- ----------
Total current assets 695,852 4,230 17 815,548 -- 1,515,647

Marketable securities 571,327 -- -- 41,090 -- 612,417
Property, plant and
equipment, net -- -- -- 2,990,792 -- 2,990,792
Goodwill, net -- -- -- 315,627 -- 315,627
Intercompany receivables 1,057,260 1,085,944 202 -- (2,143,406) --
Investments in affiliates 170,089 2,065,230 236,829 1,095,882 (3,509,930) 58,100
Other long-term assets -- 20,359 966 88,784 -- 110,109
---------- ---------- -------- ---------- ----------- ----------
Total assets $2,494,528 $3,175,763 $238,014 $5,347,723 $(5,653,336) $5,602,692
========== ========== ======== ========== =========== ==========

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term
debt $ -- $ 295,267 $ -- $ 4,118 $ -- $ 299,385
Trade accounts payable 1 23 -- 128,816 -- 128,840
Accrued liabilities 960 10,766 3,901 145,118 -- 160,745
Income taxes payable 1,164 (190) (111) 8,540 -- 9,403
---------- ---------- -------- ---------- ----------- ----------
Total current liabilities 2,125 305,866 3,790 286,592 -- 598,373

Long-term debt -- 1,762,054 223,499 -- -- 1,985,553
Other long-term liabilities -- 3,738 -- 151,929 -- 155,667
Deferred income taxes 79 61,623 82 311,040 -- 372,824
Intercompany payable 2,049 -- -- 2,141,357 (2,143,406) --
---------- ---------- -------- ---------- ----------- ----------
Total liabilities 4,253 2,133,281 227,371 2,890,918 (2,143,406) 3,112,417
---------- ---------- -------- ---------- ----------- ----------
Shareholders' equity 2,490,275 1,042,482 10,643 2,456,805 (3,509,930) 2,490,275
---------- ---------- -------- ---------- ----------- ----------
Total liabilities and
shareholders' equity $2,494,528 $3,175,763 $238,014 $5,347,723 $(5,653,336) $5,602,692
========== ========== ======== ========== =========== ==========

-74-

CONDENSED CONSOLIDATING STATEMENTS OF INCOME

YEAR ENDED DECEMBER 31, 2004
--------------------------------------------------------------------------------
NABORS OTHER
NABORS DELAWARE NABORS SUBSIDIARIES
(PARENT/ (ISSUER/ HOLDINGS (NON- CONSOLIDATING CONSOLIDATED
GUARANTOR) GUARANTOR) (ISSUER) GUARANTORS) ADJUSTMENTS TOTAL
---------- ---------- -------- ------------ ------------- ------------

(IN THOUSANDS)
Revenues and other income:
Operating revenues $ -- $ -- $ -- $2,394,031 $ -- $2,394,031
Earnings from
unconsolidated affiliates -- -- -- 4,057 -- 4,057
Earnings from consolidated
affiliates 187,927 169,550 18,147 176,755 (552,379) --
Investment income 25,277 1 -- 24,786 -- 50,064
Intercompany interest
income 100,419 71,976 -- 522 (172,917) --
-------- -------- ------- ---------- --------- ----------
Total revenues and other
income 313,623 241,527 18,147 2,600,151 (725,296) 2,448,152
-------- -------- ------- ---------- --------- ----------

Costs and other deductions:
Direct costs -- -- -- 1,572,649 -- 1,572,649
General and administrative
expenses 5,888 932 16 191,612 (3,060) 195,388
Depreciation and amortization -- 450 -- 254,489 -- 254,939
Depletion -- -- -- 45,460 -- 45,460
Interest expense -- 39,048 11,470 (2,011) -- 48,507
Intercompany interest
expense -- 522 -- 172,395 (172,917) --
Losses (gains) on sales of
long-lived assets,
impairment charges and
other expense (income),
net (806) (2,344) -- (4,539) 3,060 (4,629)
-------- -------- ------- ---------- --------- ----------
Total costs and other
deductions 5,082 38,608 11,486 2,230,055 (172,917) 2,112,314
-------- -------- ------- ---------- --------- ----------
Income before income taxes 308,541 202,919 6,661 370,096 (552,379) 335,838
-------- -------- ------- ---------- --------- ----------
Income tax expense 6,084 12,346 2,332 12,619 -- 33,381
-------- -------- ------- ---------- --------- ----------
Net income $302,457 $190,573 $ 4,329 $ 357,477 $(552,379) $ 302,457
======== ======== ======= ========== ========= ==========

-75-

YEAR ENDED DECEMBER 31, 2003
--------------------------------------------------------------------------------
NABORS OTHER
NABORS DELAWARE NABORS SUBSIDIARIES
(PARENT/ (ISSUER/ HOLDINGS (NON- CONSOLIDATING CONSOLIDATED
GUARANTOR) GUARANTOR) (ISSUER) GUARANTORS) ADJUSTMENTS TOTAL
---------- ---------- -------- ------------ ------------- ------------

(IN THOUSANDS)
Revenues and other income:
Operating revenues $ -- $ -- $ -- $1,880,003 $ -- $1,880,003
Earnings from unconsolidated
affiliates -- -- -- 10,183 -- 10,183
Earnings from consolidated
affiliates 6,314 133,011 15,345 119,736 (274,406) --
Investment income 1,808 34 11 31,960 -- 33,813
Intercompany interest
income 207,615 59,276 -- -- (266,891) --
-------- -------- ------- ---------- --------- ----------
Total revenues and other
Income 215,737 192,321 15,356 2,041,882 (541,297) 1,923,999
-------- -------- ------- ---------- --------- ----------

Costs and other deductions:
Direct costs -- -- -- 1,276,953 -- 1,276,953
General and administrative
expenses 3,298 (48) 8 162,145 -- 165,403
Depreciation and
amortization -- -- -- 226,528 -- 226,528
Depletion -- -- -- 8,599 -- 8,599
Interest expense -- 58,785 11,448 507 -- 70,740
Intercompany interest
expense -- -- -- 266,891 (266,891) --
Losses (gains) on sales of
long-lived assets,
impairment charges and
other expense (income),
net 3,923 1,140 (15) (3,895) -- 1,153
-------- -------- ------- ---------- --------- ----------
Total costs and other
deductions 7,221 59,877 11,441 1,937,728 (266,891) 1,749,376
-------- -------- ------- ---------- --------- ----------
Income before income taxes 208,516 132,444 3,915 104,154 (274,406) 174,623
-------- -------- ------- ---------- --------- ----------
Income tax expense (benefit) 16,288 (210) 1,488 (35,171) -- (17,605)
-------- -------- ------- ---------- --------- ----------
Net income $192,228 $132,654 $ 2,427 $ 139,325 $(274,406) $ 192,228
======== ======== ======= ========== ========= ==========

