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                                                                     EXHIBIT 13


                                                              NABORS INDUSTRIES

                                                             1996 ANNUAL REPORT

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                                    [PHOTO]

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                                    [PHOTO]




REVENUES


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                                    [CHART]

REVENUES
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                                    [PHOTO]



OPERATING INCOME (LOSS)

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                                    [CHART]

OPERATING INCOME (LOSS)
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                                    [PHOTO]



STOCKHOLDERS' EQUITY (DEFICIT)
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                                    [CHART]


STOCKHOLDERS' EQUITY (DEFICIT)
<PAGE>   9
FINANCIAL HIGHLIGHTS                    NABORS INDUSTRIES, INC. AND SUBSIDIARIES
(In thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                                    Year Ended September 30,
OPERATING DATA            1996       1995       1994       1993       1992       1991       1990       1989       1988       1987
                        --------   --------   --------   --------   --------   --------   --------   --------   --------   --------
<S>                     <C>        <C>        <C>        <C>        <C>        <C>        <C>        <C>        <C>        <C>     
Revenues                $719,743   $572,788   $484,268   $419,406   $312,407   $264,239   $153,920   $ 85,600   $ 63,060   $ 33,126
Depreciation and
  amortization            46,117     31,042     26,241     22,434     16,526     10,119      5,232      3,884      3,502      5,855
Operating income (loss)   77,099     58,555      9,299     38,257     34,705     30,324     14,383      5,346        403    (72,790)
Net income (loss)         70,500     51,104      1,350     38,558     33,740     29,724     16,401      7,165     23,522    (84,953)
Net income (loss)
  per share - primary   $    .76   $    .58   $    .02   $    .50   $    .46   $    .42   $    .27   $    .14   $    .85   $  (5.90)
Weighted average
  number of shares        93,162     88,018     85,620     77,806     74,037     70,395     61,143     51,644     27,671     14,403
                        --------   --------   --------   --------   --------   --------   --------   --------   --------   --------
</TABLE>

<TABLE>
<CAPTION>
                                                                      As of September 30,
BALANCE SHEET DATA        1996       1995       1994       1993       1992       1991       1990       1989       1988       1987
                        --------   --------   --------   --------   --------   --------   --------   --------   --------   --------
<S>                     <C>        <C>        <C>        <C>        <C>        <C>        <C>        <C>        <C>        <C>     
Cash and short-term
  marketable securities $104,027   $ 15,334   $ 45,232   $ 70,458   $ 14,783   $ 15,139   $ 29,332   $  6,484   $ 13,354   $  6,509
Working capital          172,091     33,892     77,248    113,653     33,831     15,650     40,956      7,784      8,678      4,433
Property, plant and
  equipment, net         511,203    393,464    283,141    270,865    220,761    185,543    109,928     42,728     28,357     36,435
Total assets             871,274    593,272    490,273    493,927    339,930    285,615    226,846     75,519     61,123     54,086
Long-term obligations    229,504     51,478     61,879     73,109     49,294     37,489     37,729      7,760      4,254     65,864
Stockholders' equity
  (deficit)              457,822    368,750    317,424    307,583    201,058    157,302    117,335     47,215     36,101    (26,787)
Capital expenditures
  and acquisitions       174,483    144,560     62,907     84,752     61,124     88,104     73,943     19,751      7,414      3,248
                        --------   --------   --------   --------   --------   --------   --------   --------   --------   --------
</TABLE>

<TABLE>
<CAPTION>
                                                                    Year Ended September 30,
GEOGRAPHIC DISTRIBUTION   1996       1995       1994       1993       1992       1991       1990       1989       1988       1987
                        --------   --------   --------   --------   --------   --------   --------   --------   --------   --------
<S>                     <C>        <C>        <C>        <C>        <C>        <C>        <C>        <C>        <C>        <C>     
Revenues
  North America         $532,638   $416,475   $323,149   $235,716   $147,506   $165,438   $101,335   $ 67,888   $ 63,060   $ 33,126
  International          187,105    156,313    161,119    183,690    164,901     98,801     52,585     17,712       --         --
                        --------   --------   --------   --------   --------   --------   --------   --------   --------   --------
                        $719,743   $572,788   $484,268   $419,406   $312,407   $264,239   $153,920   $ 85,600   $ 63,060   $ 33,126
                        --------   --------   --------   --------   --------   --------   --------   --------   --------   --------
Operating income (loss)
  North America         $ 61,611   $ 47,989   $ 35,246   $ 26,092   $ 12,618   $ 15,119   $  9,422   $  9,116   $  4,390   $(70,311)
  International           27,848     20,293    (14,663)    23,091     35,111     27,527     13,640        609       --         --
  Corporate              (12,360)    (9,727)   (11,284)   (10,926)   (13,024)   (12,322)    (8,679)    (4,379)    (3,987)    (2,479)
                        --------   --------   --------   --------   --------   --------   --------   --------   --------   --------
                        $ 77,099   $ 58,555   $  9,299   $ 38,257   $ 34,705   $ 30,324   $ 14,383   $  5,346   $    403   $(72,790)
                        --------   --------   --------   --------   --------   --------   --------   --------   --------   --------
</TABLE>

                                      1
<PAGE>   10
TO OUR SHAREHOLDERS

     Fiscal 1996 was a year of financial and operational achievements that
established a framework for an even brighter future. Many important measures of
financial performance demonstrated solid growth. Revenues, operating income,
net income and cash flow from operations all showed good improvement and our
return on equity exceeded 17 percent.

     These improvements in our results came from a combination of capital
investments, continuing cost control and a market environment that improved as
the year progressed. Initial yields from recent investments in new offshore
platform rigs in our Sundowner subsidiary and acquisitions in Alaska and the US
Lower 48 constituted the largest component. The additional sales of top drives
made possible by our expanded CANRIG manufacturing capacity also contributed
significantly. Higher utilization and better pricing of our platform drilling
and workover jackup rigs became increasingly apparent in our results as the
year progressed. A significant increase came from our US Lower 48 operations
through the incremental effects of alliances and lower costs.

     In many ways fiscal 1996 further validated the philosophy that has
governed our approach during the past ten years. The principal elements of that
philosophy are:

     ESTABLISH AND MAINTAIN A CONSERVATIVE AND FLEXIBLE FINANCIAL POSTURE.
Financial strength and flexibility have been vital to our success. Our
financial posture has been consistently strong and conservative and we are
committed to further enhancing our standing with the credit markets. That
became even more evident in 1996 when we achieved the distinction of being the
first drilling company since the early 1980s to obtain an investment grade
credit rating. This rating and our positive outlook combined to generate
significant appeal to debt investors enabling us to complete a very successful
$172.5 million convertible debt offering during the third fiscal quarter. The
proceeds together with our internal cash generation and short-term borrowing
capacity place us in an even more favorable position to capitalize on
opportunities as they arise.

     BUILD A DIVERSE PORTFOLIO OF MARKET POSITIONS TO MITIGATE RISK AND CREATE
POTENTIAL FOR GROWTH. Nabors has evolved from a relatively obscure Canadian and
Alaskan contractor into a global leader in land drilling and offshore platform
drilling and workover operations. Geographic and market segment diversity have
allowed the Company to achieve steady growth in spite of occasional adverse
market developments in one or more areas. We strive to develop leading market
positions in long-term markets where we can achieve 

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<PAGE>   11

                                    [PHOTO]
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sustainable competitive advantages. Achieving these positions requires
recognizing opportunities and capitalizing upon them as they arise. Our growth
in the US Lower 48 market is a good example. Here we were able to make
acquisitions that gave us a strong position in the market, then obtain
profitability through economies of scale at a time when most people thought it
was impossible to do so.

     The addition of Sundowner two years ago is a different example of this
diversification and expansion strategy. It has since provided not only a new
market segment, but also a number of new investment and growth opportunities
that are only partially reflected in this year's results. Similarly, the
expansion of our top drive manufacturing subsidiary, CANRIG and the recent
acquisition of EPOCH Well Logging, Inc. have enhanced the Company's drilling
technology capability. Conversely, due to the lack of significant upside
potential, we divested our UK North Sea operations so as to employ the capital
and management talent in that unit more productively in other core areas.

     FORGE LONG-TERM RELATIONSHIPS WITH CUSTOMERS. Nabors strives to build
long-term and mutually beneficial relationships with our customers in each of
the markets in which we operate. In the process many of these relationships
have evolved into alliances both formal and informal. These range from
traditional day-work with and without performance incentives to sole-source
supplier arrangements to comprehensive planning and execution of the drilling
of a customer's well.

     BUILD A CADRE OF TALENTED AND EXPERIENCED PEOPLE. Nabors has always
possessed a group of capable people with extensive experience. As we have
acquired companies, we have inherited many different organizational styles and
cultures. Successfully integrating these various cultures into one homogenous
group with high standards of quality and productivity has been a challenge and
a key element in our success. Developing and retaining talented and experienced
people at all levels of our organization has been and continues to be a
priority.

     GROW AND REMAIN PROFITABLE IN ANY MARKET ENVIRONMENT. Nabors has been able
to achieve substantial growth and profitability in a very difficult market
environment. In fact, most of our investments during the last decade were made
at a time when few others were willing to invest in the land drilling business.
This period was characterized by a steady decline in the US land drilling rig
count. During calendar year 1995, 

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<PAGE>   13

which included our first fiscal quarter of 1996, it reached its lowest yearly
average since World War II. Against this backdrop, Nabors not only saw its
results improve, but was able to continue to invest in acquisitions, new rigs
and the expansion of CANRIG, thus fostering our growth in 1996 and beyond.

     Position the business for the future. In all of our actions we strive to
position ourselves for the future by maintaining maximum flexibility. The
investments made in people and physical assets over the last few years have
brought us to a position that should create an even broader range of
opportunities.

     This year has seen an upturn in the external market environment that I
believe will be lasting, but not without volatility. While commodity prices may
not be sustainable at the higher year-end levels, the fundamentals of this
business appear to be better than at any time during my association with
Nabors. The outlook is likely to remain positive because our customers have
been able to maintain a good level of profitability and capital spending even
at significantly lower commodity prices. This situation along with advances in
seismic and drilling technology have reinvigorated existing markets and created
whole new prospects, leading to increased rig demand, particularly for our
deeper diesel electric SCR rigs which are in tight supply. These trends appear
to be continuing and your Company is focused on meeting the customers'
challenge of holding the line on unit costs in the face of increasing rig
rates. We expect to accomplish this through higher productivity and efficiency,
by continuing to implement improvements in technology and by adopting the
industry's best practices. We are constantly striving to achieve higher
standards of quality and safety, while broadening the breadth of services we
offer our customers.

     The balance of this year's report presents our view of the external market
environment and the potential created by our enhanced market position. With
only 60 percent worldwide utilization of our fleet and an increasingly
favorable rig supply/ demand outlook, we believe that we are on the verge of
realizing the operating leverage that exists in our Company.

     Thank you for your support and, as always, I assure you of our diligence
in striving to enhance the value of your holding in Nabors.

Sincerely,

/s/ EUGENE M. ISENBERG
Eugene M. Isenberg
Chairman and Chief Executive Officer

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<PAGE>   14
                                    [PHOTO]
<PAGE>   15
THE MARKET

     The oil and gas market took an apparent turn that holds great promise for
Nabors Industries in 1997 and beyond. This optimism can be attributed to
several factors.

     First, we are seeing some exciting trends in exploration and production.
Worldwide exploration spending is rising. Rig demand in Latin and South America
is experiencing significant growth, particularly in Venezuela and in the Andean
Mountain region of Colombia. The Middle East is experiencing renewed activity,
particularly in Saudi Arabia. Alaska is also developing several new fields that
were not economically feasible only a few years ago. Offshore activity
worldwide has increased substantially, particular in the US Gulf of Mexico, and
offshore rig supply and demand has approached balance, causing a rapid rise in
dayrates for offshore rigs. Even more important to Nabors is the resurgence of
the US land market as a result of a tightened gas supply/demand situation and
new prospects identified by 3-D seismic. This is having a positive effect on
rig supply/demand balance and correspondingly, is beginning to affect the
pricing environment in certain sizes of rigs in active markets.

     This activity is being fueled largely by a worldwide increase in demand
for oil and gas and by technological achievements like 3-D seismic and
horizontal drilling. Advances in technology have played a particularly
important role. They have reduced exploration risks by allowing operators to
not only identify new drilling prospects with greater certainty, but also to
hit these targets with a higher degree of accuracy, and to obtain an
accelerated production rate and greater yield from each reservoir. This reduces
the operators' unit finding costs significantly, a factor in expanded drilling
programs. When combined with internal restructuring and cost cutting, the
operator can be profitable at lower oil and gas prices, and thus reduce the
fluctuations in their exploration and production spending that usually
accompany swings in the price of petroleum on the open market.

     While technology is improving operators' success rates, it also leads to
deeper, more complex wells. These generally take longer to drill and require
larger, more sophisticated rigs, demand for which is now pressing supply. This
is beginning to be manifested in higher rig values and increasing dayrates.
Because Nabors has a large number of these rigs, even a slight increase in
price can have a significant impact on our profitability, one of many reasons
why we are enthusiastic about the future.

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<PAGE>   16


THE CUSTOMER

     Customers today want continuous improvement in safety and quality in every
product and service. They also want to lower their unit finding costs through
constant improvements in productivity and technology.

     While technological breakthroughs are helping to achieve these goals, they
also require a higher level of competency and sophistication on the part of the
contractor in the new world of underbalanced, extended reach and horizontal
drilling. Nabors can excel here by consistently striving for higher levels of
quality in both our equipment and our people.

     To focus these resources more effectively, Nabors has increased the number
and style of our commercial arrangements. The majority of our work is still on
a traditional dayrate basis, but we have also responded to our customers'
requests for an expanded relationship. This may take the form of an alliance,
which begins with common goals and a division of the work in alignment with
each party's core competencies. More of the customer's expertise can now be
focused on optimizing the location and type of wellbore in the reservoir so as
to maximize the rate and degree of recovery. Other areas, like planning,
construction, logistics and actually drilling the well fall to Nabors. These
relationships have been successful when there is the right allocation of
control and the right balance of risk and reward.

     Nabors is also focusing on providing a more comprehensive package of
services for our customers at the wellhead. This is being accomplished by
providing additional services through our own fleet and by acquiring companies
with proprietary technology like CANRIG, our top drive manufacturer, and EPOCH,
our well logging and drilling instrumentation subsidiary. Having these
additional service capabilities allows the Company to be more of a one stop
shop for the convenience of our customers. They also increase our content at
the wellhead while simultaneously providing cost savings opportunities for both
Nabors and our customers.

THE POSITION

     Every year Nabors continues to refine and improve our position in the
drilling sector of the oil service business, expanding our assets, our market
penetration and our scope of services. As a result, the Company is well
positioned to withstand the effects of a market downturn and poised for
accelerated growth in what promises to be a dynamic marketplace.

