<PAGE>   1

                                 FRONT COVER

                                      
                           (OUTLINE DRAWING OF RIG)

                                      
                            NABORS INDUSTRIES 1997
                                      
                                ANNUAL REPORT

<PAGE>   2


================================================================================
                                            NABORS INDUSTRIES 1997 ANNUAL REPORT
================================================================================
                             FINANCIAL HIGHLIGHTS
================================================================================

(In thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                                  Year Ended September 30,
OPERATING DATA                       1997               1996               1995               1994               1993 
                                  -----------        -----------        -----------        -----------        -----------
<S>                               <C>                <C>                <C>                <C>                <C>        
Revenues                          $ 1,029,303        $   719,743        $   572,788        $   484,268        $   419,406
Depreciation and
   amortization                        66,391             46,117             31,042             26,241             22,434
Operating income                      154,761             77,099             58,555              9,299             38,257
Net income                            114,808             70,500             51,104              1,350             38,558
Net income per share -
   fully diluted                  $      1.06        $       .75        $       .57        $       .02        $       .49
Weighted average number
   of shares outstanding -
   fully diluted                      113,398             93,917             90,237             85,743             78,288

<CAPTION>
                                                                  Year Ended September 30,
OPERATING DATA                       1992               1991               1990               1989               1988
                                  -----------        -----------        -----------        -----------        -----------
<S>                               <C>                <C>                <C>                <C>                <C>        
Revenues                          $   312,407        $   264,239        $   153,920        $    85,600        $    63,060
Depreciation and
   amortization                        16,526             10,119              5,232              3,884              3,502
Operating income                       34,705             30,324             14,383              5,346                403
Net income                             33,740             29,724             16,401              7,165             23,522
Net income per share -
   fully diluted                  $       .45        $       .42        $       .26        $       .14        $       .85
Weighted average number
   of shares outstanding -
   fully diluted                       74,821             70,728             62,513             51,644             27,671

</TABLE>

<TABLE>
<CAPTION>
                                                                     As of September 30,
BALANCE SHEET DATA                   1997               1996               1995               1994               1993 
                                  -----------        -----------        -----------        -----------        -----------
<S>                               <C>                <C>                <C>                <C>                <C>        
Cash and short-term
   marketable securities          $    11,044        $   104,027        $    15,334        $    45,232        $    70,458
Working capital                        70,872            172,091             33,892             77,248            113,653
Property, plant and
   equipment, net                     861,393            511,203            393,464            283,141            270,865
Total assets                        1,234,232            871,274            593,272            490,273            493,927
Long-term obligations                 229,507            229,504             51,478             61,879             73,109
Stockholders' equity                  727,843            457,822            368,750            317,424            307,583
Capital expenditures
   including acquisitions             396,668            174,483            144,560             62,907             84,752

<CAPTION>
                                                                      As of September 30,
BALANCE SHEET DATA                    1992               1991               1990               1989               1988
                                  -----------        -----------        -----------        -----------        -----------
<S>                               <C>                <C>                <C>                <C>                <C>        
Cash and short-term
   marketable securities          $    14,783        $    15,139        $    29,332        $     6,484        $    13,354
Working capital                        33,831             15,650             40,956              7,784              8,678
Property, plant and
   equipment, net                     220,761            185,543            109,928             42,728             28,357
Total assets                          339,930            285,615            226,846             75,519             61,123
Long-term obligations                  49,294             37,489             37,729              7,760              4,254
Stockholders' equity                  201,058            157,302            117,335             47,215             36,101
Capital expenditures
   including acquisitions              61,124             88,104             73,943             19,751              7,414

</TABLE>


<TABLE>
<CAPTION>
GEOGRAPHIC DISTRIBUTION
OF EARNINGS                                                      YEAR ENDED SEPTEMBER 30,
                                      1997               1996               1995               1994               1993 
                                  -----------        -----------        -----------        -----------        -----------
<S>                               <C>                <C>                <C>                <C>                <C>        
Revenues:
  North America                   $   852,368        $   532,638        $   416,475        $   323,149        $   235,716
  International                       176,935            187,105            156,313            161,119            183,690
                                  -----------        -----------        -----------        -----------        -----------
                                  $ 1,029,303        $   719,743        $   572,788        $   484,268        $   419,406
                                  -----------        -----------        -----------        -----------        -----------
Operating income (loss):
  North America                   $   134,994        $    61,611        $    47,989        $    36,841        $    26,092
  International                        36,103             27,848             20,293            (14,663)            23,091
  Corporate                           (14,581)           (12,360)            (9,727)           (11,284)           (10,926)
  Merger expenses                      (1,755)                --                 --             (1,595)                -- 
                                  -----------        -----------        -----------        -----------        -----------
                                  $   154,761        $    77,099        $    58,555        $     9,299        $    38,257
                                  -----------        -----------        -----------        -----------        -----------
<CAPTION>

GEOGRAPHIC DISTRIBUTION
OF EARNINGS                                                       YEAR ENDED SEPTEMBER 30,
                                      1992               1991               1990               1989               1988
                                  -----------        -----------        -----------        -----------        -----------
<S>                               <C>                <C>                <C>                <C>                <C>        
Revenues:
  North America                   $   147,506        $   165,438        $   101,335        $    67,888        $    63,060
  International                       164,901             98,801             52,585             17,712                 --
                                  -----------        -----------        -----------        -----------        -----------
                                  $   312,407        $   264,239        $   153,920        $    85,600        $    63,060
                                  -----------        -----------        -----------        -----------        -----------
Operating income (loss):
  North America                   $    12,618        $    15,119        $     9,422        $     9,116        $     4,390
  International                        35,111             27,527             13,640                609                 --
  Corporate                           (13,024)           (12,322)            (8,679)            (4,379)            (3,987)
  Merger expenses                          --                 --                 --                 --                 --
                                  -----------        -----------        -----------        -----------        -----------
                                  $    34,705        $    30,324        $    14,383        $     5,346        $       403
                                  -----------        -----------        -----------        -----------        -----------
</TABLE>




                                       1
<PAGE>   3

--------------------------------------------------------------------------------
                                            NABORS INDUSTRIES 1997 ANNUAL REPORT
--------------------------------------------------------------------------------
TO OUR SHAREHOLDERS
--------------------------------------------------------------------------------

DURING FISCAL 1997, YOUR COMPANY BEGAN TO EXPERIENCE AN ACCELERATION IN THE
GROWTH OF ITS OPERATIONAL AND FINANCIAL PERFORMANCE. FAVORABLE DEVELOPMENTS IN
VIRTUALLY EVERY AREA OF OUR BUSINESS WERE THE RESULT OF BOTH STRONG MARKETS AND
THE SOLID POSITIONS WE HAVE CAREFULLY CULTIVATED OVER THE LAST DECADE.

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

     The best illustration of the magnitude of this year's performance is the
doubling of our operating income to $154.8 million. The operating leverage in
our business is apparent when one considers that this increase in operating
income came from a 43 percent improvement in revenues, which exceeded $1 billion
for the first time. Net income posted an increase of 63 percent to $114.8
million, or $1.06 per share. This is particularly noteworthy considering the
$0.47 per share increase in deferred (non-cash) taxes and 19.5 million
additional fully diluted shares. Other financial measures are equally
favorable. Net operating profit after current tax represented a return on
capital employed of 16 percent. Our capital structure improved even further as
total debt as a percentage of capitalization declined from 35 percent to 27
percent. Our improving performance, solid financial position and strong outlook
were recognized by Moody's Investor Services with an upgrade of our corporate
credit rating to A3.
        
     The year's operational accomplishments are equally significant and should
provide an expanded base for further growth. We completed over $230 million in
acquisitions while reinvesting another $160 million in technological
enhancements and rig-related component replacements, upgrades, reactivations and
new-builds. We responded to the need for additional qualified entry level rig
crews by establishing a training facility that is turning out 40 new roughnecks
per month, while preparing seasoned crew members for higher level jobs. We
further improved our safety record, which is always our top priority, and we
will continue to strive for even higher levels of performance. We also achieved
a more favorable position in most operational aspects of our extensive worldwide
fleet. Specifically, utilization increased from 58 percent to 65 percent, which
is particularly significant considering that the size of the fleet also
increased during the fiscal year, from 310 to 410 rigs. In our US Lower 48 
unit, the daily average gross margin


--------------------------------------------------------------------------------
                                       2
<PAGE>   4
--------------------------------------------------------------------------------
                                            NABORS INDUSTRIES 1997 ANNUAL REPORT
--------------------------------------------------------------------------------

per rig (rig level cash flow) increased substantially and significant increases
occurred in all of our other operating units as well.

     Progress continues toward reaching and expanding our potential in many
areas and from many sources. As we move forward, the prioritization of our
efforts will be in four areas that promise attractive returns. Our first
priority will be to optimize the return from our existing active fleet. Current
average rig dayrates are barely half of what we believe is required for economic
replacement of rigs, while Nabors' worldwide utilization stands at just 65
percent.

     Our next priority is to activate our stacked rigs as market conditions
warrant in both the domestic and international markets. This can be accomplished
with relatively small amounts of additional capital per rig, allowing us to
economically meet our customer needs for additional high quality, lower cost,
deep SCR rigs for some time to come. Nearly $100 million of 1997's investments
went to accumulating these rigs, which represent a majority of the world's
remaining stacked premium rigs. 

     Additionally, there remains significant potential for Nabors to increase
the extent of other value-added services we provide to our customers and we will
continue to focus on this in the coming year. Our efforts will be directed at
further market penetration with our existing products and services while we
seek to develop other business lines. Several examples of this additional
aspect of our strategic focus were apparent in 1997. Among these was the
expansion of our presence in the top drive drilling market, evidenced by a 50
percent increase in the number of top drives shipped by Canrig Drilling
Technology. We also entered the mudlogging and drilling instrumentation
business with the acquisition of Epoch Well Logging. Both of these developments
represent a further integration of our services, both vertically in that Canrig
and Epoch are suppliers to our own rig fleet and horizontally in that they
constitute new business lines with significant potential.
        
     We will also continue to seek attractive investment opportunities, both
internally in the form of expanding and enhancing our asset base and externally
in the form of acquisitions. Nabors' growing technical and operational staff
represents an ever increasing level of intellectual capital that, along with our
financial capacity, allow us to undertake more varied, larger and more complex
projects worldwide. Acquisitions will continue to be a prominent focus. We have
the organizational resources in-house needed to prospect for, analyze and
quickly consummate a transaction with minimal reliance on outside advisors.

     We believe the long-term fundamentals are conducive to attaining these
goals. Since 1982, an oversupply of crude oil globally and natural gas in North
America has reduced the number of wells that would normally have been drilled
annually to meet growing demand and offset depletion of existing reservoirs.


--------------------------------------------------------------------------------
                                       3
<PAGE>   5
--------------------------------------------------------------------------------
                                          NABORS INDUSTRIES 1997 ANNUAL REPORT 
--------------------------------------------------------------------------------

                                    [PHOTO]

                               EUGENE M. ISENBERG
                         Chairman and Executive Officer

                                    [PHOTO]

                              ANTHONY G. PETRELLO
                     President and Chief Operating Officer

                                    [PHOTO]

                              RICHARD A. STRATTON
                                 Vice Chairman

     Today, this excess supply has been greatly diminished, if not exhausted,
and incremental production must now come through the drilling of additional
wells. Exacerbating this situation is an apparent acceleration in the depletion
rate of North American gas production, which is requiring a significantly larger
number of rigs operating just to keep gas deliverability constant. This creates
numerous opportunities for increasing the yield from our existing assets and
reinvesting our increasing cash flow in new and upgraded rigs and other
services.

     Clearly these are exciting times for Nabors but they are not without
challenges. We must continue to help our customers improve their per barrel of
oil equivalent (boe) lifting and finding costs. This requires continued
improvements in drilling efficiency through implementation of new technology,
improved practices and the creation of more value-added services. An essential
element of this is the aggressive steps we are taking to overcome the shortage
of experienced personnel by recruiting and training new rig hands, field
supervisors, engineers and managers. We must also redouble our efforts to create
an even safer working environment, particularly as we face the challenges
presented by a rapidly expanding work force.

     The balance of this report will describe to you in more detail the various
components of our business, the diverse nature and quantity of our assets, our
competitive advantages, and how these elements collectively translate into
increased value for our customers and our investors. Thank you for the
confidence your ownership of Nabors demonstrates. We look forward to another
prosperous year and hope to report our continued progress to you.

Sincerely, 

/s/ EUGENE M. ISENBERG

Eugene M. Isenberg 
Chairman and Chief Executive Officer


--------------------------------------------------------------------------------
                                       4
<PAGE>   6
--------------------------------------------------------------------------------
THE BUSINESS                              NABORS INDUSTRIES 1997 ANNUAL REPORT 
--------------------------------------------------------------------------------


NABORS IS THE WORLD'S LARGEST PROVIDER OF LAND AND PLATFORM DRILLING CONTRACT
SERVICES FOR EXPLORATION AND DEVELOPMENT OF OIL, GAS AND GEOTHERMAL WELLS. OUR
CUSTOMER BASE REPRESENTS MOST OF THE WORLD'S MAJOR INTEGRATED OIL COMPANIES,
SIGNIFICANT INDEPENDENT PRODUCERS AND GOVERNMENT-OWNED OIL COMPANIES. OUR
CUSTOMERS CONTRACT WITH US ON A COMPETITIVE BID BASIS TO CONSTRUCT THEIR WELLS.
THE SCOPE OF THE MAJORITY OF OUR SERVICES ENTAILS THE PROVISION OF A SUITABLE
DRILLING RIG, VARIOUS AUXILIARY EQUIPMENT AND SERVICES, AND THE PERSONNEL
NECESSARY TO EFFICIENTLY CARRY OUT THIS TASK. A SMALLER, BUT GROWING PORTION OF
OUR BUSINESS IS THE PROVISION OF OTHER SERVICES AND EQUIPMENT RELATED TO
DRILLING AND THE PRODUCTION OF OIL AND GAS. 

     The construction of a well involves the drilling rig, which varies greatly
in size, style, configuration and complexity, numerous pieces of additional
equipment and several types of services. Our customers may have as many as 10 to
15 different contractors and suppliers on a more sophisticated well. Among these
suppliers are providers of drilling and completion fluids, drilling tools such
as bits, directional measurement and steering systems, wellhead and tubular
goods, cementing, formation testing and evaluation, and other auxiliary goods
and services including location construction, transportation, final cleanup and
environmental restoration.

     Nabors concentrates on the deeper, more sophisticated drilling in most of
the world's larger and sustainable producing regions. The bulk of the drilling
conducted by Nabors is accomplished on land where the Company owns over 400
active and stacked rigs. However, the offshore component of our business has
increased in the last few years and today represents nearly 15 percent of our
total revenues.