-76-

YEAR ENDED DECEMBER 31, 2002
--------------------------------------------------------------------------------
NABORS OTHER
NABORS DELAWARE NABORS SUBSIDIARIES
(PARENT/ (ISSUER/ HOLDINGS (NON- CONSOLIDATING CONSOLIDATED
GUARANTOR) GUARANTOR) (ISSUER) GUARANTORS) ADJUSTMENTS TOTAL
---------- ---------- -------- ------------ ------------- ------------

(IN THOUSANDS)
Revenues and other income:
Operating revenues $ -- $ -- $ -- $1,466,443 $ -- $1,466,443
Earnings from
unconsolidated affiliates -- -- -- 14,775 -- 14,775
Earnings from consolidated
affiliates 18,159 89,947 -- 79,525 (187,631) --
Investment income 48 49 -- 36,864 -- 36,961
Intercompany interest
income 101,436 54,326 -- -- (155,762) --
-------- -------- ------- ---------- --------- ----------
Total revenues and other
income 119,643 144,322 -- 1,597,607 (343,393) 1,518,179
-------- -------- ------- ---------- --------- ----------
Costs and other deductions:
Direct costs -- -- -- 973,910 -- 973,910
General and administrative
expenses 579 483 2 140,831 -- 141,895
Depreciation and
amortization -- -- -- 187,665 -- 187,665
Depletion -- -- -- 7,700 -- 7,700
Interest expense -- 60,206 4,102 2,760 -- 67,068
Intercompany interest
expense -- -- -- 155,762 (155,762) --
Losses (gains) on sales of
long-lived assets,
impairment charges and
other expense (income),
net (3,469) 6,191 -- (3,555) -- (833)
-------- -------- ------- ---------- --------- ----------
Total costs and other
deductions (2,890) 66,880 4,104 1,465,073 (155,762) 1,377,405
-------- -------- ------- ---------- --------- ----------
Income (loss) before income
taxes 122,533 77,442 (4,104) 132,534 (187,631) 140,774
-------- -------- ------- ---------- --------- ----------
Income tax expense (benefit) 1,044 (4,627) (1,560) 24,428 -- 19,285
-------- -------- ------- ---------- --------- ----------
Net income (loss) $121,489 $ 82,069 $(2,544) $ 108,106 $(187,631) $ 121,489
======== ======== ======= ========== ========= ==========

-77-

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

YEAR ENDED DECEMBER 31, 2004
--------------------------------------------------------------------------------
NABORS OTHER
NABORS DELAWARE NABORS SUBSIDIARIES
(PARENT/ (ISSUER/ HOLDINGS (NON- CONSOLIDATING CONSOLIDATED
GUARANTOR) GUARANTOR) (ISSUER) GUARANTORS) ADJUSTMENTS TOTAL
---------- ---------- -------- ------------ ------------- ------------

(IN THOUSANDS)
Net cash (used for) provided by
operating activities $ (64,596) $ 375,884 $(10,967) $ 581,156 $(318,279) $ 563,198
--------- --------- -------- --------- --------- ---------
Cash flows from investing activities:
Purchases of marketable
securities, available-for-sale (654,819) -- -- (91,584) -- (746,403)
Sales of marketable
securities, available-for-sale 773,786 -- -- 65,030 -- 838,816
Purchases of non-marketable
securities (45,000) -- -- (128,533) -- (173,533)
Sales of non-marketable
securities -- -- -- 69,793 -- 69,793
Cash paid for investments in
consolidated affiliates (218,053) (60,000) -- (170,968) 449,021 --
Capital expenditures -- -- -- (544,429) -- (544,429)
Proceeds from sales of assets
and insurance claims -- -- -- 6,879 -- 6,879
Investments in affiliate -- -- -- (200) -- (200)
--------- --------- -------- --------- --------- ---------
Net cash used for investing
activities (144,086) (60,000) -- (794,012) 449,021 (549,077)
--------- --------- -------- --------- --------- ---------
Cash flows from financing activities:
Increase in cash overdrafts -- -- -- 9,865 -- 9,865
Decrease in restricted cash -- -- -- 109 -- 109
Intercompany borrowings (198,675) -- -- 198,675 -- --
Reduction of long-term
debt -- (298,275) -- (4,136) -- (302,411)
Proceeds from issuance of
common shares 71,248 -- -- -- -- 71,248
Proceeds from parent
contributions -- 160,000 10,968 278,053 (449,021) --
Cash dividends paid -- (177,610) -- (140,669) 318,279 --
--------- --------- -------- --------- --------- ---------
Net cash (used for) provided by
financing activities (127,427) (315,885) 10,968 341,897 (130,742) (221,189)
--------- --------- -------- --------- --------- ---------
Effect of exchange rate
changes on cash and cash
equivalents -- -- -- 12,040 -- 12,040
--------- --------- -------- --------- --------- ---------
Net (decrease) increase in cash
and cash equivalents (336,109) (1) 1 141,081 -- (195,028)
Cash and cash equivalents,
beginning of period 403,693 1 17 176,026 -- 579,737
--------- --------- -------- --------- --------- ---------
Cash and cash equivalents,
end of period $ 67,584 $ -- $ 18 $ 317,107 $ -- $ 384,709
========= ========= ======== ========= ========= =========

-78-

YEAR ENDED DECEMBER 31, 2003
--------------------------------------------------------------------------------
NABORS OTHER
NABORS DELAWARE NABORS SUBSIDIARIES
(PARENT/ (ISSUER/ HOLDINGS (NON- CONSOLIDATING CONSOLIDATED
GUARANTOR) GUARANTOR) (ISSUER) GUARANTORS) ADJUSTMENTS TOTAL
---------- ---------- -------- ------------ ------------- ------------