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<PAGE>   17


                                    [PHOTO]

<PAGE>   18



     Our ability to endure fluctuations in markets and commodity prices stems
from the balance and diversity of our revenue streams. For instance,
approximately 60 percent of the Company's business globally is oil and 40
percent is gas. In North America it's just the opposite, approximately 40
percent oil and 60 percent gas. Land drilling accounts for nearly 70 percent of
our gross revenues with the remainder coming from offshore operations. North
American operations generate approximately 70 percent of our total revenues
while 30 percent come from International operations.

     Our potential for growth in this very fragmented market is largely the
result of the quantity, quality and diversity of our rigs. At present we have
240 actively marketed rigs in the continental United States land drilling
market with a large portion of the more highly sought diesel electric SCR rigs.
We also have a good share of the drilling market in Alaska and an equal amount
of the oilfield construction and logistics business. This leaves us well
positioned to better serve our customer's needs through multi-regional
alliances because we have the right rigs in the right places, and a lower cost
structure through economics of scale.

     Nabors has a significant position in the international land segment, as
well. The Company is an active participant in South America, particularly
Venezuela and Colombia, and in the Middle East. Offshore, Nabors' Sundowner
subsidiary is a leader in offshore platform workover operations and is emerging
as a leader in offshore platform drilling with its innovative MASE(TM) rigs,
patterned after the highly successful Sundowner workover rig design.

     The strength of our market position and the quality of our operating
assets will also allow us to continue to participate in synergistic or
contiguous business opportunities that provide equipment or services that bring
value to ourselves and our customers. This combination of both horizontal and
vertical integration has the potential to provide increased wellsite content
while generating cost economies for Nabors and our customers.

     What this means is that the Company is now well positioned to take
advantage of favorable trends wherever and whenever they occur, and diversified
enough so that unfavorable trends in any one area will have minimal impact.
This bodes well for our customers, our employees and our investors.

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<PAGE>   19



     How did Nabors get to this position? Primarily by being willing to
implement our strategy of recognizing opportunities, reinvesting our cash flow
in rigs and rig companies, achieving economies of scale and diversifying our
holdings at a time when many companies continued to scale back. This strategic
positioning of the Company combined with a conservative balance sheet and a
focus on sustainable markets have brought the Company to the point where it has
a greatly expanded horizon of opportunities to grow revenues and control costs.

THE RESOURCES

     Since its inception Nabors has been assembling the human, financial and
physical resources necessary to be solidly profitable whatever the market
conditions, and to further increase earnings when the market is strong. These
resources are now in place and give great potential to 1997 and the succeeding
years.

     One of the primary assets of any company is its human talent pool. Nabors
will continue to place a high priority on recruiting and retaining quality
people at every level of the organization. Special emphasis is placed on rig
crew and field supervisors where our customers see the biggest impact. Nabors
has developed a personnel base with experience in virtually every significant
oil, gas and geothermal drilling area worldwide. This talent is translatable
with Nabors moving people and equipment from one area to another thereby taking
advantage of our expertise, experience and knowledge of the best practices in
any given situation. Nabors has also assembled an engineering department with
similar levels of experience. During the last five years they have designed,
built or modified a significant number of rigs, many with proprietary designs
and innovative technology. Developing this cadre of employees was very
important for Nabors because finding competent and qualified people has and
will continue to be a critical issue in the industry.

     Another primary resource the Company has is good financial strength and
stability. This has not only provided a competitive advantage during
acquisitions, but allowed the Company to upgrade and maintain its existing
assets. It also allowed the Company to obtain an investment grade credit rating
and thus obtain favorable terms for its recently issued subordinated
convertible debentures, which were well received and are still selling at a
substantial premium. Proceeds from this offering combined with existing credit
lines and our continually improving cash flow from operations now give Nabors
the size and flexibility to take advantage of a broadened scope of
opportunities.

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<PAGE>   20


                                    [PHOTO]

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     The Company has assembled a diverse and strategically located rig fleet
with rigs of every depth range located in most of the major oil and gas areas
of the world. The Nabors fleet includes the industries largest quantity of deep
capacity diesel electric rigs. These rigs command higher margins and are in
strong demand for deeper, more sophisticated wells. We also have a good share
of the highly mobile, shallow and medium depth rigs. The Company's Sundowner
subsidiary has the most modular, most mobile offshore platform workover rigs in
the industry, and its MASE platform drilling rigs are continuing Sundowner's
legacy of enhancing customer economics. Recent acquisitions have also provided
the Company with additional high quality rigs, people and component parts,
which insure the Company's continuing ability to meet demand.

     Finally, Nabors has worked hard to make technology one of its most
valuable resources. In addition to the innovative MASE platform drilling rig,
the Company also offers a sophisticated top drive system through its CANRIG
subsidiary. Our recently acquired EPOCH subsidiary allows the Company to offer
mud logging services and drilling instrumentation systems which provide a
significant cost benefit to Nabors while increasing the scope of services we
can offer to our customers.

THE STRATEGY

     To take advantage of the opportunities that are sure to arise in the
coming years will require a clearly defined strategy. At Nabors, that strategy
is already in place. It's the same one we have used to build the Company into
the largest land drilling contractor in the world.

     Our strategy includes maintaining our numerous competitive advantages. We
are in a strong financial position from which to make appropriate internal and
external investments, we have great geographical diversity, we have a very low
cost structure and we are constantly expanding the services we offer our
customers.

     We will continue to focus on our customers' ever evolving needs and how to
meet them. In the process we will attempt to build expanded relationships with
good customers in long-term, sustainable markets.

     We will continue to improve our financial performance through increased
yields on existing assets. This will entail a constant focus on cost control
while finding additional wellsite content and new ways to improve utilization
and margins with

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<PAGE>   22



minimal capital. We have already taken important steps to reduce cost, and
supply and demand balance for rigs is paving the way for better yields.

     We will continue to invest in upgrading existing assets when the return
justifies it. We are doing this in several ways. For instance, we are adding
top drives to many of our rigs in response to increased customer demand. We
also expect to soon unstack, upgrade and put into service some of the inactive
rigs acquired in recent acquisitions.

     We will look to invest in new assets where we have a competitive
advantage. Our Sundowner MASE rig is a good example of a product with a
significant competitive advantage and we expect to build more of these in the
future.

     We will continue to seek attractive acquisitions. This might include
additional land rig capacity when the assets have strategic appeal and there is
potential for synergy with what we already own, as was the case with the Noble
and Exeter acquisitions. It would also include acquisitions where an infusion
of capital would allow us to exploit a technological advantage, as was the case
when we acquired Sundowner. We're also looking for technologically advanced
products or services which we can integrate with our current operations and
which offer the potential for increasing our profitability at the wellhead. The
CANRIG and EPOCH acquisitions are good examples.

THE CHALLENGE

     There is clearly great optimism surrounding the recently re-energized oil
service industry and equal enthusiasm at Nabors with regard to our ability to
participate in it. There will be seen and unforeseen challenges, however, and
our task will be to anticipate, prepare for and meet these challenges.

     Among the foreseen challenges will be finding qualified people as growth
and attrition require. The economic state of the industry over the last 15
years curtailed the hiring of much new talent and this has created a shortage
of people from that generation. That's why we have implemented a program of
hiring undergraduate engineers and technically experienced MBAs who can be
rapidly trained to fill our operational and managerial needs at these levels.
We've also implemented a training program to upgrade skills at the

                                      10
<PAGE>   23


                                    [PHOTO]

<PAGE>   24

field level, and to develop and train field supervisory personnel. When
combined with our active recruiting program it shows great potential to
successfully address what is sure to be an industry-wide manpower need.

     The next foreseen challenge will be keeping up with market demand for rigs
without sacrificing quality and safety. Since we are only at 60 percent
capacity, we clearly have the rigs and components to meet a significant amount
of increased demand. We also have the financial resources to obtain more of the
rigs that are in tight supply by investing in new capacity, reactivations and
upgrades.

     Finding ways to lower our customers' costs is another foreseen challenge.
We are committed to this process and have had great success with the
establishment of alliances which have paid dividends for all parties involved.
We will continue to investigate the application of emerging technologies and
will remain a clearinghouse for the best practices and procedures
industry-wide. This effort has played a roll in keeping our customers' costs
down and we expect it to play a bigger role in the future.

     Risks, be they financial, contractual liability, operational, market or
political are often unforeseen challenges. We are always taking steps to
mitigate our risks and have employed successful strategies in the past. The
changing nature of the world and our industry will require us to come up with
new and innovative approaches to both new and age old problems.

     There is clearly no shortage of challenges as we move into an exciting
time in the oil and gas industry. We feel the greatest security we can offer
our customers, employees and investors is to anticipate these challenges and
set in motion a flexible and dynamic plan to address them.

                                      11
<PAGE>   25
RIG FLEET

<TABLE>
<CAPTION>
                                                                    Greater
                               Less than   10,000      15,000         than
LAND RIG FLEET - 329 RIGS        10,000   to 14,999   to 19,999      20,000      Total
--------------------------------------------------------------------------------------
<S>                               <C>         <C>        <C>          <C>        <C>
ALASKA
  North Slope                                  3           1           5           9
  Kenai/Cook Inlet                             1           2                       3
                               -------------------------------------------------------
INTERNATIONAL
  Middle East                      4           7           4           4          19
  South and Central America        1           8           2           7          18
  CIS                              1           3           1                       5
  Africa                                       1           1                       2
  Far East                                     1           2           1           4
                               -------------------------------------------------------
US LOWER 48                       34          69          93          45         241
                               -------------------------------------------------------
CANADA                             9           5           6           8          28
                               -------------------------------------------------------
TOTAL                             49          98         112          70         329
                               -------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
                                      Sundowner 
                                 Offshore Platforms
                                 ------------------
                                  MASE     Sundowner    Platform
Offshore Rig Fleet - 34 Rigs    Drilling    Workover    Drilling      Jackup      Barge      Total
--------------------------------------------------------------------------------------------------
<S>                                 <C>        <C>          <C>         <C>         <C>        <C>
ALASKA                                                      1                                   1
                                ------------------------------------------------------------------
INTERNATIONAL
  Middle East                                                           1                       1
  South and Central America         1                                                           1
  CIS                                           1                                               1
  Europe and Africa                             2                                               2
                                ------------------------------------------------------------------
Gulf of Mexico                      2          11           5           5*          5**        28
                                ------------------------------------------------------------------
TOTAL                               3          14           6           6           5          34
                                ------------------------------------------------------------------
</TABLE>

*  Includes one charter.
** Includes three plug and abandonment barges.

<TABLE>
<CAPTION>
                                      Less than       10,000 to         15,000 to       20,000 and
                                        10,000          14,999            19,999          Greater 
                                    -------------    -------------     -------------    ------------
US Lower 48 Rig Fleet - 241 Rigs    Mech      SCR    Mech      SCR     Mech      SCR    Mech     SCR   Total
------------------------------------------------------------------------------------------------------------
<S>                                   <C>       <C>    <C>       <C>     <C>      <C>      <C>    <C>    <C>
SOUTHERN DIVISION
  East Texas District                                   7*       1        7*      17*              5*     37
  South Texas District                                  7        1        4       13       2       9      36
  Arkoma District                      6                7        1        8        1               7      30
                                    ------------------------------------------------------------------------
GULF COAST DIVISION
  Gulf Coast District                                            1        3                4       7      15
  Gulf of Mexico District                                                 1                        1       2
                                    ------------------------------------------------------------------------
WESTERN DIVISION
  California District                  1                1        1                 3               4      10
  Costa Rica District                                                              2                       2
  Northeast District                   6                                                                   6
  North Dakota District                                 7                 9        2                      18
  West Texas District                 10               17                 6        2       2       1      38
  Rockies District                     9        2      17        1       12        3               3      47
                                    ------------------------------------------------------------------------
Total                                 32        2      63        6       50       43       8      37     241
                                    ------------------------------------------------------------------------
</TABLE>

* Number includes Noble rigs acquired as of December 31, 1996.

                                      12
<PAGE>   26
                                    [PHOTO]


                              AREAS OF OPERATION
<PAGE>   27
DIRECTORS

EUGENE M. ISENBERG 
Chairman and Chief Executive Officer 
Nabors Industries, Inc. 

ANTHONY G. PETRELLO 
President and Chief Operating Officer 
Nabors Industries, Inc. 

RICHARD A. STRATTON
Vice Chairman 
Nabors Industries, Inc. 

GARY T. HURFORD 
President 
Hunt Oil Company 

HANS W. SCHMIDT 
Formerly President 
Deutag Drilling

MYRON M. SHEINFELD 
Attorney 
Sheinfeld, Maley & Kay

JACK WEXLER 
International Business Consultant

MARTIN J. WHITMAN
Managing Director 
Whitman Heffernan Rhein & Co., Inc.
Chairman
Danielson Holding Corporation


OFFICERS

EUGENE M. ISENBERG 
Chairman and Chief Executive Officer

ANTHONY G. PETRELLO 
President and Chief Operating Officer

RICHARD A. STRATTON
Vice Chairman

MICHAEL W. DUNDY 
Vice President and General Counsel

DANIEL MCLACHLIN 
Vice President and Corporate Secretary

BRUCE P. KOCH 
Vice President of Finance

                                      14
<PAGE>   28

                                    [PHOTO]
<PAGE>   29
FINANCIAL REVIEW


16 Selected Financial Data

17 Management's Discussion and Analysis of Financial Condition and Results 
   of Operations

23 Report of Independent Accountants

24 Consolidated Balance Sheets

25 Consolidated Statements of Income

26 Consolidated Statements of Changes in Stockholders' Equity

27 Consolidated Statements of Cash Flows

28 Notes to Consolidated Financial Statements

                                      15
<PAGE>   30
SELECTED FINANCIAL DATA                 NABORS INDUSTRIES, INC. AND SUBSIDIARIES

(In thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                                   Year Ended September 30,
OPERATING DATA(1)              1996      1995      1994         1993      1992      1991     1990    1989    1988         1987
                             --------  --------  --------     --------  --------  -------- -------- ------- -------     --------
<S>                          <C>       <C>       <C>          <C>       <C>       <C>      <C>      <C>     <C>         <C>      
Revenues                     $719,743  $572,788  $484,268     $419,406  $312,407  $264,239 $153,920 $85,600 $63,060     $ 33,126
Operating expenses:
  Direct costs                539,665   434,097   369,677      313,458   215,939   187,873  111,405  64,285  50,682       29,831
  General and
    administrative expenses    56,862    49,094    49,365       45,257    45,237    35,923   22,900  12,085   8,473        6,230
  Depreciation and
    amortization               46,117    31,042    26,241       22,434    16,526    10,119    5,232   3,884   3,502        5,855
  Provision for reduction in
    carrying value of assets     --        --      29,686(2)      --        --        --       --      --      --         64,000(3)
                             --------  --------  --------     --------  --------  -------- -------- ------- -------     --------
Operating income (loss)        77,099    58,555     9,299       38,257    34,705    30,324   14,383   5,346     403      (72,790)
Interest income
  (expense), net               (9,189)   (5,917)   (5,778)      (7,733)   (4,349)      551    1,153      48  (8,422)(4)  (18,747)(4)
Other income (expense), net    13,690     5,990     2,718       11,593     5,559     2,395    3,341   1,790   4,012         (562)
                             --------  --------  --------     --------  --------  -------- -------- ------- -------     --------
Income (loss) before
  income taxes (benefits)      81,600    58,628     6,239       42,117    35,915    33,270   18,877   7,184  (4,007)     (92,099)
Income taxes (benefits)        11,100     7,524     4,889        3,559     2,175     3,546    2,476      19    (780)      (7,146)
                             --------  --------  --------     --------  --------  -------- -------- ------- -------     --------
Income (loss) before
  extraordinary gain           70,500    51,104     1,350       38,558    33,740    29,724   16,401   7,165  (3,227)     (84,953)
Extraordinary gain               --        --        --           --        --        --       --      --    26,749(5)      --
                             --------  --------  --------     --------  --------  -------- -------- ------- -------     --------
Net income (loss)            $ 70,500  $ 51,104  $  1,350     $ 38,558  $ 33,740  $ 29,724 $ 16,401 $ 7,165 $23,522     $(84,953)
                             --------  --------  --------     --------  --------  -------- -------- ------- -------     --------
Primary earnings (loss)
  per share:
    Income (loss) before
      extraordinary gain     $    .76  $    .58  $    .02     $    .50  $    .46  $    .42 $    .27 $   .14 $  (.12)    $  (5.90)
    Extraordinary gain           --        --        --           --        --        --       --      --       .97(5)      --
                             --------  --------  --------     --------  --------  -------- -------- ------- -------     --------
  Net income (loss)          $    .76  $    .58  $    .02     $    .50  $    .46  $    .42 $    .27 $   .14 $   .85     $  (5.90)
                             --------  --------  --------     --------  --------  -------- -------- ------- -------     --------
Weighted average number
  of shares outstanding        93,162    88,018    85,620       77,806    74,037    70,395   61,143  51,644  27,671       14,403
                             --------  --------  --------     --------  --------  -------- -------- ------- -------     --------
</TABLE>