     A significant portion of Nabors' offshore and Alaskan North Slope revenues
comes from two other aspects of the business called workover and
reentry/redrilling. This involves going back into existing wells and repairing
or redrilling the well, often horizontally, to restore or enhance the
hydrocarbon production. Special rigs are used for this purpose on both land and
offshore.


--------------------------------------------------------------------------------
                                       5
<PAGE>   7
--------------------------------------------------------------------------------
THE BUSINESS                                NABORS INDUSTRIES 1997 ANNUAL REPORT
--------------------------------------------------------------------------------

     Nabors enters into contracts with its customers that govern the commercial
terms of our work. The great majority of our contracts are on a daywork
compensation basis, wherein we conduct the drilling of the well at the
customer's direction for an agreed price per day, regardless of the time
required and without the consequences of weather or geologic risk. Occasionally,
when we judge the assumption of risk as rational and the risk/reward balance
attractive, we drill wells either on a footage or turnkey basis, which is a lump
sum price for a completed well. Frequently, contracts for our offshore,
international and Alaskan rigs are for a defined term of one to three years. The
duration of contracts in the US Lower 48 and Canada are usually on a
well-to-well basis or for a specified number of wells.

CORE BUSINESSES 

     Nabors' four core business units are Alaska, the US Lower 48 and Canada,
International and Sundowner/Nabors Offshore Drilling, Inc.

ALASKA 

     Nabors and its predecessor companies drilled the discovery well and
confirmation wells on the supergiant Prudhoe Bay field and we have been the
leading North Slope contractor since 1963. The Company holds many of the
drilling records in Alaska and was one of the pioneers in horizontal drilling,
which was initially applied full-scale on the North Slope. The Company currently
operates nine highly specialized arctic drilling and workover/redrilling rigs on
the North Slope and three more conventional land rigs in the Kenai/Cook Inlet
area, as well as one offshore platform drilling rig. A 50 percent-owned joint
venture, Peak Oilfield Services Company (Peak), is also active in Alaska and is
expanding into the Lower 48. Peak is involved in moving rigs from one drilling
location to another; in other heavy oilfield hauling; in oilfield construction
of roads and pads, pipelines and facilities; and in maintenance and operation of
production facilities and equipment.

     1997 saw an increase in the number of rigs running and was a robust year
for the construction activities of Peak. We commenced initial development
drilling operations on the Badami field, 26 miles east of Prudhoe Bay on the
Arctic Ocean coastline. The drillsites and interconnecting roads for Badami were
constructed by another 50 percent joint venture, Alaska Interstate Construction.

     We believe 1998 holds the promise of a significant increase in activity
with a long stacked rig scheduled for reactivation and commencement of
developmental drilling operations in the Prudhoe Bay unit and subsequently on
North Star, a new offshore satellite field development project. The commencement
of numerous other satellite field developments and existing field rework
projects are planned. This may require new-built, modularized, quick-moving
arctic rigs in support of our customers' efforts to arrest the decline in
production from the North Slope. Production peaked at 1.8 million barrels of oil
per day (bopd) in 1988 and has since declined to less than 1.5 million bopd.


--------------------------------------------------------------------------------
                                       6
<PAGE>   8
                                     PAGE 7
                                   PHOTO HERE

                            (WET TRIP ON RIG FLOOR)


--------------------------------------------------------------------------------
                                       7
<PAGE>   9
--------------------------------------------------------------------------------
THE BUSINESS                                NABORS INDUSTRIES 1997 ANNUAL REPORT
--------------------------------------------------------------------------------

US LOWER 48 AND CANADA 

     Nabors is the leading North American land drilling company with some 90
years of operating experience. The US Lower 48 unit operates in every region of
the country except the northeastern quadrant, with a large concentration of
assets in the most significant producing regions. Our US Lower 48 and Canadian
operations encompass a combined total of approximately 330 actively marketed
rigs. In the US Lower 48, we also have approximately 45 premium rigs in stacked
condition that can be economically reactivated to meet increasing demand as
market conditions warrant. There is also a large quantity of major component
equipment for use in assembling new rigs or upgrading stacked rigs, or to repair
and/or replace operating rigs. Almost 60 percent of the rigs in these fleets
have drilling capacities of greater than 15,000 feet and over 40 percent are
powered with diesel electric SCR systems. In addition, there are a significant
number of wheel mounted, highly mobile rigs which are also in strong demand
since their inherently lower moving costs create a competitive advantage.

     Nabors is the industry leader in total footage drilled and drills a high
proportion of the directional, horizontal and multi-lateral wells undertaken by
the industry. In Canada, the Company has particular expertise in drilling deep
gas wells and wells with high levels of "sour" hydrogen sulfide.

     During 1997, the fleet grew through acquisitions by over 60 rigs, while
utilization increased from 55 percent to 64 percent. The US Lower 48 average
daily gross margin per rig rose significantly over the previous year's levels as
pricing moved upward in response to limited supply and increased demand.

     We believe the prospects for 1998 look promising with numerous projects
planned by our customers that will require incremental deep premium rigs.
Activity in every area is expected to be steady to increasing, particularly in
areas that have lagged in recent years. The integration of our value-added
services into our own fleet will continue, further benefiting our overall
returns while creating new market opportunities with external customers.

INTERNATIONAL 

     Nabors has a long and productive record in the international drilling
arena. We have been in Venezuela for more than 50 years, in Saudi Arabia for 35
years and have extensive experience in numerous other countries. Nabors' rigs
and crews have conducted some of the most difficult international drilling
operations. We also drilled the major Yemen discovery wells and virtually all of
the development wells there.

     Nabors' International fleet consists of 46 land rigs and one offshore
jackup rig. These assets are concentrated in the Middle East with 19 rigs and in
South America, primarily in Venezuela, with 17 rigs. Six additional rigs were
recently added to the


--------------------------------------------------------------------------------
                                       8
<PAGE>   10
--------------------------------------------------------------------------------
THE BUSINESS                                NABORS INDUSTRIES 1997 ANNUAL REPORT
--------------------------------------------------------------------------------

Company's expanding Saudi Arabia operation. Five of these rigs are conducting
development drilling operations in the large, strategically important Shaybah
field, a remote and logistically difficult area of Saudi Arabia. This field is
expected to be producing 500 thousand bopd by 1999.

     We believe 1998 promises to be a robust year with an increase in bidding
activity, portending a large increase in international rig demand in virtually
every area in which we currently operate, and in several areas where we have
expansion interests.

SUNDOWNER/NABORS OFFSHORE DRILLING, INC. 

     The Nabors Offshore Division is composed of Sundowner Offshore Services,
Inc., which conducts workover and reentry/ redrilling operations, and Nabors
Offshore Drilling, Inc., which focuses on offshore drilling projects. Both units
operate in the Gulf of Mexico, as well as in a number of foreign locations. The
Company has developed innovative platform rig designs for both workover and
drilling rigs that provide significant economic advantages over competitive
rigs. All of the platform rigs are capable of operating in any water depth in
which a production platform is located, including the highly prospective deep
water basins throughout the world. Our rigs are capable of being adapted for use
on deep water Tension Leg Platforms, Floating Production Systems and the new 
generation Spar Platforms.

     The 15 Sundowner and Super Sundowner workover/redrilling rigs are of
modular design and are therefore highly mobile. In fact, the very name Sundowner
was derived from the Company's ability to complete a rig-up by sundown.
Sundowner also operates five shallow water workover/redrilling jackup rigs.

     Nabors Offshore Drilling operates five conventionally configured API
(American Petroleum Institute) rigs, two innovative land rig conversions and
three of its proprietary Minimum Area, Self-Erecting (MASE(TM)) offshore
platform drilling rigs. The MASE(TM) rig is patterned after the Sundowner
workover rig configuration. It is lighter, occupies less space and moves at
significantly less cost than conventional API platform rigs.

     In 1997, utilization and rates for both companies' rigs increased
significantly. Additionally, one new Sundowner workover rig and one new platform
drilling rig were added to the fleet.

     We believe 1998 will be a year of further improvement with continued
revenue and utilization increases expected. One additional API rig and the two
rigs added in late fiscal 1997 should be largely incremental to 1998 results.
Strong market demand is expected to continue, including in the international
market.



--------------------------------------------------------------------------------
                                       9
<PAGE>   11
--------------------------------------------------------------------------------
THE BUSINESS                                NABORS INDUSTRIES 1997 ANNUAL REPORT
--------------------------------------------------------------------------------

OTHER BUSINESSES 

     Other businesses include Canrig Drilling Technology, a manufacturer of top
drives which are used on most offshore rigs, as well as on many of the more
sophisticated land drilling rigs; Epoch Well Logging, which furnishes mudlogging
services and manufactures rig instrumentation systems; and Peak Oilfield
Services, an oilfield construction and transportation company which moves rigs
and related equipment from one drilling site to another. During 1997, we also
expanded our Performance Drilling Services business, which offers turnkey and 
complete project management services to our customers.


                 [Graphs regarding operational and statistical
                  information to be interspursed throughout.]


--------------------------------------------------------------------------------
                                       10
<PAGE>   12
--------------------------------------------------------------------------------
THE ASSETS                                  NABORS INDUSTRIES 1997 ANNUAL REPORT
--------------------------------------------------------------------------------


AMONG NABORS' STRENGTHS IS THE SIZE, DIVERSITY, PREMIUM QUALITY AND GEOGRAPHIC
LOCATION OF OUR PHYSICAL ASSETS. WE ARE ABLE TO MEET OUR CUSTOMERS' REQUIREMENTS
ECONOMICALLY WITH THE OPTIMUM RIG FOR ANY DEPTH RANGE IN MOST OF THE WORLD'S
SIGNIFICANT OIL AND GAS PRODUCING REGIONS. 

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

LAND RIGS 

     Nabors has the largest land rig fleet. The majority of our rigs, some 60
percent of our worldwide fleet, are the more sophisticated rigs capable of
drilling to 15,000 feet or deeper. Even more important is the premium nature of
our fleet, with over 40 percent of our rigs being diesel-electric SCR rigs,
widely preferred for deeper, more sophisticated wells.

     Recent advancements in seismic and directional drilling capabilities have
made it possible to locate, identify and economically exploit deeper, smaller
and previously uneconomic or unidentified reservoirs. This development is
particularly noteworthy in the US Lower 48 gas drilling market where Nabors is
well positioned.

     Deep SCR rigs are becoming more in demand as land drilling markets
worldwide tend toward deeper formations and/or more directional, extended reach
or horizontal wells. This in turn creates increased demand for big rigs,
particularly SCR rigs, which provide a number of operational and economic
advantages when compared to typical mechanical rigs.

     The time required to move rigs between wells is also becoming increasingly
important to our customers, especially on short duration wells or in-field roads
where weight limits are less stringent. The impact of mobilization costs can be
significant on operator economics, as well as the contractor's competitive
position, since moving costs are amortized over the number of days required to
drill the well.

     This has given rise to the development of a number of highly mobile Nabors
rigs. The best example is in Alaska where the Company operates a fleet of
sophisticated, modularized arctic rigs. The arctic North Slope rigs consist of
self-propelled or towed modules weighing up to 2.5 million pounds, but easily
transportable from location to location. These large rigs are capable of moving
between wells on the same drillsite in a matter of hours and require only one to
two days when moving between drillsites. They are also fully winterized and
self-contained so that the working environment is comfortable in temperatures
approaching -70 degrees Fahrenheit, with wind chill factors as low as -140
degrees. These rigs possess integral containment and disposal systems designed
to prevent contaminants or drilling fluids from reaching the sensitive arctic
environment.


--------------------------------------------------------------------------------
                                       11
<PAGE>   13
--------------------------------------------------------------------------------
THE ASSETS                                  NABORS INDUSTRIES 1997 ANNUAL REPORT
--------------------------------------------------------------------------------

     Other modularization and specialized moving systems are utilized to
increase mobility of desert rigs at work in the Middle East. Many of these rigs
are mounted on a chassis with oversized sand tires, allowing each rig to be
transported across the soft desert sand in larger packages, thus reducing moving
costs.

     In the US Lower 48, Canada and internationally, a small but significant
percentage of our fleet are the highly mobile, wheel mounted, shallower (6,000
to 12,000 feet) land drilling rigs capable of moving and rigging-up or down more
quickly than conventional substructure rigs.

OFFSHORE RIGS 

     Nabors maintains a growing fleet of technically sophisticated offshore
platform drilling and workover rigs through our Sundowner and Nabors Offshore
Drilling subsidiaries. These include MASE(TM), Tortuga and API drilling rigs,
and Sundowner, Super Sundowner and jackup workover/redrilling rigs.

     The Minimum Area, Self-Erecting (MASE(TM)) rig is a new generation offshore
drilling rig with innovative features designed to enhance our customers'
economics. It is modular in design, occupies less space and weighs significantly
less than conventional platform drilling rigs. A MASE(TM) rig is capable of
being erected with standard platform cranes, thus eliminating the need for
expensive derrick barges. It is also engineered to assume several different
configurations, which allow the rig to be installed on most offshore platforms
with minimal interference with production equipment on the drill deck.

     The Tortuga rig is an equally innovative offshore drilling rig that
showcases Sundowner's engineering expertise. It is a land rig that has been
converted to work as an offshore platform rig. It has been especially
cost effective on the narrower structures which characterize several platforms
in the shallow waters of the Gulf of Mexico, near the mouth of the Mississippi
River where mudslides often occur.

     The Sundowner and Super Sundowner are offshore workover/redrilling rigs
designed to re-enter existing wells and replace tubing, improve flow or perform
other remedial action. The Super Sundowner can also perform redrilling or
sidetracking operations, which are often done horizontally at a higher cost, but
which pay off in increased production of oil and gas. Both rigs are highly
mobile, meaning they can rig-up and rig-down in a very short period of time,
making the rig very cost effective for the customer.

AUXILIARY ASSETS 

     Nabors has additional assets that are increasingly contributing to Company
revenues. These include top drives manufactured by Canrig, a Nabors subsidiary,
which are being placed on many


--------------------------------------------------------------------------------
                                       12
<PAGE>   14
--------------------------------------------------------------------------------
THE ASSETS                                  NABORS INDUSTRIES 1997 ANNUAL REPORT
--------------------------------------------------------------------------------

of the Company's land rigs. Top drives are especially valuable for directional
drilling and other technically difficult drilling operations. They provide a
value-added service for our customers while contributing to an improved Nabors
gross margin per rig. 

     The acquisition of Epoch provides a similar opportunity. Nabors is
currently placing Rigwatch(TM), a sophisticated drilling monitoring device, on
many of its rigs. This product performs a valuable function for our customers
while also increasing the revenues generated per rig.