(IN THOUSANDS)
Net cash provided by (used
for) operating activities $ 169,665 $ 641,821 $(10,786) $ 408,424 $(813,386) $ 395,738
--------- --------- -------- ----------- --------- -----------
Cash flows from investing activities:
Purchases of marketable
securities, available-for-sale (225,904) -- -- (1,203,641) -- (1,429,545)
Sales of marketable securities,
available-for-sale 77,640 -- -- 1,315,998 -- 1,393,638
Purchases of non-marketable
securities -- -- -- (47,002) -- (47,002)
Sales of non-marketable
securities -- -- -- 17,506 -- 17,506
Cash paid for investments in
consolidated affiliates -- (700,484) -- (236) 700,720 --
Capital expenditures -- -- -- (353,138) -- (353,138)
Proceeds from sales of assets and
insurance claims -- -- -- 10,476 -- 10,476
Investments in affiliate -- -- -- (175) (175)
--------- --------- -------- ----------- --------- -----------
Net cash (used for) provided
by investing activities (148,264) (700,484) -- (260,212) 700,720 (408,240)
--------- --------- -------- ----------- --------- -----------
Cash flows from financing activities:
Decrease in cash overdrafts -- -- -- (778) -- (778)
Decrease in restricted cash -- -- -- 1,925 -- 1,925
Proceeds from long-term debt -- 700,000 -- -- -- 700,000
Retirement of intercompany loan 316,050 -- -- (316,050) -- --
Reduction of long-term debt -- (494,903) -- (49,576) -- (544,479)
Debt issuance costs -- (11,366) (159) -- -- (11,525)
Proceeds from issuance of
common shares 26,115 -- -- 226 -- 26,341
Proceeds from parent
contributions -- -- 10,755 689,965 (700,720) --
Cash dividends paid -- (135,105) -- (678,281) 813,386 --
--------- --------- -------- ----------- --------- -----------
Net cash provided by (used
for) financing activities 342,165 58,626 10,596 (352,569) 112,666 171,484
--------- --------- -------- ----------- --------- -----------
Effect of exchange rate
changes on cash and cash
equivalents -- -- -- 6,704 -- 6,704
--------- --------- -------- ----------- --------- -----------
Net increase (decrease) in
cash and cash equivalents 363,566 (37) (190) (197,653) -- 165,686
Cash and cash equivalents,
beginning of period 40,127 38 207 373,679 -- 414,051
--------- --------- -------- ----------- --------- -----------
Cash and cash equivalents,
end of period $ 403,693 $ 1 $ 17 $ 176,026 $ -- $ 579,737
========= ========= ======== =========== ========= ===========

-79-

YEAR ENDED DECEMBER 31, 2002
---------------------------------------------------------------------------------
NABORS OTHER
NABORS DELAWARE NABORS SUBSIDIARIES
(PARENT/ (ISSUER/ HOLDINGS (NON- CONSOLIDATING CONSOLIDATED
GUARANTOR) GUARANTOR) (ISSUER) GUARANTORS) ADJUSTMENTS TOTAL
---------- ---------- --------- ------------ ------------- ------------

(IN THOUSANDS)

Net cash provided by (used
for) operating activities $ 78,235 $(193,818) $ (128) $ 597,850 $ (81,263) $ 400,876
-------- --------- --------- --------- --------- ---------
Cash flows from investing activities:
Purchases of marketable
securities, available-for-sale (25,055) -- (21) (720,307) -- (745,383)
Sales of marketable
securities, available-for-sale -- -- -- 542,133 -- 542,133
Purchases of non-marketable
securities -- -- -- (15,000) -- (15,000)
Investments in unconsolidated
affiliates (15,089) -- (221,484) (24) 236,597 --
Cash paid for acquisitions of
businesses, net -- -- -- (135,652) -- (135,652)
Capital expenditures -- -- -- (326,536) -- (326,536)
Cash paid for other current
assets -- -- -- (8,725) -- (8,725)
Proceeds from sales of assets
and insurance claims -- -- -- 34,877 -- 34,877
-------- --------- --------- --------- --------- ---------
Net cash used for investing
activities (40,144) -- (221,505) (629,234) 236,597 (654,286)
-------- --------- --------- --------- --------- ---------
Cash flows from financing activities:
Decrease in cash overdrafts -- -- -- (3,658) -- (3,658)
Decrease in restricted cash -- -- -- 210 -- 210
Decrease in short-term
borrowings -- -- -- (844) -- (844)
Proceeds from long-term debt -- 272,765 223,139 -- -- 495,904
Reduction of long-term debt -- (5,047) -- (25,784) -- (30,831)
Debt issuance costs -- (1,634) (1,311) -- -- (2,945)
Proceeds from issuance of
common shares 4,522 8,328 -- -- -- 12,850
Proceeds from parent
contributions -- -- 12 236,585 (236,597) --
Repurchase of common shares (2,486) -- -- -- -- (2,486)
Cash dividends paid -- (81,263) -- -- 81,263 --
Payments related to cash flow
hedges -- (1,494) -- -- -- (1,494)
-------- --------- --------- --------- --------- ---------
Net cash provided by financing
activities 2,036 191,655 221,840 206,509 (155,334) 466,706
-------- --------- --------- --------- --------- ---------
Effect of exchange rate
changes on cash and cash
equivalents -- -- -- 2,312 -- 2,312
-------- --------- --------- --------- --------- ---------
Net increase (decrease) in cash
and cash equivalents 40,127 (2,163) 207 177,437 -- 215,608
Cash and cash equivalents,
beginning of period -- 2,201 -- 196,242 -- 198,443
-------- --------- --------- --------- --------- ---------
Cash and cash equivalents,
end of period $ 40,127 $ 38 $ 207 $ 373,679 $ -- $ 414,051
======== ========= ========= ========= ========= =========

-80-

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

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

The Company's management, with the participation of the Company's
Chairman and Chief Executive Officer and Chief Financial Officer, has
evaluated the effectiveness of the Company's disclosure controls and
procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e)
under the Exchange Act) as of the end of the period covered by this
report. Based on such evaluation, the Company's Chairman and Chief
Executive Officer and Chief Financial Officer have concluded that, as
of the end of such period, the Company's disclosure controls and
procedures are effective, at the reasonable assurance level, in
recording, processing, summarizing and reporting, on a timely basis,
information required to be disclosed by the Company in the reports
that it files or submits under the Exchange Act and are effective, at
the reasonable assurance level, in ensuring that information required
to be disclosed by the Company in the reports that it files or submits
under the Exchange Act is accumulated and communicated to the
Company's management, including the Company's Chairman and Chief
Executive Officer and Chief Financial Officer, as appropriate to allow
timely decisions regarding required disclosure.

(b) Changes in Internal Control Over Financial Reporting. There have not
been any changes in the Company's internal control over financial
reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act) during the most recently completed fiscal
quarter that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial
reporting.

See Management's Report on Internal Control over Financial Reporting
included in Part I Item 8 on page 34 of this report.