<TABLE>
<CAPTION>
                                                                        As of September 30,
BALANCE SHEET DATA(1)          1996      1995      1994         1993      1992      1991     1990    1989    1988         1987
                             --------  --------  --------     --------  --------  -------- -------- ------- -------     --------
<S>                          <C>       <C>       <C>          <C>       <C>       <C>      <C>      <C>     <C>         <C>      
Cash and short-term
  marketable securities      $104,027  $ 15,334  $ 45,232     $ 70,458  $ 14,783  $ 15,139 $ 29,332 $ 6,484 $ 13,354     $  6,509
Working capital               172,091    33,892    77,248      113,653    33,831    15,650   40,956   7,784    8,678        4,433
Property, plant and
  equipment, net              511,203   393,464   283,141      270,865   220,761   185,543  109,928  42,728   28,357       36,435
Long-term marketable
  securities                   11,839     9,645    20,266         --        --        --       --      --       --           --
Total assets                  871,274   593,272   490,273      493,927   339,930   285,615  226,846  75,519   61,123       54,086
Long-term obligations         229,504    51,478    61,879       73,109    49,294    37,489   37,729   7,760    4,254       65,864
Stockholders' equity
  (deficit)                   457,822   368,750   317,424      307,583   201,058   157,302  117,335  47,215   36,101      (26,787)
Capital expenditures
  and acquisitions            174,483   144,560    62,907       84,752    61,124    88,104   73,943  19,751    7,414        3,248
                             --------  --------  --------     --------  --------  -------- -------- ------- --------     --------
</TABLE>

(1)  The results of operations and financial position for all years prior to
     1995 have been retroactively restated to include the results of operations
     and financial position of Sundowner Offshore Services, Inc., which was
     merged with the Company during October 1995. Other acquisitions' results
     of operations and financial position have been included beginning on the
     respective dates of acquisition, and include Exeter Drilling Company and
     its subsidiary, JW Gibson Well Services Company (April 1996), Delta
     Drilling Company (January 1995), Grace Drilling Company (June 1993),
     Henley Drilling Company (November 1990), Loffland Brothers Company (March
     1990) and the Westburne Group of Companies (November 1988).

(2)  Represents reduction in carrying value of the Company's Yemen logistical
     assets and inventory as well as facility closure costs in certain
     international areas, including Yemen, totaling $.35 per share.

(3)  Represents reduction in carrying value of the Company's rig assets in
     Alaska, US Lower 48 and Canada totaling $4.44 per share.

(4)  Includes interest expense and discount amortization totaling $7.8 million
     and $18.8 million during 1988 and 1987, respectively, relating to secured
     income notes.

(5)  Represents gain recognized in connection with the Company's
     reorganization.

                                      16
<PAGE>   31
MANAGEMENT'S DISCUSSION AND ANALYSIS 
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

FISCAL YEAR 1996 COMPARED TO FISCAL YEAR 1995

     Company revenues for fiscal year 1996 ("1996") totaled $719.7 million,
representing a $147.0 million, or 26% increase, compared to fiscal year 1995
("1995"). Operating income during 1996 totaled $77.1 million, compared to $58.6
million during 1995. Net income totaled $70.5 million ($.75 per share) during
1996, compared to $51.1 million ($.57 per share) during the prior year. The
significant improvement in operating results during 1996 is attributable to
the Company's operations in Alaska, the US Lower 48, the Gulf of Mexico and
South America.

     The following tables set forth information with respect to the Company and
its subsidiaries on a consolidated basis by geographical area:

<TABLE>
<CAPTION>
                                                                                            Increase (Decrease)
                                                                             ------------------------------------------
(In thousands, except percentages)         1996        1995        1994         1996 to 1995           1995 to 1994
                                         --------    --------    --------    -------------------    -------------------
<S>                                      <C>         <C>         <C>         <C>             <C>    <C>            <C> 
Revenues:
  North America                          $532,638    $416,475    $323,149    $116,163        28%    $ 93,326        29%
                                         --------    --------    --------    --------      ----     --------      ---- 
  International:
    Middle East, CIS, Africa and other     64,682      58,932      76,156       5,750        10%     (17,224)      (23%)
    South and Central America              69,232      49,453      32,991      19,779        40%      16,462        50%
    UK North Sea                           53,191      47,928      51,972       5,263        11%      (4,044)       (8%)
                                         --------    --------    --------    --------      ----     --------      ---- 
      Total International                 187,105     156,313     161,119      30,792        20%      (4,806)       (3%)
                                         --------    --------    --------    --------      ----     --------      ---- 
                                         $719,743    $572,788    $484,268    $146,955        26%    $ 88,520        18%
                                         --------    --------    --------    --------      ----     --------      ---- 

Operating income (loss):
  North America                          $ 61,611    $ 47,989    $ 35,246    $ 13,622        28%    $ 12,743        36%
                                         --------    --------    --------    --------      ----     --------      ---- 
  International:
    Middle East, CIS, Africa and other      6,742       8,346     (26,091)     (1,604)      (19%)     34,437       132%
    South and Central America              14,531       8,031       5,781       6,500        81%       2,250        39%
    UK North Sea                            6,575       3,916       5,647       2,659        68%      (1,731)      (31%)
                                         --------    --------    --------    --------      ----     --------      ---- 
      Total International                  27,848      20,293     (14,663)      7,555        37%      34,956       238%
                                         --------    --------    --------    --------      ----     --------      ---- 
  Corporate                               (12,360)     (9,727)    (11,284)     (2,633)      (27%)      1,557        14%
                                         --------    --------    --------    --------      ----     --------      ---- 
                                         $ 77,099    $ 58,555    $  9,299    $ 18,544        32%    $ 49,256       530%
                                         --------    --------    --------    --------      ----     --------      ---- 
</TABLE>

<TABLE>
<CAPTION>
                                                   1996                    1995                    1994
                                            --------------------    --------------------    --------------------
                                             Rig         Rig         Rig         Rig         Rig         Rig
                                            Years    Utilization    Years    Utilization    Years    Utilization
                                            -----    -----------    -----    -----------    -----    -----------
<S>                                         <C>            <C>      <C>            <C>      <C>            <C>
Rig activity(1):
  North America                             152.6          58%      131.4          54%      100.8          46%
                                            -----         ---       -----         ---       -----         --- 
  International:
    Middle East, CIS, Africa and other       12.2          49%       12.5          44%       16.2          51%
    South and Central America                16.3          73%       13.4          89%        8.6          98%
    UK North Sea                              N/A         N/A         N/A         N/A          .8         100%
                                            -----         ---       -----         ---       -----         --- 
      Total International                    28.5          61%       25.9          60%       25.6          62%
                                            -----         ---       -----         ---       -----         --- 
                                            181.1          58%      157.3          56%      126.4          49%
                                            -----         ---       -----         ---       -----         --- 
</TABLE>

(1)  Excludes labor contracts and Gibson workover and well servicing rigs.

<TABLE>
<CAPTION>
                                                              1996       1995       1994
                                                            --------   --------   --------
<S>                                                         <C>        <C>        <C>     
Average West Texas intermediate crude oil spot ($/bbl)(1)   $  20.50   $  18.30   $  16.88
Average US natural gas spot ($/mcf)(1)                      $   2.11   $   1.45   $   1.90
Average US land rig count(2)                                     759        736        786
Average International land rig count(2)                          553        542        531
                                                            --------   --------   --------
</TABLE>

(1)  Source: Bloomberg
(2)  Source: Baker Hughes

                                      17
<PAGE>   32

     North American revenues (including Canada) totaled $532.6 million during
1996, representing a 28% increase over 1995. The increase was primarily
attributable to more equivalent rig years in the US Lower 48, where revenues
increased by 30% due to the addition of the Exeter Drilling Company rigs
acquired in April 1996 and the Delta Drilling Company rigs acquired in January
1995. Revenues for the Gulf of Mexico operations increased by 28% during the
current year as compared to the prior year. This was the result of increased
equivalent rig years and higher dayrates for the Company's platform drilling
rigs, platform workover rigs and jackup workover rigs. Platform drilling rig
equivalent rig years increased in part as a result of the purchase of rig 85.
This rig was purchased during 1995, but did not commence operations until the
first quarter of 1996. Additionally, the newly constructed MASE rig 802 and rig
269, an adapted land rig, began working in June 1996. Platform workover rig
equivalent rig years increased due to the addition of the newly constructed
Super Sundowner XVI rig, which commenced operations in September 1995, and
Sundowner XII, which was redeployed from Australia to the Gulf of Mexico in May
1995. Alaskan operation revenues increased by 26% as a result of increased
equivalent rig years and the October 1995 acquisition of Alaska Interstate
Construction by Peak Oilfield Services, the Company's Alaskan construction and
logistics joint venture. Equivalent rig years for North America during 1996
totaled 152.6 years, compared to 131.4 years during 1995.

     International revenues totaled $187.1 million during 1996, representing a
20% increase compared to 1995. Equivalent international rig years, excluding
labor contracts, increased to 28.5 years during 1996 compared to 25.9 years
during 1995.

     Middle Eastern, CIS and African revenues totaled $64.7 million during
1996, representing a 10% increase from 1995. The increase was primarily
attributable to new contracts in Saudi Arabia for three rigs which commenced
operations in the third quarter of 1996, partially offset by lower rig activity
in Africa. Middle Eastern, CIS and African equivalent rig years during 1996
totaled 12.2 rig years as compared to 12.5 years during 1995.

     South and Central American revenues totaled $69.2 million, representing a
40% increase over 1995. The increase was primarily attributable to the newly
constructed MASE rig 801, which began operations in Trinidad during January
1996, and a one rig drilling contract in Colombia, which commenced during
November 1995. Additionally, increased revenues resulted from increased
activity and higher day rates in Venezuela, where equivalent rig years during
1996 totaled 13.9 years as compared to 11.5 during 1995. Venezuela represented
approximately 74% and 85% of total South and Central American revenues and
equivalent rig years, respectively, during 1996. South and Central American rig
years totaled 16.3 years during 1996, compared to 13.4 years during 1995.

     UK North Sea revenues totaled $53.2 million during 1996, representing an
increase of 11% compared to 1995. The increase in UK North Sea revenues
resulted from additional labor contracts during 1996. Total equivalent rig
years, consisting of labor contracts, totaled 10.0 during 1996 as compared to
8.4 years during 1995. Subsequent to year-end, during November 1996, the
Company completed the sale of its UK North Sea operation. The transaction will
result in a gain which will be reflected in the Company's financial statements
in the first quarter of 1997.

     The following table sets forth selected consolidated financial information
of the Company expressed as a percentage of total operating revenues:

<TABLE>
<CAPTION>
                                          1996      1995      1994
                                         -----     -----     ----- 
<S>                                      <C>       <C>       <C>   
Revenues                                 100.0%    100.0%    100.0%
                                         -----     -----     ----- 
Operating expenses:
  Direct costs                            75.0%     75.8%     76.4%
  General and administrative
    expenses                               7.9%      8.6%     10.2%
  Depreciation and amortization            6.4%      5.4%      5.4%
  Provision for reduction in carrying
    value of assets                        --        --        6.1%
                                         -----     -----     ----- 
      Operating expenses                  89.3%     89.8%     98.1%
                                         -----     -----     ----- 
Operating income                          10.7%     10.2%      1.9%
Other income (expense)                      .6%       .0%      (.6%)
                                         -----     -----     ----- 
Income before income taxes                11.3%     10.2%      1.3%
Income taxes                               1.5%      1.3%      1.0%
                                         -----     -----     ----- 
Net income                                 9.8%      8.9%       .3%
                                         -----     -----     ----- 
</TABLE>

Direct costs as a percentage of revenues totaled 75% during 1996 as compared to
76% during 1995. The increase in operating margins during 1996 is largely due
to improved margins for the Company's South American operations, including
Venezuela and Colombia, and the contribution of the newly constructed MASE rig
801. Improved margins for the Company's Gulf of Mexico operations also
contributed. These improvements in operating margins were partially offset,
however, by a decline in the margins earned for the Company's Middle Eastern
operations, resulting primarily from higher than expected costs related to the
deployment of three rigs to Saudi Arabia during the third quarter of 1996.

                                      18
<PAGE>   33

Steps are being taken by the Company to restore the expected level of
profitability of these rigs and to recover some of the unexpected costs
incurred to date. Additionally, a decrease in operating margins resulted
because an increased percentage of the Company's total revenues during 1996
were generated by the Company's US Lower 48 operations. These contracts are
usually at a lower gross margin percentage than the Gulf of Mexico, Alaskan and
International contracts.

     General and administrative expenses as a percentage of revenues decreased
during 1996 due to an expanding revenue base in the US Lower 48 and Gulf of
Mexico.