--------------------------------------------------------------------------------
                                       13
<PAGE>   15
--------------------------------------------------------------------------------
THE ASSETS                                  NABORS INDUSTRIES 1997 ANNUAL REPORT
--------------------------------------------------------------------------------
AREAS OF OPERATION
--------------------------------------------------------------------------------

                                     [MAP]


--------------------------------------------------------------------------------
RIG FLEET
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
LAND RIG FLEET                 LESS THAN       10,000'      15,000'       20,000'
386 ACTIVELY MARKETED RIGS*     10,000'      TO 14,999'   TO 19,999'    AND DEEPER      TOTAL
---------------------------------------------------------------------------------------------
<S>                            <C>           <C>          <C>          <C>              <C> 
ALASKA
  North Slope                                      3            1            5              9
  Kenai/Cook Inlet                                 1            2                           3
---------------------------------------------------------------------------------------------
INTERNATIONAL
  Middle East                      3               7            4            5             19
  South and Central America        1               7            2            7             17
  CIS                                              3            1            1              5
  Africa                                           1                         1              2
  Far East                                                      2            1              3
---------------------------------------------------------------------------------------------
US LOWER 48                       33              93          115           59            300
---------------------------------------------------------------------------------------------
CANADA                            12               3            8            5             28
---------------------------------------------------------------------------------------------
TOTAL                             49             118          135           84            386
---------------------------------------------------------------------------------------------
</TABLE>

* As of December 31, 1997.


                                       14
<PAGE>   16
--------------------------------------------------------------------------------
THE ASSETS                                  NABORS INDUSTRIES 1997 ANNUAL REPORT
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
OFFSHORE RIG FLEET                MASE       SUNDOWNER      SUPER SUNDOWNER   PLATFORM
37 ACTIVELY MARKETED RIGS*      DRILLING      WORKOVER          WORKOVER      DRILLING     JACKUP     BARGE    TOTAL
--------------------------------------------------------------------------------------------------------------------
<S>                          <C>             <C>            <C>               <C>          <C>        <C>      <C>
ALASKA                                                                            1                               1
--------------------------------------------------------------------------------------------------------------------
INTERNATIONAL
  Middle East                                                                                 1                   1
  South and Central America         1                               1                                             2
  CIS                                             1                                                               1
  Europe and Africa                               1                 1                                             2
--------------------------------------------------------------------------------------------------------------------
GULF OF MEXICO                      2             6                 5             7**         5        5***      30
--------------------------------------------------------------------------------------------------------------------
TOTAL                               3             8                 7             8**         6        5***      37
--------------------------------------------------------------------------------------------------------------------
</TABLE>

*   As of December 31, 1997.
**  Number includes a rig under construction, deploying in January 1998.
*** Number includes three P&A barges.


<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------
                                      LESS THAN 10,000'  10,000' TO 14,999'   15,000' TO 19,999'    20,000' AND DEEPER
US LOWER 48 RIG FLEET                 -----------------  ------------------   ------------------    ------------------
300 ACTIVELY MARKETED RIGS*            MECH       SCR     MECH       SCR      MECH       SCR        MECH         SCR     TOTAL
------------------------------------------------------------------------------------------------------------------------------
<S>                                   <C>         <C>    <C>         <C>     <C>         <C>       <C>           <C>     <C>
East Texas District                                        11          1       11         14                       8       45
South Texas District                     1                  8          3        1         22                      10       45
Arkoma District                          6                  8          1       10          4          1            7       37
Gulf Coast District                                         1          2        5          4          6           16       34
California District                      2          1       3          4        1          6                       5       22
Wyoming District                        11          2      20          3       12          3          1            3       55
North Dakota District                                      10                  11          2                               23
West Texas District                     10                 18                   7          2          2                    39
------------------------------------------------------------------------------------------------------------------------------
TOTAL                                   30          3      79         14       58         57         10           49      300
------------------------------------------------------------------------------------------------------------------------------
</TABLE>

*  As of December 31, 1997.


                                       15
<PAGE>   17
--------------------------------------------------------------------------------
THE ASSETS                                  NABORS INDUSTRIES 1997 ANNUAL REPORT
--------------------------------------------------------------------------------

              (ILLUSTRATED DRAWINGS OF DIFFERENT RIG TYPES HERE)

--------------------------------------------------------------------------------
                                       16
<PAGE>   18
--------------------------------------------------------------------------------
THE EDGE                                    NABORS INDUSTRIES 1997 ANNUAL REPORT
--------------------------------------------------------------------------------

NABORS BELIEVES IT HAS A COMPETITIVE EDGE IN MOST OF ITS MARKETS RESULTING FROM
THE PREMIUM NATURE AND GEOGRAPHIC DIVERSITY OF THE FLEET, A MATURE AND
MULTI-REGIONAL OPERATIONAL INFRASTRUCTURE, THE ABILITY TO INTEGRATE VERTICALLY
AND HORIZONTALLY AND AN EVER INCREASING LEVEL OF TECHNICAL AND OPERATIONAL
INTELLECTUAL CAPITAL. ALL OF THESE ARE SUPPORTED BY OUR STRONG FINANCIAL
POSITION. 
        
--------------------------------------------------------------------------------

THE FLEET 

     Many of these competitive advantages stem from the characteristics of our
rig fleet. In fact, we have more total rigs, more SCR rigs, more deep drilling
rigs, more arctic rigs and more stacked premium rigs and components than any
other contractor. We have a solid position in the offshore platform workover and
drilling business and we are looking to the future with a number of advanced
innovative concepts under development. Nabors is also well positioned in the
highly mobile, shallow land drilling rig market, both domestically and
internationally. Our breadth of markets and assets means we can move rigs,
ancillary equipment and services anywhere in the world to serve our customers'
global requirements, or to take advantage of more favorable markets where better
long-term opportunities are believed to exist.

     The size of our fleet also provides economies of scale. This is especially
true in purchasing and logistics, where our ability to buy needed supplies and
equipment for almost 420 active rigs worldwide gives us not only bargaining
power, but also the ability to better optimize the allocation of our capital
equipment and resources. A good example of this is our various supplier
arrangements that deliver better economies and flexibility to Nabors, while
providing vendors with a larger, more stable and predictable order flow.

     Nabors also has a favorable basis in its assets, having purchased most of
our fleet at prices well below the costs of new rigs and substantially less than
today's fair market value. As a result, we have lower fixed costs per unit,
which benefits our customers, enhances our profitability and gives us further
competitive advantage in bidding.


--------------------------------------------------------------------------------
                                       17
<PAGE>   19
--------------------------------------------------------------------------------
THE EDGE                                  NABORS INDUSTRIES 1997 ANNUAL REPORT 
--------------------------------------------------------------------------------

MATURE INFRASTRUCTURE 

     Nabors already has in place an extensive infrastructure of operational
management and technical support in most of the stable, long-term oil and gas
producing regions worldwide. This gives us an advantage because of our
established critical operating mass; our available suitable assets, like those
uniquely required in the Middle East, the Arctic and offshore; and the high
level of our local operating expertise. Combined with our extensive asset base
and worldwide presence, the Nabors infrastructure allows us to add or redeploy
rigs within or between regions to take advantage of new opportunities, with
minimal capital investment or expansion of overhead. It also insures that new
crews are trained properly and that a consistent, systematic, organized safety
program is implemented on every rig.

HUMAN RESOURCES 

     Nabors believes we have an edge in the quality of our people. Few other
contractors have the depth and breadth of field experience and the highly
technical and operational staff we offer our customers. Nabors' worldwide
presence allows us to translate the knowledge and experience resident in our
people between our various operations, permitting us to bring a multitude of
skills and experience to any unique drilling or logistical problem.

     Our engineering staff is adept at designing, constructing, modifying and
deploying a multitude of rigs in almost every style and application to meet our
customers' requirements. This experience has helped us develop a high degree of
technical competence and innovation, and has led to the development of such
proprietary products as Sundowner workover rigs, the MASE(TM) rigs and a new
generation of rig instrumentation to be launched in 1998. Our human intellectual
capital continues to expand rapidly in this area, giving Nabors the ability to
efficiently plan and execute ever larger and more sophisticated projects.

     The Nabors management team strives to combine financial expertise,
operational expertise and a variety of business experiences into one homogeneous
unit, a factor that we believe has placed the Company in the market position we
now enjoy. To maintain and further expand this position, we are actively
recruiting engineers and technically oriented MBAs. The goals in developing
this group are to preserve the experience resident in our more senior staff, to
bring new dimensions to our thinking and to provide for tomorrow's leadership of
Nabors. We are simultaneously honing our edge in field experience and execution
by implementing training programs for entry level crews, as well as further
technical, business and leadership programs for our more seasoned field
personnel.


--------------------------------------------------------------------------------
                                       18
<PAGE>   20
                                    PAGE 19
                                   PHOTO HERE

                           (ALASKA RIG 28 - CLOSE-UP)


--------------------------------------------------------------------------------
                                       19
<PAGE>   21
                                    PAGE 20
                                   PHOTO HERE

                           (ALASKA RIG 28 - FAR AWAY)


--------------------------------------------------------------------------------
                                       20
<PAGE>   22
--------------------------------------------------------------------------------
THE EDGE                                  NABORS INDUSTRIES 1997 ANNUAL REPORT 
--------------------------------------------------------------------------------

FINANCIAL STRENGTH 

     We believe Nabors has an edge in financial strength. This includes
favorable earnings and cash flow, an excellent credit rating, access to capital
and a low debt to equity ratio. This should allow us to make acquisitions or
investments in new and existing rigs and components, as well as invest in and
implement improved systems and technology. It also allows us to be prepared to
quickly seize and exploit opportunities, as exemplified by our recent
acquisitions of the majority of the remaining premium stacked rigs at a cost of
over $100 million.

     Our financial strength also allows us to bid on and execute current and
prospective, large and capital intensive projects simultaneously. We recently
deployed three newly-built offshore platform rigs and currently have inquiries
pending that collectively could amount to several hundred million dollars in
potential investment. These inquiries underscore the magnitude of worldwide
demand for rigs in our US Lower 48, International, offshore and Alaskan markets.


--------------------------------------------------------------------------------
                                       21
<PAGE>   23
--------------------------------------------------------------------------------
THE EDGE                                    NABORS INDUSTRIES 1997 ANNUAL REPORT
--------------------------------------------------------------------------------

      (Photos, charts or graphs regarding operations to be inserted here)

--------------------------------------------------------------------------------
                                       22
<PAGE>   24
--------------------------------------------------------------------------------
THE OPPORTUNITY                           NABORS INDUSTRIES 1997 ANNUAL REPORT 
--------------------------------------------------------------------------------


A PRIME ELEMENT THAT DISTINGUISHES NABORS FROM OUR COMPETITORS IS THE BREADTH OF
OPPORTUNITIES AVAILABLE TO US AS A RESULT OF OUR WORLDWIDE MARKETS, OUR DIVERSE
ASSET BASE AND THE INTEGRATION OF OTHER RELATED BUSINESSES. THESE OPPORTUNITIES
WILL RECEIVE THE ATTENTION OF THIS ORGANIZATION AND THE DEDICATION OF RESOURCES
IN PROPORTION TO THE MAGNITUDE OF THEIR EXPECTED YIELD PER DOLLAR OF INCREMENTAL
CAPITAL INVESTED, AND OUR CONFIDENCE IN THEIR NEAR-TERM ACHIEVEMENT.

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

ACQUISITIONS AND INTERNAL INVESTMENT 

     Nabors will continue to look for accretive acquisitions in the form of
either additional rigs or related products and services. Acquisitions have
historically been a large contributor to the Company's success and we will
continue to seek a variety of opportunities in the coming years.

     We also foresee continuation of internal investment opportunities in many
areas. Most of these are expected to be in the form of new proprietary or highly
specialized rigs where economically sound returns on incremental capital can be
achieved. In recent years numerous such opportunities have been available to us
through our offshore operations. We have built three of our innovative MASE(TM)
rigs, three more conventional platform drilling rigs, two Super Sundowner
workover/redrilling rigs and one Sundowner workover rig. We expect that there
will continue to be additional sound investment opportunities from this division
both domestically, in the Gulf of Mexico, and internationally, where full-scale
development of deep water prospects should create a significant number of
opportunities for these types of rigs. Worldwide, there are currently numerous
bids pending for capital intensive, highly specialized, deeper rigs similar to
several of our existing rigs.

ADDITIONAL WELLSITE CONTENT 

     Nabors also expects to focus on further expanding the extent of value-added
products and services we offer our customers. This may consist of finding new
business lines that can augment our rig fleet. The size of our fleet makes
Nabors the largest consumer of many types of drilling related equipment and
services. As such, Nabors' in-house requirements alone represent a large,
vertically integrated market which any new venture we decide to embark on would
immediately possess. The breadth of our operations domestically and
internationally and the attendant infrastructure provides the opportunity to
market these products throughout the industry, thus also horizontally
integrating these businesses. The addition of companies like Epoch and Canrig
has allowed us to integrate in this way, thus improving our own cost structure
while creating new lines of business.


--------------------------------------------------------------------------------
                                       23
<PAGE>   25
--------------------------------------------------------------------------------
THE OPPORTUNITY                           NABORS INDUSTRIES 1997 ANNUAL REPORT 
--------------------------------------------------------------------------------

OPTIMIZE THE EXISTING ASSET BASE 

     Our primary focus and dedication of resources will be in two areas that we
believe promise a higher return on the incremental capital requirements.

     First, we will seek to optimize the utilization and profitability of our
existing ready-to-drill fleet. Next, we will reactivate our stacked premium rigs
as market conditions warrant. Nabors has invested over $100 million in stacked
assets in the last year, both to increase our performance and to furnish our
customers with additional high quality rigs at costs lower than newly built
rigs.

     The achievement of both of these objectives should result from a
combination of higher average year-to-year rig activity and pricing along with
strong bidding activity in all of our markets. While the demand for additional
premium rigs appears to be strong, fundamental trends in the supply and demand
balance of both rigs and oil and gas should hasten the realization of these
goals despite any short-term variations in activity.

     We cannot project with any certainty the worldwide supply/demand balance of
oil and gas that sets pricing, and effects our customers' spending levels.
However, we believe the fundamentals in the external market environment are
conducive to an acceleration of the magnitude and pace of the realization of
these opportunities. The excess supply of oil worldwide and natural gas in North
America that has limited drilling for the last decade has diminished. Much of
the incremental oil and gas production required to fill the gap between demand
and depletion must come from additional drilling.

     Regardless of the level or even absence of growth in demand for energy
worldwide, over time the supply/demand balance of rigs should continue to
improve. The combination of attrition of the existing fleet, increasing
component costs and the increase in the drilling of deeper and more
sophisticated wells are the largest factors in bringing this about.