81

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information called for by this item will be contained in the Nabors
Industries Ltd. definitive proxy statement to be distributed in connection with
its 2005 annual meeting of shareholders under the captions "Election of
Directors" and "Other Executive Officers" and is incorporated into this document
by reference.

Section 16(a) Beneficial Ownership Reporting Compliance. Section 16(a) of
the Securities Exchange Act of 1934 requires Nabors' directors and executive
officers, and persons who own more than 10% of a registered class of Nabors'
equity securities, to file with the Securities and Exchange Commission and the
American Stock Exchange initial reports of ownership and reports of changes in
ownership of common shares and other equity securities of Nabors. Officers,
directors and greater than 10% shareholders are required by Commission
regulation to furnish Nabors with copies of all Section 16(a) forms which they
file.

To our knowledge, based solely on review of the copies of Forms 3 and 4 and
amendments thereto furnished to us during 2004 and Form 5 and amendments thereto
furnished to us with respect to the year 2004, and written representations that
no other reports were required, all Section 16(a) filings required to be made by
Nabors' officers, directors and greater than 10% beneficial owners with respect
to the fiscal year 2004 were timely filed, except Mr. Alexander Knaster filed a
late Form 3 with respect to his initial holdings.

We have adopted a Code of Business Conduct that satisfies the SEC's
definition of a "Code of Ethics" and applies to all employees, including our
principal executive officer, principal financial officer, and principal
accounting officer. The Code of Ethics is posted on our website at
www.nabors.com. We intend to disclose on our website any amendments to the Code
of Conduct and any waivers of the Code of Conduct that apply to our principal
executive officer, principal financial officer, and principal accounting
officer.

ITEM 11. EXECUTIVE COMPENSATION

Except as specified in the following sentence, the information called for
by this item will be contained in our definitive proxy statement to be
distributed in connection with our 2005 annual meeting of shareholders under the
caption "Management Compensation" and is incorporated into this document by
reference. Information in Nabors' 2005 proxy statement not deemed to be
"soliciting material" or "filed" with the Commission under its rules, including
the Report of the Compensation Committee on Executive Compensation, the Report
of the Audit Committee and the Five Year Stock Performance Graph, is not deemed
to be incorporated by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The Company maintains eleven different equity compensation plans: the 1993
Stock Option Plan for Non-Employee Directors, 1996 Executive Officers Incentive
Stock Plan, 1996 Employee Stock Plan, 1996 Chairman's Executive Stock Plan, 1996
Executive Officers Stock Plan, 1997 Executive Officers Incentive Stock Plan,
1998 Employee Stock Plan, 1998 Chairman's Executive Stock Plan, 1999 Stock
Option Plan for Non-Employee Directors, 1999 Pool Employee/Director Option
Exchange Plan and 2003 Employee Stock Plan pursuant to which it may grant equity
awards to eligible persons from certain plans. The terms of the Company's Equity
Compensation Plans are described more fully below.

-82-

The following table gives information about these equity compensation plans
as of December 31, 2004:

(a) (b) (c)
Number of securities remaining
Number of securities to be Weighted-average available for future issuance
issued upon exercise of exercise price of under equity compensation
outstanding options, outstanding options, plans (excluding securities
Plan category warrants and rights warrants and rights reflected in column (a))
- --------------------- -------------------------- -------------------- ------------------------------

Equity compensation
plans approved by
security holders 9,506,506 $33.9828 6,798,663 (1)

Equity compensation
plans not approved by
security holders (2) 15,519,398 $30.9843 583,383
---------- ---------
Total 25,025,904 7,382,046
========== =========

(1) The 1996 Employee Stock Plan incorporates an evergreen formula pursuant to
which on each January 1, the aggregate number of shares reserved for
issuance under the 1996 Employee Stock Plan will increase by an amount
equal to 1 1/2 % of the common shares outstanding on December 31 of the
immediately preceding fiscal year.

(2) The Company issued 153,519 stock options under the 1999 Pool
Employee/Director Option Exchange Plan of Pool Energy Services Co. The
remaining options are exercisable for 5,560 common shares of the Company
(after giving effect to the exchange ratio provided in the Pool acquisition
agreement). The options have a weighted-average exercise price of $17.0617
per share. No further awards will be made under the 1999 Pool
Employee/Director Option Exchange Plan.

Following is a brief summary of the material terms of the plans that have
not been approved by our shareholders. Unless otherwise indicated, (1) each plan
is administered by an independent committee appointed by the Company's Board of
Directors; (2) the exercise price of options granted under each plan shall be no
less than 100% of the fair market value per common share on the date of the
grant of the option; (3) the term of an award granted under each plan may not
exceed ten years; (4) options granted under the plan are nonstatutory options
not intended to qualify under Section 422 of the Internal Revenue Code of 1986,
as amended (NSOs); and (5) unless otherwise determined by the committee in its
discretion, options may not be exercised after the optionee has ceased to be in
the employ of the Company.

1996 EXECUTIVE OFFICERS INCENTIVE STOCK PLAN.

The plan reserves for issuance up to 3,600,000 common shares of the Company
pursuant to the exercise of options granted under the plan. Options may be
granted under the plan to executive officers of the Company. No optionee may
receive grants in excess of 50% of the total number of common shares authorized
to be issued under the plan.

1996 CHAIRMAN'S EXECUTIVE STOCK PLAN

The plan reserves for issuance up to 850,000 common shares of the Company
pursuant to the exercise of options granted under the plan. Options may be
granted under the plan to the Chairman of the Board of the Company. In the event
of a termination of employment for any reason, except by the Company for cause
or by voluntary resignation by optionee, all unvested options shall be
immediately exercisable as of the date of his termination of his employment.

-83-

1996 EXECUTIVE OFFICERS STOCK PLAN

The plan reserves for issuance up to 860,000 common shares of the Company
pursuant to the exercise of options granted under the plan. Options may be
granted under the plan to executive officers of the Company. No optionee may
receive grants in excess of 50% of the total number of common shares authorized
to be issued under the Plan.

1997 EXECUTIVE OFFICERS INCENTIVE STOCK PLAN

The plan reserves for issuance up to 2,450,000 common shares of the Company
pursuant to the exercise of options granted under the plan. Options may be
granted under the plan to executive officers of the Company. No optionee may
receive grants in excess of 50% of the total number of common shares authorized
to be issued under the plan.