     Depreciation and amortization expense as a percentage of revenues totaled
6% during 1996 as compared to 5% during 1995. The increase in depreciation and
amortization is the result of capital expenditures for new rig construction,
enhancements and acquisitions made during 1995 and 1996. The Company's capital
expenditures are classified as follows:

<TABLE>
<CAPTION>
(In thousands)                            1996            1995            1994
                                        --------        --------        --------
<S>                                     <C>             <C>             <C>     
New construction                        $ 39,191        $ 21,577        $  9,480
Enhancement                               45,334          40,695          13,256
Acquisition                               53,208          57,463          25,234
Sustaining                                36,750          24,825          14,937
                                        --------        --------        --------
                                        $174,483        $144,560        $ 62,907
                                        --------        --------        --------
</TABLE>

     Interest expense increased during 1996, primarily as a result of the
interest associated with the $172.5 million, 5% Subordinated Notes issued on
May 28, 1996 (the "5% Notes"), as well as short-term, high interest borrowings
in Venezuela for foreign currency hedging purposes. Interest income increased
during 1996 due to higher average cash and cash equivalent balances that
resulted from remaining proceeds from the 5% Notes.

     Other income during 1996 included $4.9 million in realized and unrealized
gains from equity security transactions and $.5 million in dividend income.
Also included were insurance gains on damaged equipment totaling $4.7 million.
Foreign currency gains totaled $.5 million during 1996, relating primarily to
Venezuela. In December 1995, the Venezuelan bolivar devalued by approximately
71%, from an official fixed exchange rate of 170 bolivars per US dollar, to 290
per US dollar. As a result of the devaluation, the Company recognized a
translation gain of $.3 million during 1996, because the Company had a bolivar
denominated net monetary liability position. In April 1996, the Venezuelan
government, as part of moving toward a free market economy, eliminated exchange
rate control policies that had been established in June 1994. As a result, the
bolivar was allowed to float, and devalued by an additional 55% -- 70% as the
exchange rate ranged from 450 -- 500 bolivars to the US dollar. The Company
recognized an insignificant translation gain during the third quarter of 1996
as a result of this devaluation. During 1996, the Company reduced its net
monetary position by borrowing in the local currency. The Company increased its
foreign currency exposure in Saudi Arabia during 1996 as a result of increased
activity there resulting from a number of new drilling contracts. The Company,
through the use of forward exchange contracts, has offset a portion of its
foreign exchange exposure in Saudi Arabia. The Company will continue to monitor
its foreign currency exposures.

     Other income during 1995 included $2.6 million in realized and unrealized
gains from equity security transactions and $.3 million in dividend income.
Insurance gains on damaged equipment totaled $4.7 million, including a $4.1
million gain recorded for a rig damaged in Venezuela. Foreign currency loss
totaled $3.2 million during 1995. The 1995 losses include $2.5 million in the
UK North Sea relating to foreign currency losses that were deferred and
recognized as part of the specific transactions hedged.

     The current and deferred income tax provisions for 1996 and 1995 relate
primarily to foreign operations, including Canada, as substantially all of the
US taxable income is offset by available net operating loss carryforwards ("US
NOL"). As a result of the Company's available US NOL, the Company does not
expect to pay any regular US federal income taxes until the Company's US NOL
has been fully utilized, or expires. A valuation allowance is provided to
reduce deferred tax assets, which includes net operating loss carryforwards, to
a level which, more likely than not, will be realized. Primary factors
considered by management to determine the size of the allowance include the
competitive and cyclical nature of the Company's primary markets, and the
expiration timing of the net operating loss carryforwards (Note 8). For
accounting purposes, the Company expects to begin, during the first quarter of
1997, recording non-cash US federal deferred income taxes based on the
relationship between the amount of the Company's unused US NOL and the
temporary differences between the book basis and tax basis in the Company's
assets. The temporary differences primarily arise from having accelerated
depreciation for tax return purposes as compared to a lower depreciation amount
recorded for financial statement purposes. As a result, the Company's effective
tax rate for financial statement purposes during 1997 and thereafter should be
in the 35% to 38% range. Non-cash deferred taxes should represent the majority
of this amount until that point in time when the US NOL has been fully utilized
or expires.

                                      19
<PAGE>   34

FISCAL YEAR 1995 COMPARED TO FISCAL YEAR 1994

     During 1995, Nabors and Sundowner Offshore Services, Inc. ("Sundowner")
completed a tax-free merger. Under the merger agreement, Sundowner stockholders
received 2.8 shares of the Company's common stock for each of their shares of
Sundowner, or approximately 13.1 million common shares. The exchange resulted
in former Sundowner stockholders owning approximately 15% of the common stock
of Nabors outstanding after the merger.

     The merger has been accounted for as a pooling-of-interests. Accordingly,
the accompanying consolidated financial statements have been retroactively
restated to include the results of operations, financial position and cash
flows of Sundowner for all periods prior to the consummation of the merger.

     Company revenues for 1995 totaled $572.8 million, representing an $88.5
million, or 18% increase, compared to 1994. Operating income during 1995
totaled $58.6 million, compared to $9.3 million during 1994. Net income totaled
$51.1 million ($.57 per share) during 1995, compared to $1.4 million ($.02 per
share) during the prior year. The operating income and net income amounts
during 1994 include a $29.7 million charge ($.35 per share), representing a
provision for reduction in carrying value of assets. The significant
improvement in operating results during 1995 is primarily attributable to the
Company's operations in the US Lower 48, the Gulf of Mexico and Venezuela.

     North American revenues (including Canada) totaled $416.5 million during
1995, representing a 29% increase over 1994. The increase was primarily
attributable to more equivalent rig years in the US Lower 48, where revenues
increased by 38% due to the addition of the Delta Drilling Company rigs
acquired in January 1995, and the Mitchell Energy Development Corp. rigs
acquired in April 1994. The Company's increasing market share, resulting from
incremental activity under various customer alliance relationships as well as a
broadening customer base, further contributed to this increase. Revenues for
the Gulf of Mexico operations increased by 16% during the current year due to
higher dayrates for the Company's platform drilling rigs, the addition of one
inland barge drilling rig, and an increase in equivalent rig years for the
Company's platform workover rigs, including the newly constructed Super
Sundowner XIV and XV rigs, which commenced operations during July 1994 and
February 1995, respectively. This increase in activity in the US Lower 48 and
the Gulf of Mexico occurred despite lower natural gas prices in the US during
1995, and an overall decline in the Baker Hughes US land rig count. Alaskan and
Canadian revenues also increased during 1995, by 18% and 39%, respectively, due
to more equivalent rig years. Equivalent rig years for North America during
1995 totaled 131.4 years, compared to 100.8 years during 1994.

     International revenues totaled $156.3 million during 1995, representing a
3% decrease compared to 1994. Equivalent international rig years, excluding
labor contracts, totaled 25.9 years during 1995 compared to 25.6 years during
1994.

     Middle Eastern, CIS and African revenues totaled $58.9 mil-lion during
1995, representing a 23% decrease from 1994. The decrease was primarily
attributable to decreased logistical and drilling activity in Yemen due to
reduced exploration and development activity. The Company operated 12.5 rig
years during 1995 in the Middle East, CIS and Africa, down from 16.2 years in
1994. Yemen had operating losses during 1994 due to reduced drilling and
logistical activity, as well as the provision for reduction in carrying value
of assets.

     Revenues in the Company's South and Central American operations totaled
$49.5 million, a 50% increase over 1994. The increase was attributable to
increased activity in Venezuela. Venezuela represented approximately 89% and
85% of total South and Central American revenues and equivalent rig years,
respectively, during 1995. South and Central American rig years totaled 13.4
years during 1995, compared to 8.6 years in 1994.

     UK North Sea revenues totaled $47.9 million during 1995, representing a
decrease of 8% compared to 1994. Total equivalent rig years consisting of labor
contracts totaled 8.4 and 7.0 years during 1995 and 1994, respectively. The
decrease in revenues resulted from reduced incentive contracts, partially
offset by an increase in equivalent rig years resulting from the award of three
new labor contracts -- two during March 1995 and one during July 1995.

     Direct costs as a percentage of revenues totaled 76% during 1995 and 1994.
General and administrative expenses as a percentage of revenues decreased
during 1995 due to the effect of prior year cost-reduction measures for the
Company's international operations, primarily in the Middle East, and as a
result of the increase in revenues for the US Lower 48 operations, since these
expenses were spread over a larger revenue base. Depreciation and amortization
as a percentage of revenues totaled 5% during 1995 and 1994. The Company
recorded a $29.7 million provision for reduction in carrying value of assets
during the third quarter of 1994.

     Interest expense decreased during 1995, primarily due to the $6.0 million
of scheduled principal payments made on the $30.0 million 10.25% Senior Secured
Notes. Interest income decreased during 1995 due to lower average cash and
investment balances as these amounts were used to fund capital expenditures and
the acquisition of Delta.

     Other income during 1995 included $2.6 million in realized and unrealized
gains from equity security transactions and $.3 million in dividend income.
Insurance gains on damaged equipment totaled $4.7 million, including a $4.1
million gain recorded for a rig damaged in Venezuela.

                                      20
<PAGE>   35

Other income during 1994 included a $.9 million gain from the sale of an
investment in equity securities and $.6 million in dividend income. Foreign
currency losses totaled $3.2 million during 1995, compared to $1.5 million
during 1994. The 1995 losses primarily consisted of $2.5 million in the UK
North Sea relating to foreign currency losses that had previously been deferred
and recognized as part of the specific transactions being hedged. During 1994,
the Venezuela bolivar devalued by approximately 75%, as compared to the US
dollar. During June 1994, the Venezuelan government imposed exchange rate
control policies and an official fixed exchange rate of 170 bolivars to the US
dollar. As a result of the devaluation, the Company recorded translation losses
totaling $1.0 million during 1994. Subsequent to the June 1994 establishment of
the official fixed exchange rate, the Company reduced its bolivar net monetary
asset exposure. However, if the Venezuelan government allows the bolivar to
"float" relative to the US dollar or revises the official fixed exchange rate,
the Company could incur additional translation losses. The Company also
recorded amortization of deferred currency losses in the UK North Sea during
1994.

     The income tax provisions for 1995 and 1994 relate to foreign operations,
including Canada. Substantially all of the US taxable income is offset by
available net operating loss carryforwards. A valuation allowance is provided
to reduce the deferred tax assets, which includes net operating loss
carryforwards, to a level which, more likely than not, will be realized.
Primary factors considered by management to determine the size of the allowance
include the competitive and cyclical nature of the Company's primary markets
and the expiration timing of the net operating loss carryforwards.

LIQUIDITY AND CAPITAL RESOURCES

     In April 1996, the Company filed a shelf registration statement on Form
S-3 with the Securities and Exchange Commission to allow for offerings from
time to time of up to $250 million in debt securities, preferred stock, common
stock, depository shares or warrants. On May 28, 1996 the Company issued $172.5
million of 5% Convertible Notes with a scheduled maturity in 2006. The 5% Notes
are convertible into common shares of the Company at a conversion price of
$18.125 per share (Note 7). Approximately $60.0 million of the proceeds from
the 5% Notes were used to pay down long-term and short-term debt, with the
remainder of the proceeds to be used for general corporate purposes, including
working capital. The Company had working capital of $172.1 million as of
September 30, 1996, representing a $138.2 million increase over the prior year.
The ratio of long-term debt to long-term debt plus shareholder's equity,
commonly referred to as debt to capital ratio, was 0.35:1 and 0.20:1 as of
September 30, 1996 and 1995, respectively. The increase in the Company's
working capital and debt to capital ratio during 1996 are primarily
attributable to the issuance of the 5% Notes.

     Cash and cash equivalents increased by $83.8 million during 1996, compared
to a decrease of $10.5 million during 1995.

     Net cash provided by operating activities totaled $84.1 mil-lion during
1996, compared to $73.8 million during 1995. During 1996 and 1995, net income
as adjusted for non-cash items, such as depreciation, was partially offset by
the negative impact on cash that resulted from changes in the Company's working
capital accounts.

     Net cash used for investing activities totaled $160.4 million during 1996,
compared to $87.4 million during 1995. Capital expenditures, cash paid for the
acquisition of Exeter, and purchases of marketable securities represented the
primary uses of cash during 1996. This was partially offset by sales and
maturities of marketable securities, as well as proceeds from sales of fixed
assets and insurance claims. During 1995, capital expenditures and cash paid
for the acquisition of Delta represented the primary uses of cash. This was
partially offset by maturities and sales of marketable securities.

     Financing activities provided cash totaling $160.1 million during 1996,
compared to $3.1 million during the previous year. Cash provided during 1996
resulted from long-term borrowings, primarily the $172.5 million Convertible
Subordinated Notes, and common stock transactions, partially offset by a
reduction in short-term borrowings and princi-pal payments on long-term
obligations. In the prior year, cash provided by short-term and long-term
borrowings was partially offset by scheduled principal payments on long-term
obligations.

     The Company's cash and cash equivalents and short-term investments in
marketable securities totaled $104.0 million as of September 30, 1996. In
addition, the Company had long-term investments in marketable securities of
$11.8 million. The Company currently has credit facility arrangements with a
number of banks totaling $66.1 million. These credit facilities are limited at
any given time to receivables of certain of the Company's subsidiaries. As of
September 30, 1996, remaining availability, after borrowings on the facilities
and outstanding letters of credit, totaled approximately $44.2 million.

     As of September 30, 1996, the Company had capital expen-diture commitments
totaling approximately $17.5 million.

     During November 1996, the Company completed the sale of its wholly owned
UK North Sea subsidiary. The Company received approximately $36.0 million plus
the value of working capital in cash, as well as 10.8 million four year
warrants to purchase stock in Abbot Group plc at 83 pence per share (Note 15).

                                      21
<PAGE>   36

     During December 1996, the Company purchased 47 land drilling rigs from
Noble Drilling Corporation for $60.0 million in cash (Note 15).

     During December 1996, the Company's Board of Directors rescinded the
Company's stock repurchase plan due to uncertainties regarding the Securities
and Exchange Commission's Staff Accounting Bulletin No. 96. Rescinding the plan
allows the Company to avoid potential issues when it uses the
pooling-of-interests method of accounting for mergers. The Company has not
repurchased any shares under the stock repurchase plan since its original
authorization during December 1995.

     During December 1996, the Company executed a definitive agreement to merge
with Adcor-Nicklos Drilling Company ("Adcor") in a stock-for-stock exchange.
All of the stock of Adcor will be exchanged for approximately 3.4 million
shares of Nabors common stock. The transaction, which has already received
government approval, is expected to close in January 1997 (Note 15).

     The current cash and cash equivalents, short-term investments, credit
facility position, projected cash flow generated from current operations and
cash provided by the sale of the Company's UK subsidiary is expected to
adequately finance the Company's non-discretionary capital and debt service
requirements for the next twelve months as well as the purchase of the rigs
from Noble Drilling Corporation.

OTHER MATTERS

     The Company's financial condition and results of operations depend on the
level of spending by oil and gas companies for exploration, development and
production activities. There-fore, a sustained increase or decrease in the
price of oil or natural gas, which could have a material impact on exploration,
development and production activities, could materially affect the Company's
financial condition and results of operations.

     In March 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 121 ("SFAS 121"), Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.
SFAS 121 is effective for fiscal years beginning after December 15, 1995. The
Company will adopt SFAS 121 at the beginning of fiscal year 1997. It is
anticipated that the impact of adopting this statement will not have a material
effect on the financial statements.