     Meanwhile, the impact on rig demand of an accelerating depletion rate of
hydrocarbon reserves, particularly natural gas in North America, is only now
beginning to be felt. The natural gas depletion rate in Canada, for instance,
has steadily risen from 13 percent in 1990 to around 23 percent today. When
combined with a 4 percent growth rate, it means that approximately 27 percent of
the past year's production must be replaced each year just to keep pace. As a
result, in Canada 17 out of 20 rigs drilling are working just to keep supply
constant regardless of demand. In the US, indications are that the same trend is
occurring. Natural gas depletion data versus the number of rigs drilling
indicates that higher well volumes per drilling day are not materializing. This
is evidenced by the fact that since early 1995, a near doubling of the number of
rigs drilling for gas has yet to result in any appreciable increase in supply.
There is also a growing concensus that


--------------------------------------------------------------------------------
                                       24
<PAGE>   26
                                    PAGE 25
                                   PHOTO HERE

                          (TRAINING SHOT - RIG FLOOR)


--------------------------------------------------------------------------------
                                       25
<PAGE>   27
--------------------------------------------------------------------------------
THE OPPORTUNITY                           NABORS INDUSTRIES 1997 ANNUAL REPORT 
--------------------------------------------------------------------------------

new supplies of gas associated with deep water oil projects or additional
Canadian exports will not provide any significant offset to increasing depletion
rates, further improving the current rig demand outlook. This North American
situation is further compounded by rapidly increasing demand for the same rigs
internationally, where the supply of deep premium rigs is exhausted.

     This Annual Report on Form 10-K includes certain statements that may be
deemed to be "forward-looking statements" within the meaning of Section 27A of
the Securities Act of 1988 and Section 21E of the Securities Exchange Act of
1984, as amended. All statements, other than statements of historical facts,
included in this Annual Report on Form 10-K that address activities, events or
developments that Nabors Industries, Inc. (collectively with its subsidiaries,
"Nabors" or the "Company") "expects", "projects", "believes"or "anticipates"
will or may occur in the future, including such matters as future capital
expenditures and investments in the acquisition and refurbishment of rigs
(including the amount and nature thereof), repayment of debt, expansion and
other development trends of the contract drilling industry, business strategies,
expansion and growth of operations and other such matters are forward-looking
statements. These statements are based on certain assumptions and analyses made
by management of the Company in light of its experience and its perception of
historical trends, current conditions, expected future developments and other
factors it believes are appropriate in the circumstances. Such statements are
subject to a number of risks and uncertainties, including those discussed herein
and in the Company's 10-K filing, general economic and business conditions,
prices of crude oil and natural gas, foreign exchange and currency fluctuations,
the business opportunities (or lack thereof) that may be presented to and
pursued by the Company, changes in laws or regulations and other factors, many
of which are beyond the control of the Company. Any such statements are not
guarantees of future performance and actual results or developments may differ
materially from those projected in the forward-looking statements.


--------------------------------------------------------------------------------
                                       26
<PAGE>   28
                                    PAGE 27
                                   PHOTO HERE

                     (RIG REFURBISHMENT 1 - BREEN RD SHOP)


--------------------------------------------------------------------------------
                                       27
<PAGE>   29


                                    PAGE 28
                                   PHOTO HERE

                     (RIG REFURBISHMENT 2 - BREEN RD SHOP)



--------------------------------------------------------------------------------
                                       28
<PAGE>   30
--------------------------------------------------------------------------------
THE RESULTS                                 NABORS INDUSTRIES 1997 ANNUAL REPORT
--------------------------------------------------------------------------------
                            SELECTED FINANCIAL DATA
================================================================================

(In thousands, except per share amounts)


<TABLE>
<CAPTION>
                                                                    YEAR ENDED SEPTEMBER 30,
Operating Data(1)                              1997           1996           1995           1994              1993 
                                           -----------    -----------    -----------    -----------       -----------
<S>                                        <C>            <C>            <C>            <C>               <C>        
Revenues                                   $ 1,029,303    $   719,743    $   572,788    $   484,268       $   419,406
Operating expenses:
        Direct costs                           737,780        539,665        434,097        369,677           313,458
        General and
                administrative expenses         68,616         56,862         49,094         47,770            45,257
        Depreciation and
                amortization                    66,391         46,117         31,042         26,241            22,434
        Merger expenses                          1,755             --             --          1,595                -- 
        Provision for reduction in
                carrying value of assets            --             --             --         29,686(2)             -- 
                                           -----------    -----------    -----------    -----------       -----------
Operating income                               154,761         77,099         58,555          9,299            38,257
Interest income
        (expense), net                         (13,098)        (9,189)        (5,917)        (5,778)           (7,733)
Other income, net                               40,747         13,690          5,990          2,718            11,593
                                           -----------    -----------    -----------    -----------       -----------
Income (loss) before income
        taxes (benefits)                       182,410         81,600         58,628          6,239            42,117
Income taxes (benefits)                         67,602         11,100          7,524          4,889             3,559
                                           -----------    -----------    -----------    -----------       -----------
Net income (loss) before
        extraordinary gain                     114,808         70,500         51,104          1,350            38,558
Extraordinary gain                                  --             --             --             --                -- 
                                           -----------    -----------    -----------    -----------       -----------
Net income                                 $   114,808    $    70,500    $    51,104    $     1,350       $    38,558
                                           -----------    -----------    -----------    -----------       -----------
Fully diluted earnings (loss)
        per share:
        Net income (loss) before
                extraordinary gain         $      1.06    $       .75    $       .57    $       .02       $       .49
        Extraordinary gain                          --             --             --             --                -- 
                                           -----------    -----------    -----------    -----------       -----------
        Net Income                         $      1.06    $       .75    $       .57    $       .02       $       .49
                                           -----------    -----------    -----------    -----------       -----------
Weighted average number
        of shares outstanding -
        fully diluted                          113,398         93,917         90,237         85,743            78,288
                                           -----------    -----------    -----------    -----------       -----------
<CAPTION>
                                                                    YEAR ENDED SEPTEMBER 30,
Operating Data(1)                             1992           1991          1990          1989          1988
                                           -----------    -----------   -----------   -----------   -----------
<S>                                        <C>            <C>           <C>           <C>           <C>        
Revenues                                   $   312,407    $   264,239   $   153,920   $    85,600   $    63,060
Operating expenses:
        Direct costs                           215,939        187,873       111,405        64,285        50,682
        General and
                administrative expenses         45,237         35,923        22,900        12,085         8,473
        Depreciation and
                amortization                    16,526         10,119         5,232         3,884         3,502
        Merger expenses                             --             --            --            --            --
        Provision for reduction in
                carrying value of assets            --             --            --            --            --
                                           -----------    -----------   -----------   -----------   -----------
Operating income                                34,705         30,324        14,383         5,346           403
Interest income
        (expense), net                          (4,349)           551         1,153            48        (8,422)
Other income, net                                5,559          2,395         3,341         1,790         4,012
                                           -----------    -----------   -----------   -----------   -----------
Income (loss) before income
        taxes (benefits)                        35,915         33,270        18,877         7,184        (4,007)
Income taxes (benefits)                          2,175          3,546         2,476            19          (780)
                                           -----------    -----------   -----------   -----------   -----------
Net income (loss) before
        extraordinary gain                      33,740         29,724        16,401         7,165        (3,227)
Extraordinary gain                                  --             --            --            --        26,749(3)
                                           -----------    -----------   -----------   -----------   -----------
Net income                                 $    33,740    $    29,724        16,401   $     7,165   $    23,522
                                           -----------    -----------   -----------   -----------   -----------
Fully diluted earnings (loss)
        per share:
        Net income (loss) before
                extraordinary gain         $       .45    $       .42   $       .26   $       .14   $      (.12)
        Extraordinary gain                          --             --            --            --           .97(3)
                                           -----------    -----------   -----------   -----------   -----------
        Net Income                         $       .45    $       .42   $       .26   $       .14           .85
                                           -----------    -----------   -----------   -----------   -----------
Weighted average number
        of shares outstanding -
        fully diluted                           74,821         70,728        62,513        51,644        27,671
                                           -----------    -----------   -----------   -----------   -----------
</TABLE>


<TABLE>
<CAPTION>
                                                    AS OF SEPTEMBER 30,
Balance Sheet Data(1)              1997         1996         1995         1994         1993 
                                 ----------   ----------   ----------   ----------   ----------
<S>                              <C>          <C>          <C>          <C>          <C>       
Cash and short-term
        marketable securities    $   11,044   $  104,027   $   15,334   $   45,232   $   70,458
Working capital                      70,872      172,091       33,892       77,248      113,653
Property, plant and
        equipment, net              861,393      511,203      393,464      283,141      270,865
Long-term marketable
        securities                   42,279       11,839        9,645       20,266           -- 
Total assets                      1,234,232      871,274      593,272      490,273      493,927
Long-term obligations               229,507      229,504       51,478       61,879       73,109
Stockholders' equity                727,843      457,822      368,750      317,424      307,583
Capital expenditures
        including acquisitions      396,668      174,483      144,560       62,907       84,752
Funded debt to capital ratio         0.27:1       0.35:1       0.20:1       0.21:1       0.24:1

<CAPTION>
                                                    AS OF SEPTEMBER 30,
Balance Sheet Data(1)               1992         1991         1990         1989         1988
                                 ----------   ----------   ----------   ----------   ----------
<S>                              <C>          <C>          <C>          <C>          <C>       
Cash and short-term
        marketable securities    $   14,783   $   15,139   $   29,332   $    6,484   $   13,354
Working capital                      33,831       15,650       40,956        7,784        8,678
Property, plant and
        equipment, net              220,761      185,543      109,928       42,728       28,357
Long-term marketable
        securities                       --           --           --           --           --
Total assets                        339,930      285,615      226,846       75,519       61,123
Long-term obligations                49,294       37,489       37,729        7,760        4,254
Stockholders' equity                201,058      157,302      117,335       47,215       36,101
Capital expenditures
        including acquisitions       61,124       88,104       73,943       19,751        7,414
Funded debt to capital ratio         0.28:1       0.24:1       0.27:1       0.23:1       0.25:1
</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 1994. Other acquisitions' results
     of operations and financial position have been included beginning on the
     respective dates of acquisition and include Cleveland Drilling Company,
     Inc. (August 1997), Chesley Pruet Drilling Company (April 1997),
     Adcor-Nicklos Drilling Company (January 1997, retroactive to October
     1996), Noble Drilling Corporation land rigs (December 1996), Exeter
     Drilling Company and its subsidiary, 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 gain recognized in connection with the Company's
     reorganization.




                                      29
<PAGE>   31
--------------------------------------------------------------------------------
                                            NABORS INDUSTRIES 1997 ANNUAL REPORT
--------------------------------------------------------------------------------
                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS 

FISCAL YEAR 1997 COMPARED TO FISCAL YEAR 1996 

     Company revenues for fiscal year 1997 ("1997") totaled $1,029.3 million,
representing a $309.6 million or 43% increase compared to fiscal year 1996
("1996"). Operating income during 1997 totaled $154.8 million, compared to
$77.1 million during 1996, representing an increase of 101%. Net income totaled
$114.8 million ($1.06 per fully diluted share) during 1997, compared to $70.5
million ($.75 per fully diluted share) during the prior year. The significant
improvement in operating results during 1997 reflects a number of positive
trends and developments in each of the Company's businesses. Most notable is
the convergence of the supply and demand for rigs on a worldwide basis. The
continued attrition in the supply of quality rigs, coupled with an increase in
demand, is exerting upward pressure on rig pricing, which is having a
correspondingly positive effect on the Company's results. The same situation is
also generating higher utilization in almost all of the Company's operating
areas. This year's results also benefited from the contribution of several
acquisitions in the Company's US Lower 48 unit and continued strong oil and
natural gas prices. Net income was also positively affected during 1997 by a
gain on the sale of the Company's UK North Sea operation. Partially offsetting
these increases was an increase in the Company's effective tax rate to 37%
during 1997 from 14% during 1996, resulting from non-cash US federal deferred
income taxes, which reduced net income. 

     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)         1997         1996         1995           1997 TO 1996        1996 TO 1995
                                       ----------    ---------    ---------         ------------        ------------
<S>                                    <C>           <C>          <C>          <C>                 <C>
Revenues: 
     North America                     $  852,368    $ 532,638    $ 416,475       $ 319,730     60%    $116,163     28%
     International                        176,935      187,105      156,313         (10,170)   (5%)      30,792     20%
                                       ----------    ---------    ---------       ---------   ----     --------   ----
                                       $1,029,303    $ 719,743    $ 572,788       $ 309,560     43%    $146,955     26%
                                       ----------    ---------    ---------       ---------   ----     --------   ---- 
Operating income(loss): 
     North America                     $  134,994    $  61,611    $  47,989       $  73,383    119%    $ 13,622     28%
     International                         36,103       27,848       20,293           8,255     30%       7,555     37%
     Corporate                            (14,581)     (12,360)      (9,727)         (2,221)  (18%)      (2,633)  (27%) 
     Merger expenses                       (1,755)          --           --          (1,755)   N/A           --    N/A 
                                       ----------    ---------    ---------       ---------   ----     --------   ----
                                       $  154,761    $  77,099    $  58,555       $  77,662    101%    $ 18,544     32% 
                                       ----------    ---------    ---------       ---------   ----     --------   ----

                                                  1997                         1996                       1995
                                           ------------------------------------------------------------------------------
                                            RIG           RIG            RIG          RIG            RIG         RIG 
                                           YEARS       UTILIZATION      YEARS      UTILIZATION      YEARS     UTILIZATION
                                           -----       -----------      -----      -----------      -----     -----------
Rig activity(1): 
     North America                         227.4           66%          152.6          58%          131.4          54% 
     International                          31.0           60%           28.5          61%           25.9          60% 
                                           -----         ----           -----        ----           -----        ----
                                           258.4           65%          181.1          58%          157.3          56% 
                                           -----         ----           -----        ----           -----        ----
</TABLE>

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

<TABLE>
<CAPTION>

        
                                             1997                1996                1995
                                        ------------       -------------       -------------
<S>                                     <C>                <C>                 <C>
Average West Texas intermediate
     crude oil spot ($/bbl)(1)          $      21.78       $       20.50       $       18.30
Average US natural gas spot ($/mcf)(1)  $       2.43       $        2.11       $        1.45
Average US land rig count(2)                     764                 633                 624
Average International land rig count(2)          556                 553                 542
                                                                                            
</TABLE>

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

     North America revenues totaled $852.4 million during 1997, representing a
60% increase over 1996. This increase was primarily attributable to a
significant increase in revenues for the Company's US Lower 48 operations. US
Lower 48 revenues increased 83% as a result of contributions from the
acquisition of Exeter Drilling Company and its subsidiary JW Gibson Well Service
Company during April 1996; the December 1996 purchase of the Noble Drilling
Corporation land rigs; the acquisition of Adcor-Nicklos Drilling Company
("Adcor") during January 1997, which was 

                                       30
<PAGE>   32

--------------------------------------------------------------------------------
                                            NABORS INDUSTRIES 1997 ANNUAL REPORT
--------------------------------------------------------------------------------

accounted for as a pooling-of-interests with Adcor results retroactively
included to October 1, 1996; and the acquisition of Chesley Pruet Drilling
Company land rigs during April 1997. Additionally, dayrates and rig
utilization improved in the US Lower 48 as a result of increased rig demand,
primarily for deep drilling, silicon-controlled rectifier (SCR) rigs.
Revenues for the Gulf of Mexico operations increased by 29% during 1997 as a
result of increased equivalent rig years and higher dayrates for the
Company's platform drilling rigs and platform workover rigs, as well as
higher dayrates for the Company's jackup workover rigs as compared to 1996.
Platform drilling equivalent rig years increased in part as a result of the
newly constructed MASE(TM) rigs 802 and 803, which began working during June
1996 and November 1996, respectively. Additionally, rigs 269 and 270, land
rigs adapted for platform drilling applications, began working in the Gulf
of Mexico during June 1996 and August 1997, respectively. Jackup workover
rig years were lower than 1996 as a result of two rigs that were down for
repairs during the third quarter of 1997. Canada operation revenues
increased 90% during 1997 as a result of the contribution of nine land rigs
purchased from Noble Drilling Corporation during December 1996, as well as
an improvement in dayrates and rig utilization as compared to 1996. Alaskan
operation revenues increased by 10% as a result of increased activity for
Peak Oilfield Services, the Company's Alaskan construction and logistics
joint venture. Drilling revenues in Alaska were flat as increased dayrates
were offset by a decrease in equivalent rig years. Equivalent North America
rig years increased to 227.4 years during 1997 compared to 152.6 years
during 1996.