1998 EMPLOYEE STOCK PLAN

The plan reserves for issuance up to 17,500,000 common shares of the
Company pursuant to the exercise of options granted under the plan. The persons
who shall be eligible to participate in the plan are employees and consultants
of the company. Options granted to employees may either be awards of shares,
non-qualified stock options (NQSOs), incentive stock options (ISOs) or stock
appreciation rights (SARs). An optionee may reduce the option exercise price by
paying the Company in cash, shares, options, or the equivalent, an amount equal
to the difference between the exercise price and the reduced exercise price of
the option. The committee shall establish performance goals for stock awards in
writing not later than the date required for compliance under IRC Section 162(m)
and the vesting of such shares shall be contingent upon the attainment of such
performance goals. Stock awards shall vest over a period determined by the
Committee, which period shall expire no later than January 18, 2006. The
committee may grant ISOs of not less than 100% of the fair market value per
common share on the date of grant; except that in the event the optionee owns on
the date of grant, securities possessing more than 10% of the total combined
voting power of all classes of securities of the Company or of any subsidiary of
the Company, the price per share shall not be less than 110% of the fair market
value per common share on the date of the grant and such option shall expire
five years from the date such option is granted. SARs may be granted in
conjunction with all or part of any option granted under the plan, in which case
the exercise of the SAR shall require the cancellation of a corresponding
portion of the option and the exercise of the option will result in cancellation
of a corresponding portion of the SAR. In the case of a NQSO, such rights may be
granted either at or after the time of grant of such option. In the case of an
ISO, such rights may be granted only at the time of grant of such option. A SAR
may also be granted on a stand alone basis. The term of a SAR shall be
established by the committee. The exercise price of a SAR shall in no event be
less than 100% of the fair market value per common share on the date of grant.
The committee shall have the authority to make provisions in its award and grant
agreements to address vesting and other issues arising in connection with a
change of control.

1998 CHAIRMAN'S EXECUTIVE STOCK PLAN

The plan reserves for issuance up to 764,924 common shares of the Company
pursuant to the exercise of options granted under the plan. Options may be
granted under the plan to the Chairman of the Board of the Company. In the event
of a termination of employment for any reason, except by the Company for cause
or by voluntary resignation by optionee, all unvested options shall be
immediately exercisable as of the date of his termination of his employment.

1999 STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS

The plan reserves for issuance up to 1,500,000 common shares of the Company
pursuant to the exercise of options granted under the plan. The plan is
administered by the Company's Board of Directors, provided that the Board may
appoint a committee to administer the plan. In no event shall an eligible
director consider or vote on the administration of this plan or serve as a
member of the committee. Options may be granted under the plan to non-employee
directors of the Company. Options shall vest and become non-forfeitable on the
first year anniversary of the day on which such option was granted, if the
optionee has continued to serve as a director until that day, unless

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otherwise provided. In the event of termination of an optionee's service as a
director by reason of voluntary retirement, declining to stand for re-election
or becoming a full time employee of the Company or a subsidiary of the Company,
all unvested options granted pursuant to this Plan shall automatically expire
and shall not be exercisable and all options unexercised shall continue to be
exercisable until the stated expiration date of such options. In the event of
death or disablement of an optionee while the optionee is a director, the
then-outstanding options of such optionee shall be exercisable for two years
from the date of the death or disablement of the optionee or by his/her
successors in interest. All unvested options shall automatically vest and become
non-forfeitable as of the date of death or disablement and shall be exercisable
for two years from the date of the death of the optionee or until the stated
grant expiration date, whichever is earlier, by the optionee or by his/her
successors in interest. In the event of the termination of an optionee's service
as a director by the Board of Directors for cause or the failure of such
director to be re-elected, the administrator of the plan in its sole discretion
can cancel the then-outstanding options of such optionee, including those
options which have vested and such options shall automatically expire and become
non-exercisable on the effective date of such termination.

1999 POOL EMPLOYEE/DIRECTOR OPTION EXCHANGE PLAN

The plan reserves for issuance up to 1,466,010 common shares of the Company
pursuant to the exercise of options granted under the plan. Options may be
granted under the plan to former employees and non-employee directors of Pool
Energy Services Co. or its subsidiaries who held options to purchase shares of
Pool common stock pursuant to certain stock option plans of Pool. The exercise
price of options granted under the plan shall equal the exercise price per share
of the corresponding Pool option, divided by 1.025 (rounding the resulting
exercise price up to the nearest whole cent). The period for exercise of an
option shall be the same as the period for exercise of the corresponding Pool
option. If an optionee has ceased to be in the employ of the Company or its
subsidiaries, any outstanding options, whether or not vested, generally may not
be exercised after the optionee's date of termination and shall be forfeited;
provided however, in its sole discretion the committee may extend the time to
exercise any option to a period ending on it applicable expiration date. The
committee, in its discretion, shall have the authority to make provisions in its
grant agreements to address vesting and other issues arising in connection with
a change of control.

The remainder of the information called for by this item will be contained in
Nabors' 2005 proxy statement under the caption "Share Ownership of Management
and Principal Shareholders" and is incorporated into this document by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information called for by this item will be contained in Nabors' 2005
proxy statement under the captions "Certain Relationships" and "Compensation
Committee Interlocks and Insider Participation" and is incorporated into this
document by reference.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

The information called for by this item will be contained in Nabors' 2005
Proxy Statement under the caption "Principal Accountant Fees and Services" and
is incorporated into this document by reference.

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PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) The following documents are filed as part of this report:

(1) Financial Statement Schedules

Page No.
--------

Report of Independent Auditors on Financial Statement
Schedule................................................ S-1
Schedule II - Valuation and Qualifying Accounts............ S-2

All other supplemental schedules are omitted because of the absence of
the conditions under which they are required or because the required
information is included in the financial statements or related notes.

(b) Exhibits

Exhibit No. Description
----------- -----------

2.1 Agreement and Plan of Merger among Nabors Industries, Inc.,
Nabors Acquisition Corp. VIII, Nabors Industries Ltd. and
Nabors US Holdings Inc. (incorporated by reference to Annex I
to the proxy statement/prospectus included in Nabors
Industries Ltd.'s Registration Statement on Form S-4 (File
No. 333-76198) filed with the Commission on May 10, 2002, as
amended).

2.2 Amended and Restated Acquisition Agreement, dated as of March
18, 2002, by and between Nabors Industries, Inc. and Enserco
Energy Service Company Inc. (incorporated by reference to
Exhibit 2.1 to Nabors Industries, Inc.'s Registration
Statement on Form S-3 (File No. 333-85228)).