     In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 ("SFAS 123"), Accounting for
Stock-Based Compensation. SFAS 123 is effective for fiscal years beginning
after December 15, 1995. The Company will adopt the pro forma disclosure
provisions of SFAS 123 in fiscal year 1997.

                                      22
<PAGE>   37
REPORT OF INDEPENDENT ACCOUNTANTS       NABORS INDUSTRIES, INC. AND SUBSIDIARIES

TO THE STOCKHOLDERS AND BOARD OF DIRECTORS 
OF NABORS INDUSTRIES, INC.

     We have audited the accompanying consolidated balance sheets of Nabors
Industries, Inc. and Subsidiaries as of September 30, 1996 and 1995, and the
related consolidated statements of income, changes in stockholders' equity, and
cash flows for each of the three years in the period ended September 30, 1996.
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 in accordance with generally accepted auditing
standards. 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 includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

     In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Nabors
Industries, Inc. and Subsidiaries as of September 30, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended September 30, 1996, in conformity with
generally accepted accounting principles.




Coopers & Lybrand L.L.P.



Houston, Texas
November 25, 1996, except as to certain information presented 
in Notes 9 and 15, for which date is December 20, 1996

                                      23
<PAGE>   38
CONSOLIDATED BALANCE SHEETS             NABORS INDUSTRIES, INC. AND SUBSIDIARIES
(In thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                                                 September 30,
ASSETS                                                                         1996        1995 
------                                                                       --------    --------
<S>                                                                          <C>         <C>     
Current assets:
  Cash and cash equivalents                                                  $ 95,867    $ 12,038
  Marketable securities                                                         8,160       3,296
  Accounts receivable, net                                                    172,720     132,482
  Inventory and supplies                                                       18,528      14,079
  Prepaid expenses and other current assets                                    33,259      21,550
                                                                             --------    --------
    TOTAL CURRENT ASSETS                                                      328,534     183,445
Property, plant and equipment, net                                            511,203     393,464
Marketable securities                                                          11,839       9,645
Other long-term assets                                                         19,698       6,718
                                                                             --------    --------
    TOTAL ASSETS                                                             $871,274    $593,272
                                                                             --------    --------

LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
  Current portion of long-term obligations                                   $  7,738    $ 11,158
  Short-term borrowings                                                        10,235      30,684
  Trade accounts payable                                                       64,955      53,891
  Accrued liabilities                                                          64,063      48,944
  Income taxes payable                                                          9,452       4,876
                                                                             --------    --------
    TOTAL CURRENT LIABILITIES                                                 156,443     149,553
Long-term obligations                                                         229,504      51,478
Other long-term liabilities                                                     9,139       7,643
Deferred income taxes                                                          18,366      15,848
                                                                             --------    --------
    TOTAL LIABILITIES                                                         413,452     224,522
                                                                             --------    --------

Commitments and contingencies

Stockholders' equity:
  Preferred stock, par value $.10 per share:
    Authorized 10,000 shares; none issued or outstanding                         --          --
  Capital stock, par value $.10 per share:
    Authorized common shares 200,000 in 1996 and 1995;
      issued 87,470 in 1996 and 85,017 in 1995                                  8,747       8,502
    Authorized Class B shares 8,000; none issued or outstanding                  --          --
  Capital in excess of par value                                              250,995     229,267
  Cumulative translation adjustment                                            (2,692)     (2,670)
  Net unrealized gain on marketable securities                                  3,728         354
  Retained earnings since May 1, 1988                                         200,208     138,091
  Less treasury stock, at cost, 489 and 755 common shares in 1996 and 1995     (3,164)     (4,794)
                                                                             --------    --------
    TOTAL STOCKHOLDERS' EQUITY                                                457,822     368,750
                                                                             --------    --------
    TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                               $871,274    $593,272
                                                                             --------    --------
</TABLE>

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

                                      24
<PAGE>   39

CONSOLIDATED STATEMENTS OF INCOME       NABORS INDUSTRIES, INC. AND SUBSIDIARIES

(In thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                             Year Ended September 30,
                                                          1996        1995        1994
                                                        --------    --------    --------
<S>                                                     <C>         <C>         <C>     
Revenues                                                $719,743    $572,788    $484,268
                                                        --------    --------    --------
Operating expenses:
  Direct costs                                           539,665     434,097     369,677
  General and administrative expenses                     56,862      49,094      49,365
  Depreciation and amortization                           46,117      31,042      26,241
  Provision for reduction in carrying value of assets       --          --        29,686
                                                        --------    --------    --------
    Operating expenses                                   642,644     514,233     474,969
                                                        --------    --------    --------
Operating income                                          77,099      58,555       9,299
                                                        --------    --------    --------
Other income (expense):
  Interest expense                                       (11,884)     (7,611)     (8,237)
  Interest income                                          2,695       1,694       2,459
  Gain on sales of long-term assets                        2,462       1,404       2,010
  Other income, net                                       11,228       4,586         708
                                                        --------    --------    --------
    Other income (expense)                                 4,501          73      (3,060)
                                                        --------    --------    --------
Income before income taxes                                81,600      58,628       6,239
                                                        --------    --------    --------
Income taxes:
  Current                                                  8,488       4,913       4,139
  Deferred                                                 2,612       2,611         750
                                                        --------    --------    --------
    Total income taxes                                    11,100       7,524       4,889
                                                        --------    --------    --------
Net income                                              $ 70,500    $ 51,104    $  1,350
                                                        --------    --------    --------
Earnings per share:
  Primary                                               $    .76    $    .58    $    .02
                                                        --------    --------    --------
  Fully diluted                                         $    .75    $    .57    $    .02
                                                        --------    --------    --------
Weighted average number of shares outstanding:
  Primary                                                 93,162      88,018      85,620
                                                        --------    --------    --------
  Fully diluted                                           93,917      90,237      85,743
                                                        --------    --------    --------
</TABLE>

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

                                      25
<PAGE>   40
                                        NABORS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

(In thousands)

<TABLE>
<CAPTION>
                                                                                           Net
                                                                  Capital               Unrealized
                                                  Common Stock   in Excess  Cumulative   Gain on                           Total
                                               ------------------  of Par  Translation  Marketable  Retained Treasury  Stockholders'
                                               Shares   Par Value   Value   Adjustment  Securities  Earnings   Stock      Equity
                                               ------   -------- ---------  ----------  ----------  -------- --------  ------------
<S>                                            <C>      <C>       <C>        <C>         <C>        <C>      <C>         <C>     
BALANCES, SEPTEMBER 30, 1993                   83,376   $ 8,338   $211,985   $ (3,660)   $   --     $ 94,211 $ (3,283)   $307,591
Adjustment to conform Sundowner                                                                              
  to Nabors' fiscal year-end                                                                            (396)                (396) 
Net income                                                                                             1,350                1,350  
Translation adjustment                                                            912                                         912  
Net unrealized gain on marketable securities                                                1,345                           1,345  
Issuance of common shares and treasury stock                                                                 
  for stock options exercised and employee                                                                   
  benefit plans                                   168        16      1,021                                        188       1,225
Issuance of common shares for stock awards        110        11        627                                                    638
Issuance of common shares in connection                                                                      
  with acquisition of mutual fund assets          729        73      4,686                                                  4,759
                                               ------   -------   --------   --------    --------   -------- --------    --------
BALANCES, SEPTEMBER 30, 1994                   84,383     8,438    218,319     (2,748)      1,345     95,165   (3,095)    317,424
Net income                                                                                            51,104               51,104
Translation adjustment                                                             78                                          78
Reclassification of pre-quasi-reorganization                                                                 
  tax benefit                                                        8,178                            (8,178)                --
Net unrealized loss on marketable securities                                                 (991)                           (991) 
Issuance of common shares for stock                                                                          
  options exercised                               505        51      2,012                                                  2,063
Issuance of common shares for stock awards        129        13        758                                                    771
Repurchase of common shares                                                                                    (1,699)     (1,699) 
                                               ------   -------   --------   --------    --------   -------- --------    --------
BALANCES, SEPTEMBER 30, 1995                   85,017     8,502    229,267     (2,670)        354    138,091   (4,794)    368,750
Net income                                                                                            70,500               70,500
Translation adjustment                                                            (22)                                        (22) 
Reclassification of pre-quasi-reorganization                                                                 
  tax benefit                                                        8,383                            (8,383)                --
Net unrealized gain on marketable securities                                                3,374                           3,374
Issuance of common shares for stock                                                                          
  options exercised                             2,422       242     11,769                                                 12,011
Issuance of common shares for stock awards         31         3        214                                                    217
Issuance of treasury stock in connection with                                                                
  acquisition of assets                                              2,370                                      1,630       4,000
Repurchase of Company warrants                                      (1,008)                                                (1,008)
                                               ------   -------   --------   --------    --------   -------- --------    --------
BALANCES, SEPTEMBER 30, 1996                   87,470   $ 8,747   $250,995   $ (2,692)   $  3,728   $200,208 $ (3,164)   $457,822
                                               ------   -------   --------   --------    --------   -------- --------    --------
</TABLE>

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

                                      26
<PAGE>   41
                                        NABORS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

<TABLE>
<CAPTION>
                                                                    Year Ended September 30,
                                                                  1996        1995        1994
                                                                --------    --------    --------
<S>                                                             <C>         <C>         <C>     
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income                                                      $ 70,500    $ 51,104    $  1,350
Adjustments to net income:
  Depreciation and amortization                                   46,117      31,042      26,241
  Provision for reduction in carrying value of assets               --          --        29,686
  Deferred taxes                                                   2,612       2,611         750
  Gain on sales of long-term assets                               (2,462)     (1,404)     (2,010)
  Gain on insurance claims                                        (4,693)     (4,649)       (484)
  Gain on marketable securities                                   (4,871)     (2,406)       (908)
  Foreign currency transaction and translation (gains) losses       (510)      3,160       1,502
  Non-cash compensation element of stock awards and options          152         476       1,051
  Equity in earnings of affiliate                                   (139)       --          --
  Other                                                              201        (207)       (137)
(Decrease) increase, net of effects from acquisitions,
 from changes in:
  Accounts receivable                                            (21,089)    (13,715)        160
  Inventory and supplies                                          (4,149)        962        (811)
  Prepaid expenses and other current assets                       (7,968)     (2,723)      1,274
  Other long-term assets                                          (7,699)       (792)      1,721
  Accounts payable and accrued liabilities                        12,005      12,895      (8,486)
  Income taxes payable                                             4,576       2,497        (295)
  Other long-term liabilities                                      1,541      (5,085)       (395)
                                                                --------    --------    --------
NET CASH PROVIDED BY OPERATING ACTIVITIES                         84,124      73,766      50,209
                                                                --------    --------    --------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchases of marketable securities, held-to-maturity              --        (5,121)    (39,762)
  Maturities of marketable securities, held-to-maturity            2,000      21,254      10,000
  Sales of marketable securities, held-to-maturity                  --        12,416        --
  Purchases of marketable securities, available-for-sale            --        (2,273)    (12,617)
  Sales of marketable securities, available-for-sale               1,698       5,189       2,597
  Purchases of marketable securities, trading                    (11,280)       --          --
  Sales of marketable securities, trading                          8,766        --          --
  Payments received on investment in sales-type
    leases and notes receivable                                     --          --         1,541
  Cash paid for acquisitions, net                                (28,317)    (19,572)       --
  Capital expenditures                                          (146,440)   (109,321)    (62,907)
  Proceeds from sales of assets and insurance claims              15,726      10,039       5,315
  Investment in affiliates                                        (2,548)       --          --
                                                                --------    --------    --------
NET CASH USED FOR INVESTING ACTIVITIES                          (160,395)    (87,389)    (95,833)
                                                                --------    --------    --------
Cash flows from financing activities:
  Decrease (increase) in restricted cash                             861        (795)        (44)
  Long-term borrowings                                           183,295       4,538       6,537
  Reduction of long-term obligations                             (14,633)    (20,317)    (26,762)
  (Decrease) increase in short-term borrowings                   (20,449)     19,522         453
  Common stock and treasury stock transactions                    11,026         150      24,951
                                                                --------    --------    --------
NET CASH PROVIDED BY FINANCING ACTIVITIES                        160,100       3,098       5,135
                                                                --------    --------    --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS              83,829     (10,525)    (40,489)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                      12,038      22,563      63,052
                                                                --------    --------    --------
CASH AND CASH EQUIVALENTS, END OF YEAR                          $ 95,867    $ 12,038    $ 22,563
                                                                --------    --------    --------
</TABLE>

                The accompanying notes are an integral part of
                   these consolidated financial statements.
                                      27
<PAGE>   42
                                        NABORS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NATURE OF OPERATIONS

     Nabors Industries, Inc. (collectively with its subsidiaries, "Nabors" or
the "Company") is the largest land drilling contractor in the world. The
Company, which was incorporated in Delaware in 1978, has principally been
engaged, through its subsidiaries, in oil, gas and geothermal land drilling
operations in Alaska, the US Lower 48 states and Canada, and internationally in
the Middle East, the Far East, the CIS, North and West Africa and South and
Central America. The Company also provides offshore drilling, well servicing
and workover services in the Gulf of Mexico, Alaska's Cook Inlet and several
international markets. The Company's CANRIG subsidiary manufactures top drives
for a broad range of drilling rig applications. The Company also provides
oilfield management, engineering, transportation, construction, maintenance,
well logging and other support services in selected domestic and international
markets.

PRINCIPLES OF CONSOLIDATION

     The consolidated financial statements of the Company include the accounts
of the Company and all subsidiaries. All significant intercompany accounts and
transactions are eliminated in consolidation. The Company has an investment
representing a 33 1/3% ownership interest in a company which is accounted for
using the equity method.

     The Company's investments in several joint ventures are accounted for
under the proportionate consolidation method. The Company's proportionate share
of the joint ventures' net assets and net income was as follows:

<TABLE>
<CAPTION>
                                                      September 30,
(In thousands)                             1996            1995            1994
                                         -------         -------         -------
<S>                                      <C>             <C>             <C>    
Net assets                               $27,895         $22,755         $17,580
Net income                                 6,464           4,868           4,386
                                         -------         -------         -------
</TABLE>

CASH AND CASH EQUIVALENTS

     Cash and cash equivalents include commercial paper and various other
short-term investments with an original maturity of three months or less at the
time of purchase.

MARKETABLE SECURITIES

     The Company's marketable securities consist of debt securities, including
United States Government securities, and equity securities. Marketable debt
securities that are classified as held-to-maturity are stated at amortized
cost, which approximates market, and marketable securities that are classified
as available-for-sale or trading are stated at fair value. Unrealized holding
gains and losses for available-for-sale securities are excluded from earnings
and, until realized, are reported as a net amount in a separate component of
stockholders' equity. Unrealized gains and losses on securities classified as
trading are reported in earnings currently.

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

INVENTORY AND SUPPLIES

     Inventory and supplies are composed of replacement parts and supplies held
for use in the operations of the Company, and top drives that are manufactured
by a Company subsidiary for resale. Inventory and supplies are valued at the
lower of weighted average cost or market.