     International revenues totaled $176.9 million during 1997, representing a
5% decrease compared to 1996 as a result of the sale of the Company's UK North
Sea labor contract operation during November 1996. Equivalent international rig
years, excluding labor contracts, increased to 31.0 years during 1997 compared
to 28.5 years during 1996. 

     Middle Eastern revenues increased significantly compared to 1996 due to new
contracts in Saudi Arabia for six rigs, three of which commenced operations
during the third quarter of 1996 and three of which commenced operations during
the second quarter of 1997. Additionally, a jackup rig began operating in the
Persian Gulf during March 1997. CIS revenues increased as a result of increased
rig activity in Kazakhstan during 1997. 

     South and Central American revenues decreased by 8% compared to 1996. The
decrease was primarily attributable to lower rig activity in Venezuela, and the
completion of two contracts in Costa Rica during 1996. These decreases were
partially offset, however, by the contributions of MASE(TM) rig 801, which began
operations in Trinidad during January 1996, and Super Sundowner XII, which was
redeployed from the Gulf of Mexico and began operations in Brazil during
December 1996. 

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

<TABLE>
<CAPTION>

                                             1997                 1996                 1995 
                                            -----                -----                ----- 
<S>                                         <C>                  <C>                  <C>    
Revenues                                    100.0%               100.0%               100.0% 
                                            -----                -----                ----- 
Operating expenses: 
     Direct costs                            71.7%                75.0%                75.8% 
     General and administrative expenses      6.7%                 7.9%                 8.6% 
     Depreciation and amortization            6.4%                 6.4%                 5.4% 
     Merger expenses                           .2%                  --                   -- 
                                            -----                -----                ----- 
          Operating expenses                 85.0%                89.3%                89.8% 
                                            -----                -----                ----- 

Operating income                             15.0%                10.7%                10.2% 
Other income                                  2.7%                  .6%                  -- 
                                            -----                -----                ----- 
Income before income taxes                   17.7%                11.3%                10.2% 
Income taxes                                  6.5%                 1.5%                 1.3% 
                                            -----                -----                ----- 
Net income                                   11.2%                 9.8%                 8.9% 
                                            -----                -----                ----- 
</TABLE>

     Direct costs as a percentage of revenues decreased to 72% during 1997 as
compared to 75% during 1996. The resulting increase in the gross margin
percentage during 1997 is largely the result of improved margins in essentially
all of the Company's operations on the strength of improved dayrates. Partially
offsetting the increase in dayrates was the impact of an increased percentage of
the Company's revenues being derived from the Company's US Lower 48 operations,
as these contracts are usually at a lower gross margin percentage than Gulf of
Mexico, Alaska and International contracts. 

     General and administrative expenses as a percentage of revenues decreased
during 1997 due primarily to the increase in revenues for the US Lower 48
operations, since these expenses were spread over a larger revenue base. 

     Merger expenses of $1.8 million, relating to the merger with Adcor, were
recorded during the first quarter of 1997. 

     Interest expense increased during 1997, as a result of the interest
associated with the $172.5 million 5% Convertible Subordinated Notes issued on
May 28, 1996 (the "5% Notes"). Interest income increased during 1997 due to the
higher average cash and cash equivalent balances that resulted from investing
the remaining proceeds from the 5% Notes. 

     Other income increased during 1997 primarily due to a $29.9 million gain
recorded on the sale of the Company's UK North Sea operation, in which 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 Abbot
Group plc. The Company subsequently exercised the warrants and sold the
underlying shares for net proceeds of $9.4 million. Other 

                                       31
<PAGE>   33
--------------------------------------------------------------------------------
                                            NABORS INDUSTRIES 1997 ANNUAL REPORT
--------------------------------------------------------------------------------
income for fiscal year 1997 also included $2.6 million in realized and
unrealized gains from equity security transactions, $.6 million of dividend
income and gains on sales of long-term assets amounting to $2.2 million. The
Company also recorded foreign currency gains totaling $.9 million during
1997. During 1997, the Venezuelan bolivar devalued by approximately 6%. As a
result of the devaluation, the Company recognized an insignificant
translation gain as the Company had a bolivar denominated net monetary
liability position. The Company continues to reduce its net monetary
position in Venezuela by borrowing in the local currency. The Company
increased its exposure to foreign currency devaluation in Saudi Arabia
during 1997 and 1996 as a result of increased activity there resulting from
a number of new drilling contracts. The Company has offset a portion of its
foreign currency exposure in Saudi Arabia through the use of forward
exchange contracts.
     Other income during 1996 included $4.9 million in realized and unrealized
gains from equity securities transactions and $.5 million in dividend income.
Also included were gains on dispositions of long-term assets totaling $7.2
million. Foreign currency gains totaled $.5 million during 1996, relating
primarily to Venezuela. 
     During 1997, the Company began recording non-cash US federal deferred
income taxes based on the relationship between the amount of the Company's
unused US federal net operating loss carryforwards ("US NOL") and the temporary
differences between the book basis and tax basis in the Company's assets. The
temporary differences primarily arise from using accelerated depreciation for
tax return purposes as compared to a lower depreciation amount recorded for
financial statement purposes. Additionally, the Company recorded higher UK taxes
during 1997 as a result of the sale of the UK operation, resulting in a 1997
effective tax rate of 37% compared to an effective tax rate of 14% for 1996. The
effective tax rate for financial statement purposes during fiscal 1998 should
approximate 38%. Non-cash US federal deferred taxes should represent the
majority of this amount until that point in time when the US NOL has been fully
utilized or expires. The current and deferred income tax provisions for 1996
relate primarily to foreign operations as substantially all of the US taxable
income and temporary differences between the book basis and tax basis of the
Company's assets were offset by available US NOL. 

Fiscal Year 1996 Compared to Fiscal Year 1995

     Company revenues for 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.
     North America revenues 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 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(TM) rig 802 and rig 269, an adapted land rig, began
working in June 1996. Platform workover 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.
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 revenues increased during 1996 due to new contracts in Saudi
Arabia for three rigs which commenced operations in the third quarter of 1996.
Africa revenues were lower during 1996 due to reduced rig activity. 
     South and Central American revenues increased significantly compared to
1995. The increase was primarily attributable to the newly constructed MASE(TM)
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. 
     UK North Sea revenues increased during 1996 as a result of additional labor
contracts. 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.

                                       32
<PAGE>   34
--------------------------------------------------------------------------------
                                            NABORS INDUSTRIES 1997 ANNUAL REPORT
--------------------------------------------------------------------------------
     Direct costs as a percentage of revenues decreased to 75% during 1996 as
compared to 76% during 1995. The resulting increase in gross margin percentage
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(TM) 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. 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. 

     Interest expense increased during 1996, primarily as a result of the
interest associated with 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 investing 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 gains on dispositions of long-term assets totaling $7.2 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 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.
Gains on dispositions of long-term assets totaled $6.1 million, including a $4.1
million insurance gain recorded for a rig damaged in Venezuela. Foreign currency
losses totaled $3.2 million during 1995. The 1995 losses included $2.5 million
in foreign currency losses in British pound sterling. 

     The current and deferred income tax provisions for 1996 and 1995 relate
primarily to foreign operations as substantially all of the US taxable income is
offset by available 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. 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. 

LIQUIDITY AND CAPITAL RESOURCES 

     The Company's financial condition continues to strengthen, as evidenced by
the upgrade of the Company's senior debt rating to "A3" by Moody's Investor
Service during 1997. The Company generates significant cash from operations and
has substantial borrowing capacity under various credit facility arrangements.
Additionally, the Company has proven access to public debt and equity capital
markets. 

     The Company had working capital of $70.9 million as of September 30, 1997,
representing a $101.2 million decrease as compared to 1996. The decrease in
working capital relates primarily to a $91.9 million decrease in cash and cash
equivalents and a $28.9 million increase in short-term borrowings. Cash proceeds
remaining from the May 28, 1996 issuance of the 5% Notes, 

                                       33
<PAGE>   35
--------------------------------------------------------------------------------
                                            NABORS INDUSTRIES 1997 ANNUAL REPORT
--------------------------------------------------------------------------------
together with short-term borrowings and cash flows from operations, were used to
fund acquisitions and capital expenditures totaling $386.0 million during
1997. Increases in other current assets and current liabilities balances,
attributable to the Company's growth during 1997, increased working capital
by $19.6 million. The ratio of funded debt to funded debt plus shareholder's
equity, commonly referred to as the debt to capital ratio, was 0.27:1 and
0.35:1 as of September 30, 1997 and 1996, respectively. The improvement in
the debt to capital ratio is the result of an increase in shareholders'
equity resulting from the Company's earnings, common stock issued in
connection with the Adcor merger and other common stock transactions,
partially offset by an increase in funded debt relating primarily to
additional short-term borrowings. 

     Net cash provided by operating activities totaled $165.0 million during
1997, compared to $84.1 million during 1996. During 1997 and 1996, net income
was increased for non-cash items, such as depreciation and deferred taxes, but
was partially offset by the negative impact on cash from changes in the
Company's working capital accounts. 

     Net cash used for investing activities totaled $326.1 million during 1997,
compared to $160.4 million during 1996. Cash paid for acquisitions and capital
expenditures represented the primary uses of cash during 1997 and 1996. During
1997, cash was provided by the sale of the UK North Sea operation and other
fixed assets. During 1996, cash was provided by the sales and maturities of
marketable securities, as well as proceeds from the disposition of long-term
assets. 

     Financing activities provided cash totaling $68.6 million during 1997,
compared to $160.1 million during 1996. During 1997, cash was provided by
short-term borrowings and common stock transactions, primarily the exercise of
stock options, partially offset by reductions in long-term obligations. During
1996, cash was provided by long-term borrowings, primarily attributable to the
5% Notes, and common stock transactions, partially offset by a reduction in
short-term borrowings and principal payments on long-term obligations. 

     The Company's cash and cash equivalents and short-term investments in
marketable securities totaled $11.0 million as of September 30, 1997. In
addition, the Company had long-term investments in marketable securities of
$42.3 million. The Company currently has credit facility arrangements with
various banks with total availability of $256.8 million. As of September 30,
1997, remaining availability, after borrowings on the facilities and outstanding
letters of credit, totaled approximately $204.7 million. 

     During September 1997, the Company replaced an existing $100 million credit
facility with a $200 million unsecured revolving credit facility with a
syndicate of banks. The $200 million credit facility is a committed facility
with a term of five years. Loans under the new credit facility bear interest, at
the option of the Company, at the agent bank's prime rate or LIBOR plus a margin
(0.25% at September 30, 1997) that varies depending on the Company's senior
unsecured debt rating. 

     On April 15, 1997, the Company filed a universal shelf registration
statement on Form S-3 with the Securities and Exchange Commission to allow the
Company to offer, from time to time, up to $300.0 million in debt securities,
preferred stock, common stock, depository shares or warrants, and for secondary
sales of securities not involving the Company of up to $50.0 million. The
registration statement was declared effective by the Securities and Exchange
Commission on May 2, 1997. During 1997, the Company did not issue any securities
that had been registered under the shelf registration statement. 

     During July 1997, the Company executed an agreement to sell all of the
stock in the Company's wholly owned subsidiary, JW Gibson Well Service Company
("Gibson") to Key Energy Group, Inc. ("Key"). The assets of Gibson consist of 74
active well servicing and workover rigs, associated auxiliary equipment, trucks,
inventory, and several yards and related facilities. The transaction, which has
already received regulatory approval, is subject to certain closing conditions
and is expected to close during January 1998. At the time of closing, the
Company will receive $20.0 million plus the value of Gibson's working capital in
cash, 100,000 shares of Key common stock and 265,000 warrants to acquire stock
in Key at $18.00 per share. The transaction, when closed, will result in a gain
which will be reflected in the Company's financial statements during 1998. 

     As of September 30, 1997, the Company had capital expenditure commitments
totaling approximately $50.5 million. 

     Capital expenditures for 1998 should include spending for construction
projects, enhancements and reactivation of existing rig assets, including the
addition of top drive units, as well as normal levels of replacement or
sustaining capital. Additionally, the Company completed several acquisitions
during the periods presented and will continue to evaluate opportunities to
acquire assets or businesses to enhance the Company's core operations. Such
capital expenditures and acquisitions are subject to the discretion of the
Company and will depend on management's view of market conditions and other
factors. 

     The Company's capital expenditures are classified as follows: 
<TABLE>
<CAPTION>

(In thousands)                                 1997                1996                1995 
                                             ---------           ---------           ---------
<S>                                          <C>                 <C>                 <C>
New construction                             $  14,664           $  39,191           $  21,577
Enhancement                                     86,766              45,334              40,695 
Acquisition                                    234,492              53,208              57,463 
Sustaining                                      60,746              36,750              24,825
                                             ---------           ---------           ---------
                                             $ 396,668           $ 174,483           $ 144,560
                                             ---------           ---------           ---------
</TABLE>


     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 Gibson are expected to adequately finance the
Company's sustaining capital and debt service requirements for the next twelve
months.