2.3 Form of Plan of Arrangement Under Section 192 of the Canada
Business Corporations Act Involving and Affecting Enserco
Energy Service Company Inc. and its Securityholders (included
in Schedule B to Exhibit 2.2).

2.4 Arrangement Agreement dated August 12, 2002 between Nabors
Industries Ltd. and Ryan Energy Technologies Inc.
(incorporated by reference to Exhibit 2.4 to Nabors
Industries Ltd.'s Form 10-K for the year ended December 31,
2002 (File No. 000-49887)).

3.1 Memorandum of Association of Nabors Industries Ltd.
(incorporated by reference to Annex II to the proxy
statement/prospectus included in Nabors Industries Ltd.'s
Registration Statement on Form S-4 (Registration No.
333-76198) filed with the Commission on May 10, 2002, as
amended).

3.2 Amended and Restated Bye-Laws of Nabors Industries Ltd.
(incorporated by reference to Annex III to the proxy
statement/prospectus included in Nabors Industries Ltd.'s
Registration Statement on Form S-4 (Registration No.
333-76198) filed with the Commission on May 10, 2002, as
amended).

3.3 Form of Resolutions of the Board of Directors of Nabors
Industries Ltd. authorizing the issue of the Special Voting
Preferred Share (incorporated by reference to Exhibit 3.3 to
Nabors Industries Ltd.'s Post-Effective Amendment No. 1 to
Registration Statement on Form S-3 (Registration No.
333-85228-99) filed with the Commission on June 11, 2002).

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4.1 Indenture dated as of February 5, 2001 between Nabors
Industries, Inc. and Bank One, N.A., as trustee, in
connection with $1,382,200,000 principal amount at maturity
of Zero Coupon Convertible Senior Debentures due 2021
(incorporated by reference to Exhibit 4.11 to Nabors
Industries, Inc.'s Form 10-K, File No. 1-9245, filed with the
Commission on March 30, 2001).

4.2 First Supplemental Indenture, dated as of June 21, 2002 among
Nabors Industries, Inc., as issuer, Nabors Industries Ltd. as
guarantor, and Bank One, N.A. as trustee, with respect to
Nabors Industries, Inc.'s zero coupon convertible senior
debentures due 2021 (incorporated by reference to Exhibit 4.5
to Nabors Industries Ltd.'s Form 10-Q, File No. 000-49887,
filed with the Commission on August 14, 2002).

4.3 Second Supplemental Indenture dated as of October 25, 2004 by
and among Nabors Industries, Inc., as issuer, Nabors
Industries Ltd., as guarantor, and J.P. Morgan Trust Company,
National Association (as successor to Bank One, N.A.), as
Trustee, to the Indenture, dated as of February 5, 2001, as
amended, with respect to Nabors Industries, Inc.'s Zero
Coupon Convertible Senior Debentures due 2021 (incorporated
by reference to Exhibit 4.1 to Nabors Industries Ltd.'s
Current Report on Form 8-K, File No. 000-49887, filed October
27, 2004).

4.4 Indenture, dated August 22, 2002, among Nabors Industries,
Inc., as issuer, Nabors Industries Ltd., as guarantor, and
Bank One, N.A., with respect to Nabors Industries, Inc.'s
Series A and Series B 5.375% Senior Notes due 2012
(incorporated by reference to Exhibit 4.1 to Nabors
Industries, Inc.'s Registration Statement on Form S-4
(Registration No. 333-10049201) filed with the Commission on
October 11, 2002).

4.5 Indenture, dated August 22, 2002, among Nabors Holdings 1,
ULC, as issuer, Nabors Industries, Inc. and Nabors Industries
Ltd., as guarantors, and Bank One, N.A., with respect to
Nabors Holdings 1, ULC's Series A and Series B 4.875% Senior
Notes due 2009 (incorporated by reference to Exhibit 4.1 to
Nabors Holdings 1, ULC's Registration Statement on Form S-4
(Registration No. 333-10049301) filed with the Commission on
October 11, 2002).

4.6 Form of Provisions Attaching to the Exchangeable Shares of
Nabors Exchangeco (Canada) Inc. (incorporated by reference to
Exhibit 4.1 to Nabors Industries, Inc.'s Registration
Statement on Form S-3 (Registration No. 333-85228) filed with
the Commission on March 29, 2002, as amended).

4.7 Form of Support Agreement between Nabors Industries, Inc.,
3064297 Nova Scotia Company and Nabors Exchangeco (Canada)
Inc. (incorporated by reference to Exhibit 4.2 to Nabors
Industries, Inc.'s Registration Statement on Form S-3
(Registration No. 333-85228) filed with the Commission on
March 29, 2002, as amended).

4.8 Form of Acknowledgement of Novation to Nabors Industries,
Inc., Nabors Exchangeco (Canada) Inc., Computershare Trust
Company of Canada and 3064297 Nova Scotia Company executed by
Nabors Industries Ltd. (incorporated by reference to Exhibit
4.3 to Nabors Industries Ltd.'s Post-Effective Amendment No.
1 to Registration Statement on Form S-3 (Registration No.
333-85228-99) filed with the Commission on June 11, 2002).

4.9 Indenture, dated as of June 10, 2003, between Nabors
Industries, Inc., Nabors Industries Ltd. and Bank One, N.A.
with respect to Nabors Industries, Inc.'s Zero Coupon Senior
Exchangeable Notes due 2023 (incorporated by reference to
Exhibit 4.1 to Nabors Industries, Inc.'s and Nabors
Industries Ltd.'s Registration Statement on Form S-3, (File
No. 333-107806-01, filed with the Commission of August 8,
2003)).

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4.10 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 Industries Inc.'s and Nabors Industries
Ltd.'s Registration Statement on Form S-3, File No.
333-107806-01, filed with the Commission on August 8, 2003).

4.11 First Supplemental Indenture, dated as of October 25, 2004,
by and among Nabors Industries, Inc., as issuer, Nabors
Industries Ltd., as guarantor, and J.P. Morgan Trust Company,
National Association, (as successor to Bank One, N.A.), as
trustee to the Indenture, dated as of June 10, 2003, with
respect to Nabors Industries, Inc.'s Zero Coupon Senior
Exchangeable Notes due 2023 (incorporated by reference to
Exhibit 4.2 to Nabors Industries Ltd.'s Current Report on
Form 8-K, File No. 000-49887, filed October 27, 2004).