PROPERTY, PLANT AND EQUIPMENT

     Property, plant and equipment are stated at cost. The Company provides for
depreciation of drilling rigs on the unit-of-production method over a 3,800-day
period after provision for salvage value. To provide for any deterioration that
may occur while the rigs are not operating for an extended period of time, a
minimum depreciation charge is provided for using the straight-line method over
an assumed depreciable life of 20 years. Depreciation on buildings, oilfield
hauling and mobile equipment and other machinery and equipment is computed
using the straight-line method over the estimated useful lives of the assets
after provision for salvage value (buildings -- 10 to 30 years; oilfield
haul-ing and mobile equipment and other machinery and equipment -- 3 to 10
years). Maintenance and repairs are charged to expense when incurred; renewals
and betterments are capitalized. Amortization of capitalized leases is included
in depreciation and amortization expense. Interest applicable to the
construction of drilling and other equipment is capitalized. Provisions for
permanent asset impairment are charged to income when it is considered probable
that the carrying values of equipment may not be recovered over their remaining
service lives, based on estimates of future net cash flows on an undiscounted
basis. 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 results of operations.

     In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 121 ("SFAS 121"), Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of. SFAS 121, which is effective for fiscal years beginning 

                                      28
<PAGE>   43

after December 15, 1995, requires that long-lived assets and certain
identifiable intangibles held and used by an entity be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. The Company will adopt SFAS 121 at the
beginning of 1997. It is anticipated that the impact of adopting this statement
will not have a material effect on the financial statements.

INCOME TAXES

     The Company utilizes the asset and liability method in accounting for
income taxes that requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have been
recognized in the Company's financial statements or tax returns.

     United States deferred income taxes have not been provided on unremitted
earnings of subsidiaries located outside the United States, as such earnings
are considered permanently reinvested.

REVENUE RECOGNITION

     Revenues and costs on daywork contracts are recognized daily
(percentage-of-completion method); revenues and costs applicable to footage and
turnkey contracts are recognized on completion of the well (completed contract
method) and revenues and related costs for the manufacturing operation are
recognized when products are shipped or services are rendered to the customer.

FOREIGN CURRENCY TRANSLATION

     For certain foreign subsidiaries, such as those in the United Kingdom,
Canada and Saudi Arabia, the local currency is the functional currency. Assets
and liabilities are translated at year-end exchange rates, and income and
expenses are translated at the average exchange rates prevailing during the
year. Translation gains or losses are accumulated in a separate section of
stockholders' equity and transaction gains and losses are included in net
income. For subsidiaries operating in highly inflationary countries, such as
Venezuela, and for certain other subsidiaries, the US dollar is the functional
currency and translation gains and losses are included in determining net
income.

     The Company utilizes forward exchange contracts and local currency
borrowings to hedge its exposure to exchange rate fluctuations in connection
with monetary assets and liabilities held in foreign currencies. The carrying
amounts of the forward exchange contracts equal their fair value and are
adjusted at each balance sheet date for changes in exchange rates. Realized and
unrealized gains and losses on the forward contracts are deferred and
recognized as foreign currency gains or losses over the life of the contract.
The Company does not hold or issue foreign exchange contracts or other
derivative financial instruments for speculative purposes. To hedge its foreign
currency exposure in Saudi Arabia, the Company holds forward exchange contracts
maturing at various dates through June 30, 1999 with a face value of
approximately $39.7 million at September 30, 1996. Unrealized losses associated
with these forward contracts amount to $.3 million at September 30, 1996.

     Foreign currency transaction and translation gains (losses) for 1996, 1995
and 1994 totaled $.5 million, ($3.2) million and ($1.5) million, respectively,
and are included in the caption "Other income, net" in the accompanying
consolidated statements of income. In December 1995, the Venezuelan bolivar
devalued by approximately 71%, from an official fixed exchange rate of 170
bolivars to 290 bolivars to the US dollar. As a result of the devaluation, the
Company recognized a translation gain of $.3 million during 1996, as the
Company had a bolivar denominated net monetary liability position. In April
1996, the Venezuelan government, as part of moving toward a free market
economy, eliminated exchange rate control policies that had been established in
June 1994. As a result, the bolivar was allowed to float, and devalued by an
additional 55% to 70% as the exchange rate ranged from 450 to 500 bolivars to
the US dollar. The Company recognized an insignificant translation gain during
the third quarter of 1996 as a result of the devaluation. During 1996, the
Company reduced its net monetary position by borrowing in the local currency.
The Company increased its exposure to foreign currency devaluation in Saudi
Arabia during 1996 as a result of increased activity there resulting from a
number of new drilling contracts. The Company, through the use of forward
exchange contracts has offset a portion of the foreign exchange exposure in
Saudi Arabia. The Company will continue to monitor its foreign currency
exposures.

     The 1995 losses include $2.5 million in the UK North Sea relating to
foreign currency losses that were deferred and recognized as part of the
specific transactions hedged. During 1994, the Venezuelan bolivar devalued by
approximately 75%, as compared to the US dollar. During June 1994, the
Venezuelan government imposed exchange rate control policies and an official
fixed rate of 170 bolivars to the US dollar. As a result of the devaluation,
the Company recorded translation losses totaling $1.0 million during 1994. The
Company also recorded amortization of deferred currency losses in the UK North
Sea during 1994.

EARNINGS PER SHARE

     The Company's earnings per share are based upon the weighted average
number of common shares ("Shares") outstanding during the year, excluding
Shares held in treasury. Shares reserved for issuance against stock options
outstanding under the Company's stock option plans and stock warrants issued
are considered common stock equivalents if dilutive.

                                      29
<PAGE>   44

CASH FLOW INFORMATION

     Cash paid for income taxes and interest during 1996, 1995 and 1994 was as
follows:

<TABLE>
<CAPTION>
(In thousands)                                 1996          1995          1994
                                              ------        ------        ------
<S>                                           <C>           <C>           <C>   
Income taxes                                  $3,160        $5,045        $2,765
Interest, net of
  capitalized interest                         9,309         7,064         7,818
                                              ------        ------        ------
</TABLE>

     A summary of the Company's non-cash activities during 1996, 1995 and 1994
is as follows:

<TABLE>
<CAPTION>
(In thousands)                                1996           1995         1994
                                            --------       --------       ------
<S>                                         <C>            <C>            <C> 
Acquisition of businesses:
  Fair value of assets acquired
    less negative goodwill                  $ 50,400       $ 39,385       $ --
  Goodwill                                     3,825           --           --
  Consideration paid:
    Cash                                     (29,051)       (20,000)        --
    Treasury shares issued                    (4,000)          --           --
                                            --------       --------       ------
    Liabilities assumed
      or created                              21,174         19,385         --
Common stock issued to a
  mutual fund in exchange
  for the Company's shares                      --             --         83,135
                                            --------       --------       ------
</TABLE>

CONCENTRATIONS OF CREDIT RISK

     Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of investments in commercial
paper with maturities of less than three months, and other temporary cash
investments that the Company has with a variety of companies and financial
institutions with strong credit ratings. The Company believes that, due to the
foregoing, the credit risk in such instruments is minimal. In addition, the
Company's trade receivables are with a variety of international and national
oil companies. Management considers this credit risk to be limited due to these
companies' financial resources.

FAIR VALUE OF FINANCIAL INSTRUMENTS

     The following methods and assumptions were used to estimate the fair value
of each class of financial instrument:

o CASH AND CASH EQUIVALENTS The carrying amount approximates fair value due to
the relatively short period to maturity of these instruments.

o MARKETABLE SECURITIES The carrying amount of marketable securities are
adjusted to fair value based on quoted market prices.

o SHORT-TERM BORROWINGS The carrying amount approximates fair value due to the
relatively short period to maturity of these instruments.

o FORWARD EXCHANGE CONTRACTS The carrying amount of forward exchange contracts
are adjusted to fair value based on quoted exchange rates.

o LONG-TERM DEBT The fair value of the Company's long-term debt is estimated
based on quoted market prices, where applicable, or based on the present value
of expected cash flows relating to existing borrowings discounted at rates
currently available to the Company for long-term borrowings with similar terms
and maturities. The fair value of the Company's long-term debt as of September
30, 1996 and 1995 amounted to $243.2 million and $66.8 million, respectively.

USE OF ESTIMATES

     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. These estimates and assumptions affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates.

RECLASSIFICATION

     Certain prior year amounts were reclassified to conform to the
presentation in the current year.

2 ACQUISITIONS

     During April 1996, the Company acquired Exeter Drilling Company ("Exeter")
and its subsidiary, JW Gibson Well Service Company ("Gibson") from Occidental
Oil and Gas Corporation. The consideration paid consisted of $18.0 million in
cash, $4.0 million of Nabors common stock (266,223 shares) and $10.6 million
paid in cash for Exeter's and Gibson's working capital. Exeter's land drilling
rig fleet consisted of 47 actively marketed rigs in the United States, and two
located internationally. Gibson operated 78 workover and well servicing land
rigs located in the United States. The acquisition was accounted for under the
purchase method of accounting; accordingly, the total purchase price was
allocated to net assets based on estimated fair values. The results of Exeter's
and Gibson's operations have been included in the consolidated financial
statements of the Company commencing on the effective date of the acquisition.

                                      30
<PAGE>   45

     During January 1995, the Company acquired Delta Drilling Company
("Delta"), a company engaged in the business of contract land drilling in the
United States. The purchase price of Delta was approximately $20.0 million in
cash plus liabilities assumed. Delta owned 30 rigs as well as yard and office
facilities. The acquisition was accounted for under the purchase method of
accounting. The results of Delta's operations have been included in the
consolidated financial statements commencing on the effective date of the
acquisition.

     During October 1994, the Company consummated its merger with Sundowner, a
company that provides contract well servicing and workover services in the Gulf
of Mexico and various international offshore markets and utilizes
self-contained, modular platform rigs and jackup workover rigs. Under the
merger agreement, Sundowner stockholders received 2.8 shares of the Company's
common stock for each of their shares of Sundowner. As a result, the Company
issued 13,081,600 common shares to Sundowner stockholders.

     The merger was accounted for as a pooling-of-interests. Accordingly, the
accompanying consolidated financial statements were retroactively restated to
include the results of operations, financial position and cash flows of
Sundowner for all periods prior to consummation of the merger. In addition to
combining the companies' historical operations, the accompanying consolidated
financial statements include adjustments to Sundowner's deferred income tax
expense to reflect the combined companies' use of the Company's operating loss
carryforwards for US federal income tax purposes. Such adjustments resulted in
a reduction in US federal deferred income tax expense in the combined
companies' statement of operations. Earnings per common share for each period
are based on the combined weighted average number of common shares outstanding
after adjusting Sundowner's historical amounts for the conversion into 2.8
shares of the Company's common stock.

     Operating results for the separate companies for the period prior to the
merger are as follows:

<TABLE>
<CAPTION>
                                                           September 30, 1994
(In thousands)                                         Revenues        Net Income
                                                       --------        ----------
<S>                                                    <C>              <C>     
Nabors                                                 $422,551         $    650
Sundowner                                                61,717              148
Deferred income tax adjustment                                               552
                                                       --------         --------
                                                       $484,268         $  1,350
                                                       --------         --------
</TABLE>

3 MARKETABLE SECURITIES

     Marketable securities classified as current and long-term assets are as
follows:

<TABLE>
<CAPTION>
                                                                September 30,
(In thousands)                                                 1996       1995
                                                             --------   --------
<S>                                                          <C>        <C>     
Current assets:
  Debt securities, classified as held-to-
    maturity, at amortized cost, which
    approximates fair value:
      US Government securities                               $    --    $  2,002
  Equity securities, classified as trading,
    at fair value                                               8,160      1,294
                                                             --------   --------
                                                                8,160      3,296
                                                             --------   --------
Long-term assets:
Equity securities, classified as
  available-for-sale, at fair value                          $ 11,839   $  9,645
                                                             --------   --------
</TABLE>

     The fair value of equity securities that were classified as
available-for-sale exceeded the cost by approximately $3.7 million and $.4
million as of September 30, 1996 and 1995, respectively. During 1996, the
Company received $1.7 million of proceeds and realized gains of $.5 million,
and received $8.8 million of proceeds and realized gains of $1.9 million
resulting from the sale of certain investments in equity securities that had
been classified as available-for-sale and trading, respectively. During 1996,
the Company recorded unrealized holding gains totaling $2.5 million on equity
securities classified as trading.

     During 1995, the Company sold debt securities with an amortized cost of
$12.6 million and recorded a loss of $.2 million. The debt securities
previously had been classified as held-to-maturity and were sold to fund the
acquisition of Delta. During 1995, the Company recorded a gain totaling $2.4
million and received $6.3 million of proceeds in a combination of shares,
warrants and cash in settlement of the tender offer for the Company's
investment in certain equity securities and from other sales of equity
securities classified as available-for-sale. During 1995, the Company recorded
unrealized holding gains totaling $.2 million on equity securities classified
as trading.

     During 1994, the Company received $2.6 million of proceeds and realized a
gain of $.9 million resulting from the sale of certain investments in equity
securities that had been classified as available-for-sale.

                                      31
<PAGE>   46

4 Property, Plant and Equipment

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

<TABLE>
<CAPTION>
                                                              September 30,
(In thousands)                                              1996         1995
                                                          --------     --------
<S>                                                       <C>          <C>     
Land                                                      $  3,986     $  3,828
Buildings                                                   14,891       13,735
Contract drilling and related equipment                    680,050      525,423
Oilfield hauling and mobile equipment                       43,077       42,834
Other machinery and equipment                               20,070       19,994
                                                          --------     --------
                                                           762,074      605,814
Less: accumulated depreciation
  and amortization(1)                                     (250,871)    (212,350)
                                                          --------     --------
                                                          $511,203     $393,464
                                                          --------     --------
</TABLE>

(1)  Includes, as of September 30, 1996 and 1995, reserves of $54.8 million and
     $56.3 million, respectively, resulting from the permanent impairment of
     certain asset values.

     Repair and maintenance expense included in direct costs in the statements
of income amounted to $81.4 million, $63.2 million and $49.2 million for the
years ended September 30, 1996, 1995 and 1994, respectively.

     Interest expense of $1.0 million, $.7 million and $.4 million was
capitalized during 1996, 1995 and 1994, respectively.

5 PROVISION FOR REDUCTION IN CARRYING VALUE OF ASSETS

     During the third quarter of 1994, the Company recorded a provision for
reduction in carrying value of assets totaling $29.7 million. The assets
primarily affected were the Company's Yemen logistical assets and inventory.
The provision also included estimates of facility closure costs and other costs
in certain international areas, including Yemen. The determining factor
resulting in the provision for reduction in carrying value of assets was the
general reduction of activity in Yemen, further exacerbated by the civil war
there.

6 SHORT-TERM BORROWINGS AND LETTERS OF CREDIT

     The Company has available lines of credit with a number of banks that
permit borrowing at interest rates generally not to exceed, at the option of
the Company, each bank's prime rate or LIBOR plus .75%. The weighted average
interest rate on short-term borrowings outstanding as of September 30, 1996 and
1995, excluding short-term borrowings in the local currency for hedging
purposes in Venezuela, equaled 5.65% and 6.76%, respectively. The weighted
average interest rate inclusive of the Venezuela borrowings outstanding as of
September 30, 1996, equaled 13.35%.