                                       34
<PAGE>   36
--------------------------------------------------------------------------------
                                            NABORS INDUSTRIES 1997 ANNUAL REPORT
--------------------------------------------------------------------------------
OTHER MATTERS

     This document contains certain statements that may be deemed to be
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. The forward looking statements are based on current expectations of
management that are subject to a number of risks, uncertainties and assumptions
that could cause actual results to differ materially from those expected,
estimated or projected. 

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

     During December 1997, the Board of Directors approved changing the
Company's fiscal year-end from September 30 to December 31, effective for the
calendar year beginning January 1, 1998. A three-month fiscal transition period
from October 1, 1997 through December 31, 1997 (the "Transition Period") will
precede the start of the new fiscal year period. 

     In January 1997, the Securities and Exchange Commission issued Financial
Reporting Release 48 ("FRR 48"), which expands the disclosure requirements with
respect to certain derivative and other financial instruments. FRR 48, which is
effective for fiscal years ending after June 15, 1998, requires enhanced
descriptions in the footnotes to the financial statements and also requires
certain qualitative and quantitative disclosures outside the financial
statements regarding market risk related to derivative and other financial
instruments. The Company will adopt FRR 48 at the beginning of fiscal year 1998.

     In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 ("SFAS 128"), Earnings Per Share. SFAS
128 is effective for fiscal years ending after December 15, 1997. SFAS 128 is
designed to improve the earnings per share ("EPS") information provided in the
financial statements by simplifying the existing computational guidelines as
prescribed by APB Opinion No. 15, Earnings Per Share, revising the disclosure
requirements, and increasing the comparability of EPS data on an international
basis. SFAS 128 requires restatement of all prior-period EPS data presented
after the effective date and early application is not permitted. The Company
will adopt the provisions of SFAS 128 at the beginning of the Transition Period.

     In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 ("SFAS 130"), Reporting Comprehensive
Income. SFAS 130, which is effective for fiscal years beginning after December
15, 1997, establishes standards for reporting and presentation of comprehensive
income and its components. SFAS 130 requires that all items that are required to
be recognized under accounting standards as components of comprehensive income
be reported in a financial statement that is displayed with the same prominence
as other financial statements. The Company will adopt SFAS 130 at the beginning
of fiscal year 1998. 

     In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 ("SFAS 131"), Disclosures about Segments
of an Enterprise and Related Information. SFAS 131, which is effective for
fiscal years beginning after December 15, 1997, establishes revised guidelines
for determining an entity's operating segments, as well as the type and level of
financial information to be disclosed. The Company will adopt SFAS 131 at the
beginning of fiscal year 1998. 

                                       35
<PAGE>   37
--------------------------------------------------------------------------------
                                            NABORS INDUSTRIES 1997 ANNUAL REPORT
--------------------------------------------------------------------------------
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
--------------------------------------------------------------------------------

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, 1997 and 1996, 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, 1997.
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, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended September 30, 1997, in conformity with generally
accepted accounting principles.



/s/ COOPERS & LYBRAND L.L.P.
----------------------------
    Coopers & Lybrand L.L.P.



Houston, Texas
November 12, 1997


                                      36


<PAGE>   38
                                        NABORS INDUSTRIES  1997 ANNUAL REPORT
================================================================================
                                                   CONSOLIDATED BALANCE SHEETS

================================================================================
(In thousands, except per share amounts)

<TABLE>
<CAPTION>       


                                                                                       SEPTEMBER 30,       
ASSETS                                                                              1997          1996     
                                                                                -----------    -----------            
<S>                                                                             <C>            <C>                     
Current assets:                                                                                                        
   Cash and cash equivalents                                                    $     3,919    $    95,867             
   Marketable securities                                                              7,125          8,160             
   Accounts receivable, net                                                         244,956        172,720             
   Inventory and supplies                                                            21,372         18,528             
   Prepaid expenses and other current assets                                         28,456         33,259 
                                                                                -----------    ----------- 
                                                                                                                       
     Total current assets                                                           305,828        328,534             
Property, plant and equipment, net                                                  861,393        511,203             
Marketable securities                                                                42,279         11,839             
Other long-term assets                                                               24,732         19,698             
                                                                                -----------    -----------                       
     TOTAL ASSETS                                                               $ 1,234,232    $   871,274 
                                                                                -----------    ----------- 
                                                                                                                       
                                                                                                                       
LIABILITIES AND STOCKHOLDERS' EQUITY                                                                                   
                                                                                                                       
Current liabilities:                                                                                                   
   Current portion of long-term obligations                                     $     3,939    $     7,738             
   Short-term borrowings                                                             39,087         10,235             
   Trade accounts payable                                                            86,092         64,955             
   Accrued liabilities                                                               93,842         64,063             
   Income taxes payable                                                              11,996          9,452 
                                                                                -----------    ----------- 
     Total current liabilities                                                      234,956        156,443             
Long-term obligations                                                               229,507        229,504             
Other long-term liabilities                                                          13,606          9,139             
Deferred income taxes                                                                28,320         18,366             
                                                                                -----------    -----------         
     TOTAL LIABILITIES                                                              506,389        413,452 
                                                                                -----------    -----------         
                                                                                                                       
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 1997 and 1996;
       issued and outstanding 101,240 in 1997 and 87,470 in 1996                     10,124          8,747                          
     Authorized Class B shares 8,000; none issued or outstanding                         --             -- 
   Capital in excess of par value                                                   391,859        250,995 
   Cumulative translation adjustment                                                 (2,317)        (2,692)                    
   Net unrealized gain on marketable securities                                      19,087          3,728                     
   Retained earnings since May 1, 1988                                              312,254        200,208                     
   Less treasury stock, at cost, 489 common shares in 1997 and 1996                  (3,164)        (3,164)                    
                                                                                -----------    -----------                
   TOTAL STOCKHOLDERS' EQUITY                                                       727,843        457,822             
                                                                                -----------    ----------- 
   TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                   $ 1,234,232    $   871,274             
                                                                                -----------    ----------- 
                                                                                                                           
</TABLE>                                                                       
                                                                               
The accompanying notes are an integral part of these consolidated financial    
statements.                                                                    



                                      37
<PAGE>   39
                                            NABORS INDUSTRIES 1997 ANNUAL REPORT
================================================================================
                       CONSOLIDATED STATEMENTS OF INCOME
================================================================================

(In thousands, except per share amounts)

<TABLE>
<CAPTION>

                                                                 Year Ended September 30,                                
                                                               1997         1996        1995                             
                                                           ----------     --------     -------- 
<S>                                                        <C>            <C>          <C>                                         
REVENUES                                                   $1,029,303     $719,743     $572,788                          
Operating expenses:                                        ----------     --------     --------                                    
   Direct costs                                               737,780      539,665      434,097                          
   General and administrative expenses                         68,616       56,862       49,094                          
   Depreciation and amortization                               66,391       46,117       31,042                          
   Merger expenses                                              1,755           --           --                              
                                                           ----------     --------     --------                          
     Operating expenses                                       874,542      642,644      514,233                          
                                                           ----------     --------     --------                          
Operating income                                              154,761       77,099       58,555                          
                                                           ----------     --------     --------                          
Other income (expense):                                                                                                  
   Interest expense                                           (16,520)     (11,884)      (7,611)                         
   Interest income                                              3,422        2,695        1,694                          
   Other income, net                                           40,747       13,690        5,990                          
                                                           ----------     --------     --------                          
     Other income                                              27,649        4,501           73                          
                                                           ----------     --------     --------                          
Income before income taxes                                    182,410       81,600       58,628                          
                                                           ----------     --------     --------                          
Income taxes:                                                                                                            
  Current                                                      11,459        8,488        4,913                          
  Deferred                                                     56,143        2,612        2,611                          
                                                           ----------     --------     --------                          
     Total income taxes                                        67,602       11,100        7,524                          
                                                           ----------     --------     --------                          
NET INCOME                                                 $  114,808     $ 70,500     $ 51,104                          
                                                           ----------     --------     --------                          
EARNINGS PER SHARE:                                                                                                      
  PRIMARY                                                  $     1.12     $    .76     $    .58                          
                                                           ----------     --------     --------                         
  FULLY DILUTED                                            $     1.06     $    .75     $    .57                          
                                                           ----------     --------     --------                          
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:                                                                              
  PRIMARY                                                     102,200       93,162       88,018                          
                                                           ----------     --------     --------                                    
  FULLY DILUTED                                               113,398       93,917       90,237                          
                                                           ----------     --------     --------
</TABLE>

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



                                      38
<PAGE>   40
--------------------------------------------------------------------------------
                                            NABORS INDUSTRIES 1997 ANNUAL REPORT
--------------------------------------------------------------------------------
          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, 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)                      --
Unrealized loss on                              
  marketable securities, net                                                           (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)                      --
Unrealized gain on
  marketable securities, net                                                          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
Net income                                                                                      114,808                  114,808
Translation adjustment                                                      375                                              375
Unrealized gain on
  marketable securities, net                                                         15,359                               15,359
Issuance of common shares
  for stock options exercised       8,897         890       49,679                                                        50,569
Issuance of common shares
  for stock awards                     19           2          131                                                           133
Issuance of common shares
  in connection with Adcor     
  merger                            3,354         335       23,409                               (2,762)                  20,982
Issuance of common shares
  for warrants exercised            1,500         150        8,100                                                         8,250
Tax benefit recognized on exercised
  stock option deductions                                   59,545                                                        59,545
-----------------------------------------------------------------------------------------------------------------------------------
BALANCES, SEPTEMBER 30, 1997      101,240     $10,124     $391,859     $ (2,317)    $19,087     312,254     $(3,164)    $727,843
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>


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







                                   39

<PAGE>   41
--------------------------------------------------------------------------------
                                            NABORS INDUSTRIES 1997 ANNUAL REPORT
--------------------------------------------------------------------------------
                     CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

<TABLE>
<CAPTION>
                                                                                   YEAR ENDED SEPTEMBER 30,
                                                                                 1997        1996       1995
---------------------------------------------------------------------------------------------------------------
<S>                                                                        <C>           <C>          <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income                                                                   $  114,808  $   70,500  $   51,104
Adjustments to net income:
        Depreciation and amortization                                            66,391      46,117      31,042
        Deferred taxes                                                           56,143       2,612       2,611
        Gain on dispositions of long-term assets and business,
          marketable securities and other                                       (43,604)    (12,026)     (8,459)
        Foreign currency transaction and translation (gains) losses                (919)       (510)      3,160
        Non-cash compensation element of stock awards and options                   133         152         476
        Equity in earnings of affiliates                                           (450)       (139)         --
        Other                                                                       265         201        (207)
(Decrease) increase, net of effects from acquisitions and dispositions, from
changes in:

        Accounts receivable                                                     (76,646)    (21,089)    (13,715)
        Inventory and supplies                                                   (3,415)     (4,149)        962
        Prepaid expenses and other current assets                                   349      (7,968)     (2,723)
        Other long-term assets                                                   (1,540)     (7,699)       (792)
        Accounts payable and accrued liabilities                                 46,751      12,005      12,895
        Income taxes payable                                                      3,760       4,576       2,497
        Other long-term liabilities                                               2,978       1,541      (5,085)
--------------------------------------------------------------------------------------------------------------- 
NET CASH PROVIDED BY OPERATING ACTIVITIES                                       165,004      84,124      73,766
--------------------------------------------------------------------------------------------------------------- 
CASH FLOWS FROM INVESTING ACTIVITIES:
        Purchases of marketable securities, held-to-maturity                         --          --      (5,121)
        Maturities of marketable securities, held-to-maturity                        --       2,000      21,254
        Sales of marketable securities, held-to-maturity                             --          --      12,416
        Purchases of marketable securities, available-for-sale                   (4,803)         --      (2,273)
        Sales of marketable securities, available-for-sale                           --       1,698       5,189
        Purchases of marketable securities, trading                                  --     (11,280)         --
        Sales of marketable securities, trading                                   3,653       8,766          --
        Exercise of warrants                                                      9,417          --          --
        Cash paid for acquisitions, net                                        (118,134)    (28,317)    (19,572)
        Cash received from disposition of long-term assets and business          52,174      15,726      10,039
        Capital expenditures                                                   (267,882)   (146,440)   (109,321)
        Investment in affiliates                                                   (502)     (2,548)         --
---------------------------------------------------------------------------------------------------------------
NET CASH USED FOR INVESTING ACTIVITIES                                         (326,077)   (160,395)    (87,389)
---------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
        (Increase) decrease in restricted cash                                      (24)        861        (795)
        Long-term borrowings                                                         --     183,295       4,538
        Reduction of long-term obligations                                      (19,040)    (14,633)    (20,317)
        Increase (decrease) in short-term borrowings                             28,852     (20,449)     19,522
        Common stock and treasury stock transactions                             58,819      11,026         150
---------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES                                        68,607     160,100       3,098
---------------------------------------------------------------------------------------------------------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS                            (92,466)     83,829     (10,525)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                                     95,867      12,038      22,563
ADJUSTMENT FOR ADCOR CASH, BEGINNING OF PERIOD                                      518          --          --
---------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR                                       $    3,919  $   95,867  $   12,038
---------------------------------------------------------------------------------------------------------------
</TABLE>

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




                                      40
<PAGE>   42
--------------------------------------------------------------------------------
                                            NABORS INDUSTRIES 1997 ANNUAL REPORT
--------------------------------------------------------------------------------
                  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, engages in oil and gas
land drilling operations in North America (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. To supplement its primary
businesses the Company also manufactures top drives and drilling instrumentation
systems, and provides oilfield management, engineering, transportation,
construction, maintenance, well logging and other support services in selected
domestic and international markets. 

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

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)                       1997           1996           1995 
--------------------------------------------------------------------------------
<S>                               <C>            <C>            <C>      
Net assets                        $ 31,723       $ 27,895       $ 22,755 
Net income                          10,695          6,464          4,868 
</TABLE>

CASH AND CASH EQUIVALENTS 

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

MARKETABLE SECURITIES 

     The Company's marketable securities consist only of marketable equity
securities. Equity 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 net of taxes 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, including renewals and betterments, are
stated at cost, while maintenance and repairs are expensed currently. Interest
costs applicable to the construction of drilling and other equipment is
capitalized as a component of the cost of such assets. 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, a 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 life of the asset after provision for salvage value
(buildings - 10 to 30 years; oilfield hauling and mobile equipment and other
machinery and equipment - 3 to 10 years). Amortization of capitalized leases is
included in depreciation and amortization expense. The Company reviews its
assets for impairment and provisions for permanent asset impairment are charged
to income when indicators of impairment are present, and 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. 

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. 