4.12 Indenture, dated as of December 13, 2004, by and among Nabors
Industries, Inc., Nabors Industries Ltd., and J.P. Morgan
Trust Company, National Association, with respect to Nabors
Industries, Inc.'s Series B Zero Coupon Senior Exchangeable
Notes due 2023.*

10.1 (+) 1996 Employee Stock Plan (incorporated by reference to Nabors
Industries Inc.'s Registration Statement on Form S-8,
Registration No. 333-11313, filed September 3, 1996).

10.2 (+) 1994 Executive Stock Option Agreement effective December 28,
1994 between Nabors Industries, Inc. and Eugene M. Isenberg
(incorporated by reference to Exhibit 10.4 to Nabors
Industries Inc.'s Form 10-K, File No. 1-9245, filed December
30, 1996).

10.3 (+) 1994 Executive Stock Option Agreement effective December 28,
1994 between Nabors Industries, Inc. and Anthony G. Petrello
(incorporated by reference to Exhibit 10.5 to Nabors
Industries Inc.'s Form 10-K, File No. 1-9245, filed December
30, 1996).

10.4 (+) Employment Agreement effective October 1, 1996 between Nabors
Industries, Inc. and Eugene M. Isenberg (incorporated by
reference to Exhibit 10.7 to Nabors Industries Inc.'s Form
10-Q, File No. 1-9245, filed May 16, 1997).

10.5 (+) First Amendment to Amended and Restated Employment Agreement
between Nabors Industries, Inc., Nabors Industries Ltd. and
Eugene M. Isenberg dated as of June 24, 2002 (incorporated by
reference to Exhibit 10.1 to Nabors Industries Ltd.'s Form
10-Q, File No. 000-49887, filed August 14, 2002).

10.6 (+) Second Amendment to Employment Agreement between Nabors
Industries, Inc., Nabors Industries Ltd. and Eugene M.
Isenberg dated as of July 17, 2002 (incorporated by reference
to Exhibit 10.1 to Nabors Industries Ltd.'s Form 10-Q, File
No. 000-49887, filed August 14, 2002).

10.7 (+) Employment Agreement effective October 1, 1996 between Nabors
Industries, Inc. and Anthony G. Petrello (incorporated by
reference to Exhibit 10.8 to Nabors Industries Inc.'s Form
10-Q, File No. 1-9245, filed May 16, 1997).

10.8 (+) First Amendment to Amended and Restated Employment Agreement
between Nabors Industries, Inc., Nabors Industries Ltd. and
Anthony G. Petrello dated as of June 24, 2002 (incorporated
by reference to Exhibit 10.2 to Nabors Industries Ltd.'s Form
10-Q, File No. 000-49887, filed August 14, 2002).

10.9 (+) Second Amendment to Employment Agreement between Nabors
Industries, Inc., Nabors Industries Ltd. and Anthony G.
Petrello dated as of July 17, 2002 (incorporated by reference
to Exhibit 10.3 to Nabors Industries Ltd.'s Form 10-Q, File
No. 000-49887, filed August 14, 2002).

-88-

10.10 (+) Waiver dated as of September 27, 2002 pursuant to Section
9.[c] and Schedule 9.[c] of the Amended Employment Agreement
among Nabors Industries, Inc., Nabors Industries Ltd., and
Anthony G. Petrello (incorporated by reference to Exhibit
10.1 to Nabors Industries Ltd.'s Form 10-Q, File No.
000-49887, filed November 14, 2002).

10.11 (+) Nabors Industries, Inc. 1996 Chairman's Executive Stock Plan
(incorporated by reference to Exhibit 10.17 to Nabors
Industries Inc.'s Form 10-K, File No. 1-9245, filed December
29, 1997).

10.12 (+) Nabors Industries, Inc. 1996 Executive Officers Stock Plan
(incorporated by reference to Exhibit 10.18 to Nabors
Industries Inc.'s Form 10-K, File No. 1-9245, filed December
29, 1997).

10.13 (+) Nabors Industries, Inc. 1996 Executive Officers Incentive
Stock Plan (incorporated by reference to Exhibit 10.9 to
Nabors Industries Inc.'s Form 10-K, File No. 1-9245, filed
December 29, 1997).

10.14 (+) Nabors Industries, Inc. 1997 Executive Officers Incentive
Stock Plan (incorporated by reference to Exhibit 10.20 to
Nabors Industries Inc.'s Form 10-K, File No. 1-9245, filed
December 29, 1997).

10.15 (+) Nabors Industries, Inc. 1998 Employee Stock Plan
(incorporated by reference to Exhibit 10.19 to Nabors
Industries Inc.'s Form 10-K, File No. 1-9245, filed March 31,
1999).

10.16 (+) Nabors Industries, Inc. 1998 Chairman's Executive Stock Plan
(incorporated by reference to Exhibit 10.20 to Nabors
Industries Inc.'s Form 10-K, File No. 1-9245, filed March 31,
1999).

10.17 (+) Nabors Industries, Inc. 1999 Stock Option Plan for
Non-Employee Directors (incorporated by reference to Exhibit
10.21 to Nabors Industries Inc.'s Form 10-K, File No. 1-9245,
filed March 31, 1999).

10.18 (+) Amendment to Nabors Industries, Inc. 1999 Stock Option Plan
for Non-Employee Directors (incorporated by reference to
Exhibit 10.19 to Nabors Industries Inc.'s Form 10-K, File No.
1-09245, filed March 19, 2002).

10.19 (+) 1999 Pool Employee/Director Option Exchange Plan
(incorporated by reference to Exhibit 10.20 to Nabors
Industries Inc.'s Form 10-K, File No. 1-09245, filed March
19, 2002).

10.20 Form of Indemnification Agreement entered into between Nabors
Industries Ltd. and the directors and executive officers
identified in the schedule thereto (incorporated by reference
to Exhibit 10.28 to Nabors Industries Ltd.'s Form 10-K, File
No. 000-49887, filed March 31, 2003).

10.21 (+) Amended and Restated 1999 Stock Option Plan for Non-Employee
Directors (amended on May 2, 2003) (incorporated by reference
to Exhibit 10.29 to Nabors Industries Ltd.'s Form 10-Q, File
No. 000-49887, filed May 12, 2003).

10.22 (+) 2003 Employee Stock Option Plan (incorporated by reference to
Annex D of Nabors Industries Ltd.'s Notice of 2003 Annual
General Meeting of Shareholders and Proxy Statement, File
No. 000-49887, filed May 8, 2003).

-89-

10.23 Purchase and Sale Agreement (Red River) by and among El Paso
Production Company and El Paso Production GOM Inc., jointly
and severally as Seller and Ramshorn Investments, Inc., as
Purchaser dated October 8, 2003 (incorporated by reference to
Exhibit 10.23 to Nabors Industries Ltd.'s Form 10-K, File
No. 000-49887, filed March 15, 2004).