     Availability and borrowings under these lines of credit are as follows:

<TABLE>
<CAPTION>
                                                                September 30,
(In thousands)                                               1996         1995
                                                           --------     --------
<S>                                                        <C>          <C>     
Lines of credit available                                  $ 66,120     $ 53,391
Short-term borrowings outstanding                            10,235       28,440
Letters of credit outstanding                                11,657        9,853
                                                           --------     --------
</TABLE>

7 LONG-TERM OBLIGATIONS

Long-term obligations consist of the following:


<TABLE>
<CAPTION>
                                                              September 30,
(In thousands)                                             1996          1995
                                                         --------      --------
<S>                                                      <C>           <C>     
5.00% Convertible Subordinated Notes
  payable in their entirety May 2006                     $172,500      $   --
9.18% Senior Secured Notes payable
  in semiannual installments of
  $4,000 commencing January 2002                           40,000        40,000
10.25% Senior Secured Notes payable
  in semiannual installments of
  $3,000 commencing July 1992, net                          5,936         8,782
$12,995 loans payable in varying
  amounts in August 1998, November
  1998, January 1999 and April 1999                        12,995         2,200
$5,000 loan payable in monthly
  installments of $76 commencing
  December 1995                                             4,242          --
$8,284 loan payable in quarterly
  installments of $295 commencing
  July 1990                                                  --           2,071
$5,100 loan payable in quarterly
  installments of $182 commencing
  July 1991                                                  --           2,003
$4,851 loan payable in quarterly
  installments of $173 commencing
  July 1993                                                  --           3,118
Medium-term notes payable, maturing
  from 1995 to 2001, from 6.0%
  to 8.75%(1)                                               1,567         4,068
Capital leases(1)                                               2           394
                                                         --------      --------
                                                          237,242        62,636
Less: current portion                                      (7,738)      (11,158)
                                                         --------      --------
                                                         $229,504      $ 51,478
                                                         --------      --------
</TABLE>

(1)  Certain of these obligations are collateralized by specific assets
     financed with the related proceeds. The aggregate net book value of such
     assets approximated $8.7 million and $12.5 million as of September 30,
     1996 and 1995, respectively.

                                      32
<PAGE>   47

     On May 28, 1996, the Company issued $172.5 million of 5% Convertible
Subordinated Notes with a scheduled maturity on May 15, 2006 (the "5% Notes").
Interest on the 5% Notes is payable semi-annually on May 15 and November 15 of
each year commencing November 15, 1996. The 5% Notes are convertible into
common shares of the Company at any time, at a conversion price of $18.125 per
share, subject to an adjustment in certain events. The 5% Notes are redeemable
at the option of the Company, in whole or in part, at any time on or after May
15, 1999, initially at 103.5% and at decreasing prices thereafter to 100% at
maturity, in each case together with accrued and unpaid interest. The 5% Notes
also may be repaid at the option of the holder at 101%, together with accrued
and unpaid interest, any time prior to May 15, 2006 if there is a change in
control, as defined in the subordinated indenture. The proceeds from the 5%
Notes were used to repay several term loans and reduce outstanding borrowings
on the Company's credit facilities. The remaining proceeds will be used for
general corporate purposes, including working capital.

     The Company issued 9.18% Senior Secured Notes due July 31, 2006 in the
principal amount of $40.0 million (the "9.18% Senior Secured Notes") to the
John Hancock Mutual Life Insurance Company ("John Hancock"), pursuant to an
Amended and Restated Note Purchase Agreement dated October 1, 1992.

     The Company substantially financed the 1990 acquisition of Loffland
Brothers Company through certain of its subsidiaries issuing $30.0 million of
10.25% Senior Secured Notes due January 31, 1997 (the "10.25% Senior Secured
Notes") to John Hancock. The Company also issued warrants to the same financial
institution to purchase 1,500,000 shares of the Company's common stock at $5.50
per share, exercisable until January 31, 1997 (the "Warrants"). A value of $1.1
million was assigned to the Warrants.

     The 9.18% Senior Secured Notes and the 10.25% Senior Secured Notes
(collectively "Senior Secured Notes") impose certain restrictions on the
Company, including restrictions on the payments of dividends and certain
business combinations. The Company may pay dividends to the extent the
Company's cumulative dividends, plus certain other payments since March 31,
1989, do not exceed 50% of the Company's cumulative net income since March 31,
1989, plus the proceeds of any offering of equity securities of the Company
that are not redeemable at the option of the holder of the securities. As of
September 30, 1996, retained earnings available for dividend totaled
approximately $178 million. Also, proceeds from the sale of certain assets must
be used to prepay the Senior Secured Notes to the extent that an amount equal
to such proceeds is not invested by the Company during a two-year period. The
Senior Secured Notes also require that certain financial tests be met on a
consolidated Company basis, the most restrictive of which requires working
capital to be in excess of $5.0 million. The Senior Secured Notes are
guaranteed by the Company and one of its subsidiaries and are collateralized by
the pledge of all the shares and assets of the Company's subsidiaries operating
in the UK North Sea, and of all the shares of one of the Company's subsidiaries
operating in the Gulf of Mexico. The aggregate book value of such net assets
approximated $27.9 and $29.7 million as of September 30, 1996 and 1995,
respectively. Interest on the Senior Secured Notes is payable semi-annually on
July 31 and January 31 of each year.

     During 1995, a subsidiary of the Company entered into a revolving loan
agreement with a financial institution whereby it can borrow up to $20.0
million for the construction of certain drilling equipment that is exported
from Canada by one of the Company's subsidiaries. The loan proceeds can be
drawn quarterly based on the amount of qualifying drilling equipment exported
from Canada during the immediately preceding three-month period and are due for
repayment three years after the date the individual advances are made. The
Company received its first advance totaling $2.2 million during August 1995,
and subsequent advances of $2.9 million, $3.7 million and $4.2 million in
November 1995, January 1996 and April 1996, respectively. The loans bear
interest at 90-day LIBOR plus .50% (6.19% at September 30, 1996). The loans are
collateralized by several drilling rigs located in the US with an aggregate net
book value of approximately $29.2 million and $27.4 million as of September 30,
1996 and 1995, respectively. The loans are guaranteed by the Company and
require the Company, on a consolidated basis, to maintain various financial
ratios, the most restrictive of which requires working capital to be in excess
of $5.0 million.

     As of September 30, 1996, the maturities of long-term obligations for the
five years after 1996 are as follows:

<TABLE>
<CAPTION>
                (In thousands)
                <S>                                <C>     
                1997                               $  7,738
                1998                                  3,531
                1999                                 12,205
                2000                                  1,226
                2001                                    106
                Thereafter                          212,436
                                                   --------
                                                   $237,242
                                                   ========
</TABLE>

                                      33
<PAGE>   48

8 INCOME TAXES

     The Company's income tax, reconciled to the United States federal income
tax using the federal statutory rate, and an analysis of the income tax
provision is as follows:

<TABLE>
<CAPTION>
                                                    Year Ended September 30,
(In thousands)                                    1996        1995        1994
                                                --------    --------    --------
<S>                                             <C>         <C>         <C>     
Total pretax income(1)                          $ 81,600    $ 58,628    $  6,239
                                                --------    --------    --------
Expected federal income
  tax using the 35%
  statutory rate                                  28,560      20,520       2,184
Recognition of net loss
  carryforwards and valuation allowance          (20,801)    (18,949)       --
Alternative Minimum Tax                              543         574          76
State income taxes                                   469         672         115
Foreign taxes and other                            2,329       4,707       2,514
                                                --------    --------    --------
    Total income tax                            $ 11,100    $  7,524    $  4,889
                                                --------    --------    --------
Analysis of the income
  tax provision:
    Current:
      US federal                                $    543    $    574    $     76
      State and local                                 15          72         115
      Foreign                                      7,930       4,267       3,948
                                                --------    --------    --------
                                                   8,488       4,913       4,139
                                                --------    --------    --------
    Deferred:
      State and local                                454         600        --
      Foreign                                      2,158       2,011         750
                                                --------    --------    --------
                                                   2,612       2,611         750
                                                --------    --------    --------
    Total income tax                            $ 11,100    $  7,524    $  4,889
                                                --------    --------    --------
</TABLE>

(1)  Includes foreign income before taxes of $17.2 million, $7.5 million and
     $6.7 million, respectively, in the years ended September 30, 1996, 1995
     and 1994.

     The components of the Company's net deferred tax assets and liabilities
are as follows:

<TABLE>
<CAPTION>
                                                             September 30,
(In thousands)                                           1996            1995
                                                       --------        --------
<S>                                                    <C>             <C>     
Deferred tax assets:
  Net operating loss carryforwards                     $ 59,653        $ 66,327
  Accrued liabilities not deducted
    for tax purposes                                     17,770          10,960
  General tax credits                                     3,207           5,455
                                                       --------        --------
Deferred tax asset                                       80,630          82,742
Valuation allowance                                     (25,869)        (35,563)
                                                       --------        --------
  Net deferred tax asset                                 54,761          47,179
Deferred tax liabilities:
  Excess tax over book depreciation                     (73,127)        (63,027)
                                                       --------        --------
Net deferred tax liability                             $(18,366)       $(15,848)
                                                       --------        --------
</TABLE>

     In conjunction with the acquisition of Delta (Note 2), deferred tax
liabilities of $10.3 million were recorded during 1995.

     For US federal income tax purposes, the Company has net operating loss
carryforwards of approximately $169.1 million that, if not utilized, will
expire from 1999 to 2009. The net operating loss carryforwards for Alternative
Minimum Tax purposes are approximately $126.1 million. There are Alternative
Minimum Tax credit carryforwards of $1.9 million available to offset future
regular tax liabilities. In addition, the Company has approximately $1.3
million of investment-tax-credit carryforwards expiring at various dates from
1997 to 2001.

     Under 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 the Company and its subsidiaries. The
utilization of such carryforwards could be limited or effectively lost upon
certain changes in ownership. Accordingly, although the Company believes
substantial loss carryforwards are available to it, no assurance can be given
concerning such loss carryforwards, or whether or not such loss carryforwards
will be available in the future.

     A valuation allowance is provided to reduce the deferred tax assets to a
level which, more likely than not, will be realized. Primary factors considered
by management to determine the size of the allowance include the competitive
and cyclical nature of the Company's primary markets and the expiration timing
of the net operating loss carryforwards.

     The Company's accumulated deficit of $56.9 million as of May 1, 1988 was
eliminated by a transfer to paid-in capital through an accounting
reorganization of its stockholders' equity accounts (quasi-reorganization). The
quasi-reorganization did not involve any revaluation of assets or liabilities
because their fair values were, respectively, not less than or greater than
their book values.

     The Company adopted its quasi-reorganization in the context of its
reliance, at that time, on Statement of Financial Accounting Standards No. 96,
"Accounting For Income Taxes" ("SFAS 96"), which provided for recognition in
the statement of income, the tax benefits of operating loss and tax-credit
carryforward items that arose prior to a quasi-reorganization such as that
implemented by the Company.

     Subsequent to the issuance of SFAS 96 in September 1989, the Securities
and Exchange Commission issued Staff Accounting Bulletin No. 86 (SAB 86). This
bulletin set forth the SEC staff's view that the tax benefits of operating loss
and tax-credit carryforward items that arose prior to a quasi-reorganization
must be reported as a direct credit to paid-in capital following a
quasi-reorganization involving only an elimination of a deficit in retained
earnings.

                                      34
<PAGE>   49

     Since the Company implemented its quasi-reorganization based on SFAS 96
and prior to the issuance of SAB 86, it will continue to report carryforward
tax benefits directly in the statement of income, and then will reclassify the
amount of such benefit from retained earnings to paid-in capital. The SEC has
informed the Company that, under the circumstances, it will not object to the
Company's accounting for these tax benefits. If the provisions of SAB 86 had
been applied, net income for the years ended September 30, 1996 and 1995 would
have been reduced by $8.3 million ( $.09 per share) and $8.2 million ( $.09 per
share), respectively. Net income for the year ended September 30, 1994 would
not have been reduced.

     Statement of Financial Accounting Standards No. 109 "Accounting For Income
Taxes", which supersedes SFAS 96 and was adopted by the Company at the
beginning of 1994, includes a "grand-fathering" provision that permits the
Company to continue its present method of accounting for the utilization of its
operating loss and tax-credit carryforward items that arose before the
Company's 1988 quasi-reorganization.

9 CAPITAL STOCK AND STOCK OPTIONS

CAPITAL STOCK

     During June 1996, 1,100,000 warrants previously issued in connection with
the acquisition of the drilling assets of Grace Drilling Company expired.

     During April 1996, the Company issued 266,223 common shares that were
previously held in treasury to Occidental Oil and Gas Corporation in connection
with the Exeter acquisition (Note 2).

     During October 1995, the Company purchased for $1.0 million, 650,000
warrants that the Company had previously issued in connection with the purchase
of several drilling rigs in April 1994.

     During December 1994, the Company purchased 250,000 shares of its common
stock in the open market at a cost of $1.7 million or $6.80 per share.

     During October 1994, the Company completed its merger with Sundowner
whereby the Company acquired all of the outstanding shares of Sundowner in
exchange for 13,081,600 newly issued registered shares of the Company's common
stock (Note 2).

     During April 1994, the Company completed a transaction whereby it acquired
all of the assets of Equity Strategies Fund, Inc., an open-ended mutual fund
("ESI"), in exchange for 13,276,349 newly issued registered shares of the
Company's common stock. The ESI assets acquired comprised 12,548,733 shares of
the Company's common shares and $4.8 million in cash. The price at which the
Company's shares were exchanged was $6.625 per share, which was based upon an
average closing price of the Company's stock. The shares of common stock issued
to ESI then were distributed pro rata to the shareholders of ESI. The net
effect of the transaction was that the Company's common shares outstanding
increased by 727,616 shares and the Company received $4.8 million in cash.

     The Company is authorized to issue up to 10,000,000 shares of preferred
stock with a par value of $.10 per share in one or more series, and to fix the
powers, designations, preferences and rights to each series.

     During December 1996, the Company's Board of Directors rescinded the
Company's stock repurchase plan due to uncertainties regarding the Securities
and Exchange Commission's Staff Accounting Bulletin No. 96. Rescinding the plan
allows the Company to avoid potential issues when it uses the
pooling-of-interests method of accounting for mergers. The Company has not
repurchased any shares under the stock repurchase plan since its original
authorization during December 1995.

     As of September 30, 1996 there were warrants outstanding to purchase
1,500,000 common shares at $5.50 per share, exercisable until January 31, 1997.
As of September 30, 1995 there were warrants outstanding to purchase 1,500,000
common shares at $5.50 per share, exercisable until January 31, 1997;
1,100,000 common shares at $16.18 per share, exercisable until June 1996; and
650,000 common shares at $7.92 per share, exercisable until April 1996.