                                      41
<PAGE>   43
--------------------------------------------------------------------------------
                                            NABORS INDUSTRIES 1997 ANNUAL REPORT
--------------------------------------------------------------------------------
REVENUE RECOGNITION 

     Revenues and costs on daywork contracts are recognized daily, revenues and
costs applicable to footage and turnkey contracts are recognized when the well
is completed (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 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 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 certain 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. 

     Foreign currency transaction and translation gains (losses) for 1997, 1996
and 1995 totaled $.9 million, $.5 million and ($3.2) million, respectively, and
are included in the caption "Other income, net" in the accompanying
consolidated statements of income. During 1997, the Venezuelan bolivar devalued
by approximately 6%. As a result of the devaluation, the Company recognized an
insignificant translation gain, as the Company had a bolivar denominated net
monetary liability position. The Company continues to reduce its net monetary
position in Venezuela by borrowing in the local currency. The Company increased
its exposure to foreign currency devaluation in Saudi Arabia during 1997 and
1996 as a result of increased activity there resulting from a number of new
drilling contracts. To hedge a portion of its foreign currency exposure in
Saudi Arabia, the Company holds forward exchange contracts maturing at various
dates through June 30, 1999 with face values of approximately $34.4 million and
$39.7 million at September 30, 1997 and 1996, respectively. Unrealized losses
associated with these forward contracts amount to $.1 million and $.3 million
at September 30, 1997 and 1996, respectively. 

     During 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 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. 

     The 1995 losses include $2.5 million in foreign currency losses in British
pound sterling.

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. 

     In 1997, fully diluted earnings per share reflects the assumed conversion
of the $172.5 million 5% Convertible Subordinated Notes due 2006, issued on May
28, 1996 (the "5% Notes"). As a result, net income plus $5.6 million of after
tax interest expense incurred on the 5% Notes is divided by the weighted
average shares outstanding, after giving effect to dilutive stock options and
warrants, as well as 9.5 million shares assumed to be issued on conversion of
the 5% Notes. Conversion of the 5% Notes is not assumed for 1996 as it would
have been anti-dilutive. 

     In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 ("SFAS 128"), Earnings Per
Share. SFAS 128, which is effective for fiscal years ending after December 15,
1997, is designed to improve the earnings per share ("EPS") information
provided in the financial statements by simplifying the existing computational
guidelines as prescribed by APB Opinion No. 15, Earnings Per Share, revising
the disclosure requirements and increasing the comparability of EPS data on an
international basis. SFAS 128 requires restatement of all prior-period EPS data
presented after the effective date and early application is not permitted. The
Company will adopt the provisions of SFAS 128 at the beginning of the
Transition Period (Note 14). 

STOCK-BASED COMPENSATION 

     At the beginning of fiscal 1997, the Company adopted Statement of
Financial Accounting Standards No. 123 ("SFAS 123"), Accounting for Stock-Based
Compensation. SFAS 123 encourages but does not require companies to record
compensation cost for stock-based employee compensation plans at fair value.
The Company has chosen to continue to account for stock-based compensation
using the intrinsic value method prescribed by Accounting Principles Board
Opinion No. 25 ("APB No. 25"), Accounting for Stock Issued to Employees.
Accordingly, compensation cost for stock options is measured as the excess, if
any, of the quoted 

                                      42
<PAGE>   44
--------------------------------------------------------------------------------
                                            NABORS INDUSTRIES 1997 ANNUAL REPORT
--------------------------------------------------------------------------------
market price of the Company's stock at the date of grant over the amount an
employee must pay to acquire the stock. Additionally, pro forma disclosures of
net income and earnings per share, as if the fair value method of accounting
defined in SFAS 123 had been applied, are provided in Note 8. 


CASH FLOW INFORMATION 

     Cash paid for income taxes and interest during 1997, 1996 and 1995 was as
follows: 

<TABLE>
<CAPTION>

(In thousands)                              1997        1996        1995 
--------------------------------------------------------------------------------
<S>                                       <C>         <C>         <C>    
Income taxes                              $ 6,303     $ 3,160     $ 5,045
Interest, net of capitalized interest      15,028       8,324       7,064 
</TABLE>

     A summary of the Company's non-cash activities during 1997, 1996 and 1995
is as follows: 

<TABLE>
<CAPTION>

(In thousands)                           1997           1996          1995 
--------------------------------------------------------------------------------
<S>                                   <C>            <C>           <C>     
Acquisition of businesses: 
  Fair value of assets acquired 
    less negative goodwill            $ 124,415      $ 50,400      $ 39,385
Goodwill                                  4,050         3,825            -- 
Consideration paid: 
  Cash                                 (118,134)      (29,051)      (20,000)
  Treasury shares issued                     --        (4,000)           -- 
                                      ---------      --------      --------
Liabilities assumed or created           10,331        21,174        19,385 
                                      ---------      --------      --------
Property, plant and equipment 
  additions by notes payable              4,400            --            --
Disposition of businesses: 
  Equity consideration received             567            --            --
</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. The Company believes that the credit risk in such instruments is
minimal. In addition, the Company's trade receivables are with a variety of
domestic, international and national oil and gas 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 amounts approximate fair value due to
the relatively short period to maturity of these instruments. 

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

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

o FORWARD EXCHANGE CONTRACTS The carrying amounts 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 is as follows: 

<TABLE>
<CAPTION>

                                               SEPTEMBER 30, 
                                      1997                         1996 
--------------------------------------------------------------------------------

                             CARRYING        FAIR        CARRYING        FAIR
(In thousands)                VALUE         VALUE         VALUE         VALUE 
--------------------------------------------------------------------------------
<S>                        <C>           <C>           <C>            <C>       

5.00% Convertible
  Subordinated Notes       $ 172,500     $ 382,657     $ 172,500      $ 175,088 
9.18% Senior 
  Secured Notes               40,000        45,570        40,000         43,324
Other long-term 
  obligations                 20,946        20,946        24,742         24,742 
                           ---------     ---------     ---------      ---------
                           $ 233,446     $ 449,173     $ 237,242      $ 243,154 
                           ---------     ---------     ---------      ----------
</TABLE>


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, 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. 


OTHER RECENT ACCOUNTING PRONOUNCEMENTS 

     In January 1997, the Securities and Exchange Commission issued Financial
Reporting Release 48 ("FRR 48"), which expands the disclosure requirements with
respect to certain derivative and other financial instruments. FRR 48, which is
effective for fiscal years ending after June 15, 1998, requires enhanced
descriptions in the footnotes to the financial statements and also requires
certain qualitative and quantitative disclosures outside the financial
statements regarding market risk related to derivative and other financial
instruments. The Company will adopt FRR 48 at the beginning of fiscal year
1998. 

     In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 ("SFAS 130"), Reporting Comprehensive
Income. SFAS 130, which is effective 

                                      43
<PAGE>   45
--------------------------------------------------------------------------------
                                            NABORS INDUSTRIES 1997 ANNUAL REPORT
--------------------------------------------------------------------------------

for fiscal years beginning after December 15, 1997, establishes standards for
reporting and presentation of comprehensive income and its components. SFAS 130
requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. The Company will adopt SFAS 130 at the beginning of fiscal year
1998.

     In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 ("SFAS 131"), Disclosures about Segments
of an Enterprise and Related Information. SFAS 131, which is effective for
fiscal years beginning after December 15, 1997, establishes revised guidelines
for determining an entity's operating segments, as well as the type and level
of financial information to be disclosed. The Company will adopt SFAS 131 at
the beginning of fiscal year 1998.

2.  ACQUISITIONS, CAPITAL EXPENDITURES AND DISPOSITIONS

     During August 1997, the Company completed the acquisition of Cleveland
Drilling Company, Inc. ("Cleveland") for $11.7 million, plus the value of
working capital in cash. The Cleveland fleet consisted of seven rigs (six
active, one stacked), six of which were diesel electric SCR 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 Cleveland's operations have been
included in the consolidated financial statements of the Company commencing on
the effective date of the acquisition. 

     During July 1997, the Company executed an agreement to sell all of the
stock in the Company's wholly owned subsidiary, JW Gibson Well Service Company
("Gibson"), to Key Energy Group, Inc. ("Key"). The assets of Gibson consist of
74 active well servicing and workover rigs, associated auxiliary equipment,
trucks, inventory, and several yards and related facilities. The transaction,
which has already received regulatory approval, is subject to certain closing
conditions and is expected to close during January 1998. At the time of
closing, the Company will receive $20.0 million plus the value of Gibson's
working capital in cash, 100,000 shares of Key common stock and 265,000
warrants to acquire stock in Key at $18.00 per share. The transaction, when
closed, will result in a gain which will be reflected in the Company's
financial statements during 1998. 

     During April 1997, the Company completed the acquisition of substantially
all of the assets of Chesley Pruet Drilling Company ("Chesley Pruet") and an
affiliate for cash. The Chesley Pruet fleet consisted of 10 active and two
stacked land rigs located in the United States. The acquisition, which also
included drill pipe and component equipment, was accounted for under the
purchase method of accounting.

     During April 1997, the Company completed the purchase of 25 stacked land 
rigs and a large complement of component equipment located in the United
States, from a subsidiary of Samson Investment Company ("Samson") for $85.0
million in cash. 

     During January 1997, the Company completed the acquisition of
Adcor-Nicklos Drilling Company ("Adcor") through a merger of a wholly owned
subsidiary with and into Adcor. In the merger, all of the stock of Adcor was
exchanged for 3,354,175 shares of Nabors common stock. The Adcor fleet
consisted of 30 active and six stacked land rigs located in the United States.
The assets also include drill pipe, spare drilling equipment, yards, vehicles
and other support equipment. The transaction was accounted for as a
pooling-of-interests. The results of operations of Adcor were included in the
Company's fiscal 1997 results commencing January 1, 1997. The historical
consolidated financial statements of the Company were retroactively restated to
include the results of operations, financial position and cash flows of Adcor
commencing on October 1, 1996. The historical consolidated financial statements
of the Company prior to fiscal year 1997 were not restated as the effect in
those years was not significant. Accordingly, an adjustment was made to the
Company's retained earnings on October 1, 1996 to record the cumulative
retained deficit of Adcor as of September 30, 1996. 

     During December 1996, the Company acquired 47 land drilling rigs from
Noble Drilling Corporation and certain of its subsidiaries for $60.0 million in
cash. The fleet of rigs consisted of 19 operating rigs and 28 stacked rigs in
various stages of completeness with 38 of the rigs located in the United States
and nine located in Canada. The acquisition was accounted for under the
purchase method of accounting. 

     During November 1996, the Company completed the sale of its wholly owned
subsidiary, Nabors Drilling & Energy Services UK Ltd. to 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 Abbot Group plc., and recorded a gain of $29.9
million during 1997. The Company subsequently exercised such warrants
throughout 1997, and sold the underlying shares for net proceeds of $9.4
million. 

     During April 1996, the Company acquired Exeter Drilling Company ("Exeter")
and its subsidiary, JW Gibson Well Service Company, 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. 

     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 

                                      44
<PAGE>   46
--------------------------------------------------------------------------------
                                            NABORS INDUSTRIES 1997 ANNUAL REPORT
--------------------------------------------------------------------------------
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. 

     During October 1994, the Company consummated its merger with Sundowner
Offshore Services, Inc. ("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. 


3. MARKETABLE SECURITIES 

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

<TABLE>
<CAPTION>

                                                     SEPTEMBER 30, 
(In thousands)                                  1997              1996 
--------------------------------------------------------------------------------
<S>                                           <C>               <C>     

Current assets: 
  Equity securities, classified as trading, 
  at fair value                               $ 7,125           $ 8,160 
Long-term assets: 
  Equity securities, classified as 
  available-for-sale, at fair value            42,279            11,839 
</TABLE>

     The fair value of equity securities that were classified as
available-for-sale exceeded the cost by approximately $29.4 million and $3.7
million as of September 30, 1997 and 1996, respectively. During 1997, the
Company received $3.7 million of proceeds and realized gains of $1.6 million
resulting from the sale of certain investments in equity securities that had
been classified as trading. The Company also recorded unrealized holding gains
totaling $1.1 million on equity securities classified as trading. 

     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. The Company also recorded unrealized 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. The Company also 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 gains totaling
$.2 million on equity securities classified as trading. 


4. PROPERTY, PLANT AND EQUIPMENT 

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

<TABLE>
<CAPTION>

                                                  SEPTEMBER 30, 
(In thousands)                                1997            1996 
--------------------------------------------------------------------------------
<S>                                         <C>             <C>     
Land                                     $    5,995       $   3,986 
Buildings                                    17,953          14,891 
Contract drilling and related equipment   1,087,702         680,050 
Oilfield hauling and mobile equipment        47,465          43,077 
Other machinery and equipment                17,878          20,070 
                                         ----------       ---------
                                          1,176,993         762,074 
Less: accumulated depreciation 
  and amortization(1)                      (315,600)       (250,871) 
                                         ----------       ---------
                                         $  861,393       $ 511,203 
                                         ----------       ---------
</TABLE>

(1) Includes, as of September 30, 1997 and 1996, reserves of $54.6 million and
    $54.8 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 $116.9 million, $81.4 million and $63.2 million for the
years ended September 30, 1997, 1996 and 1995, respectively.

     Interest expense of $1.2 million, $1.0 million and $.7 million was
capitalized during 1997, 1996 and 1995, respectively.


5. SHORT-TERM BORROWINGS AND LETTERS OF CREDIT 

     The Company has available lines of credit with various 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 .25% as of September 30, 1997 and
LIBOR plus .75% as of September 30, 1996. The weighted average interest rate on
short-term borrowings outstanding as of September 30, 1997 and 1996, excluding
short-term borrowings in the local currency for hedging purposes in Venezuela,
equaled 5.74% and 5.65%, respectively. The weighted average interest rate
inclusive of the Venezuela borrowings outstanding as of September 30, 1997 and
1996 equaled 6.95% and 13.35%, respectively. 

     During September 1997, the Company replaced an existing $100 million
revolving credit facility with a $200 million unsecured revolving credit
facility with a syndicate of banks. The $200 million credit facility is a
committed facility with a term of 

                                      45
<PAGE>   47

--------------------------------------------------------------------------------
                                            NABORS INDUSTRIES 1997 ANNUAL REPORT
--------------------------------------------------------------------------------

five years. Loans under the new credit facility bear interest, at the option of
the Company, at the agent bank's prime rate or LIBOR, plus a margin (.25% at
September 30, 1997) that varies depending on the Company's senior unsecured
debt rating. The loans are guaranteed by certain subsidiaries of the Company
and contain affirmative and negative covenants regarding, among other things,
limitations on liens, and maintenance of financial ratios regarding funded debt
to capitalization, interest coverage and minimum net worth. 