10.24 Purchase and Sale Agreement (USA) between El Paso Production
Oil & Gas USA, L.P., as Seller and Ramshorn Investments,
Inc., as Purchaser dated October 8, 2003 (incorporated by
reference to Exhibit 10.24 to Nabors Industries Ltd.'s Form
10-K, File No. 000-49887, filed March 15, 2004).

10.25 Exploration Participation Agreement (South Texas) by and
between El Paso Production Oil & Gas Company and El Paso
Production Oil & Gas USA, L.P., jointly and severally and
Ramshorn Investments, Inc., dated November 6, 2003
(incorporated by reference to Exhibit 10.25 to Nabors
Industries Ltd.'s Form 10-K, File No. 000-49887, filed
March 15, 2004).

10.26 Exploration Participation Agreement (Catapult) by and between
El Paso Production Company, and Ramshorn Investments, Inc.,
dated November 6, 2003 (incorporated by reference to Exhibit
10.26 to Nabors Industries Ltd.'s Form 10-K, File
No. 000-49887, filed March 15, 2004).

10.27(+) Form of Restricted Stock Award--Isenberg/Petrello
(incorporated by reference to Exhibit 10.01 to Nabors
Industries Ltd.'s Form 8-K, File No. 000-49887, filed
March 2, 2005).

10.28(+) Form of Restricted Stock Award--Others (incorporated by
reference to Exhibit 10.02 to Nabors Industries Ltd.'s Form
8-K, File No. 000-49887, filed March 2, 2005).

10.29(+) Form of Stock Option Agreement--Isenberg/Petrello
(incorporated by reference to Exhibit 10.03 to Nabors
Industries Ltd.'s Form 8-K, File No. 000-49887, filed
March 2, 2005).

10.30(+) Form of Stock Option Agreement--Others (incorporated by
reference to Exhibit 10.04 to Nabors Industries Ltd.'s Form
8-K, File No. 000-49887, filed March 2, 2005).

12 Computation of Ratios. *

14 Code of Business Conduct (incorporated by reference to
Exhibit 14 to Nabors Industries Ltd.'s Form 10-K, File No.
000-49887, filed March 15, 2004).

21 Significant Subsidiaries of Nabors Industries Ltd. *

23 Consent of Independent Registered Public Accounting Firm. *

31.1 Rule 13a-14(a)/15d-14(a) Certification, executed by Eugene M.
Isenberg, Chairman and Chief Executive Officer of Nabors
Industries Ltd. *

31.2 Rule 13a-14(a)/15d-14(a) Certification, executed by Bruce P.
Koch, Vice President and Chief Financial Officer of Nabors
Industries Ltd. *

32.1 Certifications required by Rule 13a-14(b) or Rule 15d-14(b)
and Section 1350 of Chapter 63 of Title 18 of the United
States Code (18 U.S.C. 1350), executed by Eugene M. Isenberg,
Chairman and Chief Executive Officer of Nabors Industries
Ltd. and Bruce P. Koch, Vice President and Chief Financial
Officer of Nabors Industries Ltd. (furnished herewith).

- ----------
* Filed herewith.

(+) Management contract or compensatory plan or arrangement.

-90-

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

By: /s/ Eugene M. Isenberg
--------------------------------------------
Eugene M. Isenberg
Chairman and Chief Executive Officer

By: /s/ Bruce P. Koch
--------------------------------------------
Bruce P. Koch
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)

Date: March 7, 2005

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.

Signature Title Date
- --------- ----- ----

/s/ James C. Flores Director March 7, 2005
- ---------------------------
James C. Flores

/s/ Eugene M. Isenberg Chairman and March 7, 2005
- --------------------------- Chief Executive Officer
Eugene M. Isenberg

/s/ Alexander M. Knaster Director March 7, 2005
- ---------------------------
Alexander M. Knaster

/s/ James L. Payne Director March 7, 2005
- ---------------------------
James L. Payne

/s/ Anthony G. Petrello Deputy Chairman, President and March 7, 2005
- --------------------------- Chief Operating Officer
Anthony G. Petrello

/s/ Hans Schmidt Director March 7, 2005
- ---------------------------
Hans Schmidt

/s/ Myron M. Sheinfeld Director March 7, 2005
- ---------------------------
Myron M. Sheinfeld

/s/ Martin J. Whitman Director March 7, 2005
- ---------------------------
Martin J. Whitman

-91-

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON
FINANCIAL STATEMENT SCHEDULE

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

Our audits of the consolidated financial statements, of management's assessment
of the effectiveness of internal control over financial reporting and of the
effectiveness of internal control over financial reporting referred to in our
report dated March 7, 2005 appearing in this Form 10-K of Nabors Industries Ltd.
also included an audit of the financial statement schedule listed in Item
15(a)(2) of this Form 10-K. In our opinion, this financial statement schedule
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.

/s/ PRICEWATERHOUSECOOPERS LLP

Houston, Texas
March 7, 2005

S-1

NABORS INDUSTRIES LTD.

SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 2004, 2003, and 2002

Balance at Charged to Charged to Balance at
Beginning Costs and Other End of
(In Thousands) of Period Expenses Accounts Deductions Period
- -------------------------------------- ---------- ---------- ---------- ---------- ----------

2004
Allowance for doubtful accounts ... $10,986 $2,359 $ 281 $ (2,648)(1) $10,978
Inventory reserve ................. 1,367 819 -- (437)(2) 1,749
Valuation allowance on deferred
tax assets ..................... 11,703 2,805 -- -- 14,508

2003
Allowance for doubtful accounts ... $13,801 $1,311 $ 178 $ (4,304)(1) $10,986
Inventory reserve ................. 4,270 475 -- (3,378)(2) 1,367
Valuation allowance on deferred
tax assets ..................... 6,540 5,163 -- -- 11,703
2002
Allowance for doubtful accounts ... $22,366 $2,221 $3,249(3) $(14,035)(4) $13,801
Inventory reserve ................. 4,308 248 -- (286)(2) 4,270
Valuation allowance on deferred
tax assets ..................... -- 6,540 -- -- 6,540

(1) Uncollected receivables written off, net of recoveries.

(2) Inventory reserves written off.

(3) Primarily related to acquisitions.

(4) Includes uncollected receivables written off, net of recoveries, and $6.5
million related to receipt of amounts previously reserved for.

S-2