STOCK OPTION PLANS

     As of September 30, 1996, the Company has several stock option plans under
which options to purchase common shares may be granted to key officers,
directors and managerial employees of the Company and its subsidiaries. Options
granted under the plans generally are at prices equal to the fair market value
of the stock on the date of the grant. Options granted under the plans
generally are exercisable in varying cumulative periodic installments after one
year and cannot be exercised more than ten years from the date of grant.
Options to purchase 599,395 and 1,326,714 common shares remained available for
grant as of September 30, 1996 and 1995, respectively.

                                      35
<PAGE>   50

     A summary of stock option transactions during the three years ended
September 30, 1996 is as follows:

<TABLE>
<CAPTION>
                                                  Number        Price Range
(Share amounts in thousands)                    of Shares        per Share
                                                ---------        ---------
<S>                                              <C>         <C>    
Options outstanding
  September 30, 1993                             7,587       $.75 to $ 16.25
    Granted                                      1,437       5.00 to    7.50
    Exercised                                     (168)      1.07 to   6.875
    Forfeited                                     (137)      4.04 to   6.875
                                                -----------------------------
Options outstanding
  September 30, 1994                             8,719       $.75 to $ 16.25
    Granted                                      4,453       6.25 to    8.25
    Exercised                                     (505)      1.07 to   6.875
    Forfeited                                      (47)      4.77 to   6.875
                                                -----------------------------
Options outstanding
  September 30, 1995                            12,620       $.75 to $ 16.25
    Granted                                      2,339      7.188 to   14.50
    Exercised                                   (2,422)       .75 to   10.00
    Forfeited                                     (126)      6.25 to   14.50
                                                -----------------------------
Options outstanding
  September 30, 1996                            12,411       $.75 to $ 16.25
                                                -----------------------------
</TABLE>

     Of the options outstanding, 10,873,345, 9,567,270 and 5,278,870 were
exercisable as of September 30, 1996, 1995 and 1994, respectively.

     The Company has two stock grant plans under which grants of common shares
may be awarded to key officers, directors and managerial employees of the
Company and its subsidiaries. Shares granted under the plans generally vest in
varying cumulative periodic installments.

     A summary of stock grant transactions during the three years ended
September 30, 1996 is as follows:

<TABLE>
<CAPTION>
                                                          Number
                (Share amounts in thousands)            of Shares
                                                        ---------
                <S>                                        <C> 
                Grants Outstanding
                  September 30, 1993                        242
                    Granted                                 --
                    Vested                                 (110)
                    Forfeited                               --
                                                        ---------
                Grants Outstanding
                  September 30, 1994                        132
                    Granted                                  77
                    Vested                                 (129)
                    Forfeited                               --
                                                        ---------
                Grants Outstanding
                  September 30, 1995                         80
                    Granted                                 --
                    Vested                                  (31)
                    Forfeited                               (11)
                                                        ---------
                Grants Outstanding
                  September 30, 1996                         38
                                                        ---------
</TABLE>

     In October 1995, the FASB issued Statement of Financial Accounting
Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation". SFAS
123, which is effective for fiscal years beginning after December 15, 1995,
establishes financial accounting and reporting standards for stock-based
employee compensation plans. The pronouncement defines a fair value based
method of accounting for an employee stock option or similar equity instrument,
and allows an entity to either adopt that method of accounting for all of their
employee stock compensation plans, or to continue to measure compensation cost
for those plans using the intrinsic value based method of accounting prescribed
by APB Opinion No. 25, "Accounting for Stock Issued to Employees". Entities
electing to continue using the accounting methods prescribed by APB Opinion No.
25 must make pro forma disclosures of net income and earnings per share as if
the fair value based method of accounting defined in SFAS 123 had been applied.
The Company will adopt the pro forma disclosure provisions of SFAS 123 at the
beginning of fiscal year 1997.

10 EMPLOYEE BENEFIT PLANS

     Certain of the Company's employees are covered by defined contribution
plans. The Company's contributions to the plans are based on employee
contributions and totaled $3.6 million, $2.9 million and $2.6 million for the
years ended September 30, 1996, 1995 and 1994, respectively.

     In November 1992, the FASB issued Statement of Financial Accounting
Standards No. 112, "Employers' Accounting for Post-employment Benefits" ("SFAS
112"). The adoption of SFAS 112 by the Company during 1995 did not have a
material effect upon the financial statements because the Company does not
provide such benefits to its employees.

11 COMMITMENTS AND CONTINGENCIES

OPERATING LEASES

     The Company and its subsidiaries occupy various facilities and lease
certain equipment under leases, that range in length from 1 to 30 years. The
minimum rental commitments under non-cancelable operating leases, with lease
terms in excess of one year subsequent to September 30, 1996, are as follows:

                                      36
<PAGE>   51

<TABLE>
<CAPTION>
               (In thousands)
               <S>                           <C>   
               1997                          $2,325
               1998                           2,145
               1999                           1,934
               2000                           1,368
               2001                             263
               Thereafter                     1,169
                                             ------
                                             $9,204
                                             ======
</TABLE>

     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 $2.5 million, $2.2
million and $2.1 million for the years ended September 30, 1996, 1995 and 1994,
respectively.

EMPLOYMENT CONTRACTS

     The Company has entered into employment contracts with certain of its
employees. The Company's minimum salary and bonus obligations under these
contracts are as follows:

<TABLE>
<CAPTION>
               (In thousands)
               <S>                           <C>   
               1997                          $2,801
               1998                           1,674
               1999                           1,480
               2000                             130
               2001                             125
                                             ------
                                             $6,210
                                             ======
</TABLE>

CAPITAL EXPENDITURES

     As of September 30, 1996 and 1995, the Company had capital expenditure
commitments totaling approximately $17.5 million and $15.5 million,
respectively.

CONTINGENCIES

     The Company is a defendant or otherwise involved in a number of lawsuits.
In the opinion of management, the Company's ultimate liability with respect to
these lawsuits is not expected to have a significant or material adverse effect
on the Company's consolidated financial position or results of operations.

     The Company insures its drilling rigs and equipment subject to various
deductibles, but not exceeding $.25 million per occurrence. The Company retains
the first $1.0 million per occurrence of its workers' compensation exposures in
the US Lower 48 and Alaska. These operations also are subject to a $.25 million
per occurrence deductible for auto liability. All international workers'
compensation and automobile liability is subject to a retrospectively rated
insurance policy. The Company self-insures the first $1.0 million per
occurrence and $2.0 million in the aggregate of general liability claims.

12 SUPPLEMENTAL BALANCE SHEET AND STATEMENT OF INCOME INFORMATION

     Accounts receivable is net of an allowance for doubtful accounts of $1.5
million and $1.4 million as of September 30, 1996 and 1995, respectively.
Pursuant to an employment agreement with an officer, the Company has provided a
non-interest bearing loan for approximately $2.9 million.

     Accrued liabilities includes accrued compensation totaling $23.1 million
and $19.6 million as of September 30, 1996 and 1995, respectively.

     Other income, net includes the following:

<TABLE>
<CAPTION>
                                                        September 30,
(In thousands)                                    1996       1995        1994
                                                --------   --------    --------
<S>                                             <C>        <C>         <C>     
Insurance gains                                 $  4,693   $  4,649    $    484
Marketable securities realized
  and unrealized gains                             4,871      2,406         908
Dividend income                                      486        297         550
Foreign currency gains (losses)                      510     (3,160)     (1,502)
Other                                                668        394         268
                                                --------   --------    --------
                                                $ 11,228   $  4,586    $    708
                                                ========   ========    ========
</TABLE>

13 UNAUDITED QUARTERLY FINANCIAL INFORMATION

<TABLE>
<CAPTION>
                                            Year Ended September 30, 1996
(In thousands,                        First      Second       Third      Fourth
except per share amounts)            Quarter     Quarter     Quarter     Quarter
                                    --------    --------    --------    --------
<S>                                 <C>         <C>         <C>         <C>     
Revenues                            $164,338    $163,319    $181,336    $210,750
Gross profit
  (excluding depreci-
  ation and general
  and administrative
  expenses)                           39,879      43,299      46,766      50,134
Operating income                      17,332      18,189      20,550      21,028
Net income                            15,262      16,822      18,669      19,747
Primary earnings
  per share                         $    .17    $    .18    $    .20    $    .21
                                    --------    --------    --------    --------
</TABLE>

<TABLE>
<CAPTION>
                                            Year Ended September 30, 1995
(In thousands,                        First      Second       Third      Fourth
except per share amounts)            Quarter     Quarter     Quarter     Quarter
                                    --------    --------    --------    --------
<S>                                 <C>         <C>         <C>         <C>     
Revenues                            $126,002    $143,335    $152,673    $150,778
Gross profit
  (excluding depreci-
  ation and general
  and administrative
  expenses)                           32,257      34,510      36,790      35,134
Operating income                      13,655      14,163      15,132      15,605
Net income                            11,073      12,284      13,045      14,702
Primary earnings
  per share                         $    .13    $    .14    $    .15    $    .16
                                    --------    --------    --------    --------
</TABLE>

                                      37
<PAGE>   52

14 DISTRIBUTION OF EARNINGS AND ASSETS

     The following table sets forth financial information with respect to the
Company and its subsidiaries, on a consolidated basis, by geographical area:

<TABLE>
<CAPTION>
Geographic Areas                                 Year Ended September 30,
(In thousands)                               1996          1995          1994
                                           --------      --------      --------
<S>                                        <C>           <C>           <C>     
Revenues(1)(2)
  North America                            $532,638      $416,475      $323,149
                                           --------      --------      --------
  International:
    Middle East, CIS,
      Africa and other                       64,682        58,932        76,156
    South and
      Central America                        69,232        49,453        32,991
    UK North Sea                             53,191        47,928        51,972
                                           --------      --------      --------
      Total International                   187,105       156,313       161,119
                                           --------      --------      --------
                                           $719,743      $572,788      $484,268
                                           --------      --------      --------

Operating income (loss)
  North America                            $ 61,611      $ 47,989      $ 35,246
                                           --------      --------      --------
  International:
    Middle East, CIS,
      Africa and other                        6,742         8,346       (26,091)
    South and
      Central America                        14,531         8,031         5,781
    UK North Sea                              6,575         3,916         5,647
                                           --------      --------      --------
      Total International                    27,848        20,293       (14,663)
                                           --------      --------      --------
  Corporate                                 (12,360)       (9,727)      (11,284)
                                           --------      --------      --------
                                           $ 77,099      $ 58,555      $  9,299
                                           --------      --------      --------

Assets
  North America                            $496,664      $354,733      $251,848
                                           --------      --------      --------
  International:
    Middle East, CIS,
      Africa and other                      139,454       117,887       108,170
    South and
      Central America                        87,898        84,845        52,843
    UK North Sea                             15,878        15,221        21,398
                                           --------      --------      --------
      Total International                   243,230       217,953       182,411
                                           --------      --------      --------
  Corporate                                 131,380        20,586        56,014
                                           --------      --------      --------
                                           $871,274      $593,272      $490,273
                                           --------      --------      --------
</TABLE>

(1)  No material revenues were derived from transactions between geographic
     areas of operation.

(2)  No customers provided 10% or more of consolidated revenues in the years
     presented. In the opinion of management, the loss of a single customer
     would not have a material adverse effect on the Company's business.

15 SUBSEQUENT EVENTS

     During November 1996, the Company completed the sale of its wholly owned
subsidiary Nabors Drilling & Energy Services UK Ltd. ("NDES") to KCA, a wholly
owned subsidiary of Abbot Group plc, a diversified holding company listed on
the London stock exchange. The Company received approximately $36.0 million
plus the value of working capital in cash, as well as 10.8 million four year
warrants to acquire stock in the Abbot Group plc at 83 pence per share. The
transaction will result in a gain which will be reflected in the Company's
financial statements in the first quarter of 1997.

     During December 1996, the Company purchased 47 land drilling rigs from
Noble Drilling Corporation for $60 million in cash. The fleet of rigs consists
of 19 operating rigs and 28 stacked rigs in various stages of completeness; 38
of the rigs are located in the United States and nine are located in Canada.
The acquisition will be accounted for under the purchase method of accounting.

     During December 1996, the Company executed a definitive agreement to merge
with Adcor-Nicklos Drilling Company ("Adcor") in a stock-for-stock exchange
that will be accounted for as a pooling-of-interests. All of the stock of Adcor
will be exchanged for approximately 3.4 million shares of Nabors common stock.
The transaction, which has already received government approval, is expected to
close in January 1997. The Adcor fleet consists of 30 active and six stacked
rigs located in the United States. The assets also include significant amounts
of drill pipe, spare drilling equipment, yards, vehicles and other support
equipment.

                                      38
<PAGE>   53

CORPORATE ADDRESS
Nabors Industries, Inc.
515 West Greens Road
Suite 1200
Houston, Texas 77067
Telephone: (281) 874-0035
Fax: (281) 872-5205

FORM 10-K
Copies may be obtained at no charge by writing to the 
Secretary at the corporate office of the Company.

TRANSFER AGENT
First Chicago Trust Company of New York
P.O. Box 2500
Jersey City, New Jersey 07303

INVESTOR CONTACT
Dennis A. Smith
Director of Corporate Development

INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P.
Houston, Texas

PRICE OF COMMON STOCK

     As of September 30, 1996, there were 86,981,388 shares of Common Stock
outstanding held by 1,628 holders of record.

     The Common Stock is listed on the American Stock Exchange under the symbol
"NBR." The following table sets forth the reported high and low sales prices of
the Common Stock on the Composite Tape for the quarters indicated.

<TABLE>
<CAPTION>
                                  Stock Price
Fiscal Year                    High          Low
-----------                    ----          ---
<S>                           <C>          <C>      
1995
  First Quarter                7 7/8        6 1/8
  Second Quarter               7 1/2        6
  Third Quarter                9 11/16      7 3/8
  Fourth Quarter              10            7 15/16
1996
  First Quarter               11 3/8        8 1/16
  Second Quarter              15 1/4       10 1/4
  Third Quarter               16 5/8       13 7/8
  Fourth Quarter              17 3/8       13
</TABLE>

OPERATING SUBSIDIARIES
Nabors Alaska Drilling, Inc.
Anchorage, Alaska
James Denney, President

Nabors Drilling International Limited
Houston, Texas
Siegfried Meissner, President

Nabors Drilling USA, Inc.
Houston, Texas
Richard Stratton, President
Larry P. Heidt, Executive Vice President

Nabors Drilling Limited
Nisku, Alberta
Duane A. Mather, President

Peak Oilfield Services Company
Anchorage Alaska
Michael R. O' Conner, President

Loffland Brothers de Venezuela, C.A.
Caracas, Venezuela
Siegfried Meissner, President

Sundowner Offshore Services, Inc.
Houston, Texas
Jerry C. Shanklin, President and Chairman

CANRIG Drilling Technology, Ltd.
Magnolio, Texas
Allan Richardson, President

EPOCH Well Logging, Inc.
Bakersfield, California
Christopher P. Papouras, President

<PAGE>   54


                                    [PHOTO]