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

<TABLE>
<CAPTION>

                                                 SEPTEMBER 30, 
(In thousands)                               1997            1996 
--------------------------------------------------------------------------------
<S>                                      <C>              <C>      
Lines of credit available                $ 256,786        $ 66,120 
Short-term borrowings outstanding           39,087          10,235 
Letters of credit outstanding               12,951          11,657 
</TABLE>


6. LONG-TERM OBLIGATIONS 

     Long-term obligations consist of the following:

<TABLE>
<CAPTION>

                                                       SEPTEMBER 30, 
(In thousands)                                     1997            1996 
--------------------------------------------------------------------------------
<S>                                             <C>             <C>       

5.00% Convertible Subordinated Notes
   payable in their entirety May 2006           $ 172,500       $ 172,500 
9.18% Senior Secured Notes payable in semi- 
   annual installments of $4,000 commencing 
   January 2002                                    40,000          40,000 
Loans payable in varying amounts in
   August 1998, November 1998, January 1999 
   and April 1999                                  12,995          12,995 
10.25% Senior Secured Notes payable in semi-
   annual installments of $3,000 commencing 
   July 1992, net                                      --           5,936
Medium-term notes payable, maturing from 
   1996 to 2001, from 6.0% to 9.0%(1)               7,951           5,811  
                                                ---------       ---------      
                                                  233,446         237,242 
Less: current portion                              (3,939)         (7,738) 
                                                ---------       ---------
                                                $ 229,507       $ 229,504 
                                                ---------       ---------
</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 $20.3 million and $8.7 million as of September 30, 1997 
    and 1996, respectively. 

     On May 28, 1996, the Company issued $172.5 million of 5% Convertible
Subordinated Notes with a scheduled maturity on May 15, 2006. 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 the option of the holder, at a conversion price
of $18.125 per share, subject to 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 were used
for general corporate purposes, including capital expenditures, acquisitions
and working capital. 

     The Company issued 9.18% Senior Secured Notes 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 9.18% Senior Secured Notes
are due in semi-annual installments of $4.0 million commencing January 2002 and
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, 1997, retained earnings available for
dividend totaled approximately $237.0 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 are collateralized by net assets with
an aggregate book value of approximately $26.8 million and $27.8 million as of
September 30, 1997 and 1996, 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 Canadian governmental entity 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 each is
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% (6.25% at September 30, 1997). The loans
are collateralized by several 

                                      46
<PAGE>   48
--------------------------------------------------------------------------------
                                            NABORS INDUSTRIES 1997 ANNUAL REPORT
--------------------------------------------------------------------------------
drilling rigs located in the US with an aggregate net book value of
approximately $27.4 million and $29.2 million as of September 30, 1997 and
1996, 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, 1997, the maturities of long-term obligations for the
five years after 1997 are as follows: 

<TABLE>
<CAPTION>

(In thousands)
--------------------------------------------------------------------------------
<S>                      <C>       
 1998                    $   3,939 
 1999                       13,956
 2000                        2,885 
 2001                          166 
 2002                        8,000 
 Thereafter                204,500 
                         ---------
                         $ 233,446 
                         --------- 
</TABLE>


7. 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)                             1997               1996              1995
-------------------------------------------------------------------------------------
<S>                                     <C>                <C>               <C>      
Total pretax income(1)                  $ 182,410          $ 81,600          $ 58,628
                                        ---------          --------          -------- 
Expected federal income tax
 using the 35% statutory rate              63,844            28,560            20,520 
Recognition of net loss carryforwards          --           (20,801)          (18,949) 
Alternative Minimum Tax                     1,113               543               574 
State income taxes                          1,453               469               672 
Foreign taxes and other                     1,192             2,329             4,707 
                                        ---------          --------          --------
  Total income tax                      $  67,602          $ 11,100          $  7,524
                                        ---------          --------          --------
 Analysis of the income tax provision:
  Current:
  US federal                            $   1,113          $    543          $    574 
  State and local                              35                15                72 
  Foreign                                  10,311             7,930             4,267 
                                        ---------          --------          --------
                                           11,459             8,488             4,913 
                                        ---------          --------          --------
Deferred: 
  US federal                               49,269                --                -- 
  State and local                           2,200               454               600 
  Foreign                                   4,674             2,158             2,011 
                                        ---------          --------          --------
                                           56,143             2,612             2,611 
                                        ---------          --------          --------
Total income tax                        $  67,602          $ 11,100          $  7,524 
                                        ---------          --------          --------
</TABLE>

(1) Includes foreign income before taxes of $30.9 million, $17.2 million, $7.5 
    million, respectively, for the years ended September 30, 1997, 1996 and 
    1995.

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

<TABLE>
<CAPTION>

                                                    SEPTEMBER 30, 
(In thousands)                                  1997             1996 
--------------------------------------------------------------------------------
<S>                                         <C>              <C>       

Deferred tax assets: 
  Net operating loss carryforwards          $  57,795        $  59,653 
  Accrued liabilities not deducted
    for tax purposes                           29,430           17,770 
  General tax credits                           4,208            3,207 
                                            ---------        ---------
Deferred tax asset                             91,433           80,630 
Valuation allowance                                --          (25,869) 
                                            ---------        ---------
  Net deferred tax asset                       91,433           54,761 
Deferred tax liabilities: 
  Excess tax over book depreciation          (109,475)         (73,127) 
  Unrealized gain on marketable securities    (10,278)              -- 
                                            ---------        ---------
Net deferred tax liability                  $ (28,320)       $ (18,366) 
                                            ---------        ---------
</TABLE>

     In conjunction with the acquisition of Cleveland (Note 2), deferred tax
liabilities of $2.9 million were recorded during 1997. 

     For US federal income tax purposes, the Company has net operating loss
carryforwards of approximately $164.5 million that, if not utilized, will expire
from 1999 to 2009. The net operating loss carryforwards for Alternative Minimum
Tax purposes are approximately $83.3 million. There are Alternative Minimum Tax
credit carryforwards of $3.1 million available to offset future regular tax
liabilities. In addition, the Company has approximately $1.1 million of
investment-tax-credit carryforwards expiring at various dates from 1997 to 
2001. 

    Under US 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. 

     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.

                                      47
<PAGE>   49
--------------------------------------------------------------------------------
                                            NABORS INDUSTRIES 1997 ANNUAL REPORT
--------------------------------------------------------------------------------
     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.

     Since the Company implemented its quasi-reorganization based on SFAS 96
and prior to the issuance of SAB 86, it reported carryforward tax benefits
directly in the statement of income, and then reclassified 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 $8.4 million ($.09 per share) and $8.2 million ($.09 per
share), respectively.

     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 "grandfathering" 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.

     In 1997, income tax benefits of $59.5 million, related to employee stock
option transactions, were recorded directly to stockholders equity.



8. CAPITAL STOCK AND STOCK OPTIONS


CAPITAL STOCK

     During January 1997, the Company completed the acquisition of Adcor
whereby the Company acquired all the outstanding shares of Adcor in exchange
for 3,354,175 newly issued shares of the Company's common stock (Note 2).

     During January 1997, warrants to acquire 1,500,000 shares of the Company's
common stock were exercised at a price of $5.50 per share. The warrants had
originally been issued to a financial institution during 1990 and were
exercisable until January 31, 1997. 

     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 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 did not
repurchase any shares under the stock repurchase plan since its original
authorization during December 1995.

     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). 

     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. 

     As of September 30, 1997 there were no warrants outstanding. 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, 1997, 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 are at prices equal to the fair market value of the
stock on the date of the grant. Options granted under the plans are exercisable
in varying cumulative periodic installments after one year. In the case of
certain key executives, options granted under the plans are subject to
accelerated vesting related to target common stock prices, or may vest
immediately on the grant date. Options granted under the plans cannot be
exercised more than ten years from the date of grant. Options to purchase
127,395 and 599,395 common shares remained available for grant as of September
30, 1997 and 1996, respectively.

                                      48
<PAGE>   50
--------------------------------------------------------------------------------
                                            NABORS INDUSTRIES 1997 ANNUAL REPORT
--------------------------------------------------------------------------------

    A summary of stock option transactions during the three years ended 
September 30, 1997 is as follows:

<TABLE>
<CAPTION>
                                              Weighted
                                              Average
                                              Exercise
(Share amounts in thousands)    Shares         Price
---------------------------------------------------------
<S>                              <C>        <C>      
Options outstanding: 
   September 30, 1994            8,719      $    4.78  
   Granted                       4,453           6.42  
   Exercised                      (505)          3.77  
   Forfeited                       (47)          6.03  
---------------------------------------------------------
Options outstanding: 
   September 30, 1995           12,620      $    5.39    
    Granted                      2,339           9.97    
    Exercised                   (2,422)          4.97    
    Forfeited                    (126)           8.01
---------------------------------------------------------
Options outstanding: 
    September 30, 1996          12,411      $    6.31    
     Granted                    11,706          21.72   
     Exercised                  (8,897)          5.68    
     Forfeited                    (118)         10.34
---------------------------------------------------------
Options outstanding 
    September 30, 1997          15,102      $   18.59
---------------------------------------------------------
</TABLE>

    Of the options outstanding, 13,268,670, 10,873,345 and 9,301,019 were
exercisable at weighted average exercise prices of $19.30, $5.98 and $5.03 as
of September 30, 1997, 1996 and 1995, respectively.

    A summary of stock options outstanding at September 30, 1997 is as follows:

<TABLE>
<CAPTION>
 
                                              Options Outstanding
                              --------------------------------------------------
                                                  Weighted            Weighted
                                Number            Average             Average
                             Outstanding          Remaining           Exercise
(Share amounts in thousands)  at 9/30/97      Contractual Life         Price
--------------------------------------------------------------------------------
<S>                          <C>                  <C>                 <C>       
Range of exercise prices:
   $    1.07    -    1.63         237               3.3              $  1.10 
        4.04    -    5.88         307               5.0                 4.83 
        6.25    -    8.63       1,110               6.6                 6.73 
        9.56    -   14.25       1,769               8.2                 9.99 
        15.50   -   22.50       7,614               9.1                17.59
        23.31   -   30.94       4,063               9.8                29.50
        40.25                       2               9.9                40.25
--------------------------------------------------------------------------------
                               15,102               8.8              $ 18.59
--------------------------------------------------------------------------------
</TABLE>



<TABLE>
<CAPTION>
                                     Options Exercisable
                            ----------------------------------
                                                   Weighted               
                                   Number           Average 
                                Exercisable        Exercise
(Share amounts in thousands)    at 9/30/97           Price   
---------------------------------------------------------------
<S>                            <C>                 <C>
Range of exercise prices:                                  
 $    1.07    -  1.63               237            $  1.10 
      4.04    -  5.88               307               4.83 
      6.25    -  8.63               716               6.82 
      9.56    - 14.25             1,270               9.74 
     15.50    - 22.50             6,721              17.61 
     23.31    - 30.94             4,018              29.55       
---------------------------------------------------------------
                                 13,269            $ 19.30 
---------------------------------------------------------------
</TABLE>                              
                                      
    The weighted average fair value of options granted during the years ended 
September 30, 1997 and 1996 was $4.96 and $2.46, respectively. 

    The fair value of each stock option granted is estimated on the date of
grant using the Black-Scholes option-pricing model with the following weighted
average assumptions for grants during 1997 and 1996, respectively: risk-free
interest rates of 5.80% and 5.25%; dividend yield of 0.0% for both years;
expected life of 2.1 years and 2.5 years; and volatility of 30.9% for both
years. 

     Had compensation cost for the Company's stock-based compensation plans
been recognized in accordance with SFAS 123, the Company's net income and fully
diluted earnings per share would have been $66.1 million and $.63 per share,
respectively, for the year ended September 30, 1997 and $68.1 million and $.73
per share, respectively, for the year ended September 30, 1996. The effects of
applying SFAS 123 in this pro forma disclosure are not indicative of future
amounts. SFAS 123 does not apply to awards prior to 1996. 

     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, 1997 is as follows: 

<TABLE>
<CAPTION>


                                         1997           1996             1995 
(Share amounts in thousands)            Shares          Shares          Shares 
--------------------------------------------------------------------------------
<S>                                     <C>             <C>             <C>
Stock grants: 
  Outstanding at beginning of year       38               80              132 
  Granted                                --               --               77 
  Vested                                (19)             (31)            (129) 
  Forfeited                              --              (11)              -- 
--------------------------------------------------------------------------------
  Outstanding at end of year             19               38               80
--------------------------------------------------------------------------------
</TABLE>


                                       49
<PAGE>   51
--------------------------------------------------------------------------------
                                            NABORS INDUSTRIES 1997 ANNUAL REPORT
--------------------------------------------------------------------------------
9. 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 $4.4 million, $3.6 million and $2.9 million for the
years ended September 30, 1997, 1996 and 1995, respectively. The Company does
not provide post-employment benefits to its employees.


10. 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 40 years. The
minimum rental commitments under non-cancelable operating leases, with lease
terms in excess of one year subsequent to September 30, 1997, are as follows:


<TABLE>
<CAPTION>

(In thousands) 
--------------------------------------------------------------------------------
<S>                                  <C>
1998                                  $ 2,732 
1999                                    2,624 
2000                                    1,852 
2001                                      175 
2002                                       77 
Thereafter                              1,057
                                      -------
                                      $ 8,517 
                                      -------

</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 $3.1 million, $2.5
million and $2.2 million for the years ended September 30, 1997, 1996 and 1995,
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>
1998                           $  2,689 
1999                              2,448 
2000                              2,395
2001                              2,390 
2002                                140 
                               --------
                               $ 10,062 
                               --------

</TABLE>

        Pursuant to an employment agreement with an officer, the Company has
provided a non-interest bearing loan for approximately $2.9 million. 

CAPITAL EXPENDITURES 

        As of September 30, 1997 and 1996, the Company had capital expenditure
commitments totaling approximately $50.5 million and $17.5 million, 
respectively. 


CONTINGENCIES 

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


                                      50
<PAGE>   52
-------------------------------------------------------------------------------
                                           NABORS INDUSTRIES 1997 ANNUAL REPORT
-------------------------------------------------------------------------------

11. SUPPLEMENTAL BALANCE SHEET AND 
    INCOME STATEMENT INFORMATION

     Accounts receivable is net of an allowance for doubtful accounts of $2.8 
million and $1.5 million as of September 30, 1997 and 1996, respectively. 

     Accrued liabilities include the following:
        
<TABLE>
<CAPTION>
                                             SEPTEMBER 30,
(In thousands)                             1997          1996
--------------------------------------------------------------
<S>                                 <C>            <C>          
Accrued compensation                $    30,055    $    23,145  
Deferred revenue                         15,143          5,975
Workers' compensation liabilities        12,368          9,178
Other accrued liabilities                36,276         25,765
--------------------------------------------------------------
                                    $    93,842    $    64,063
--------------------------------------------------------------
</TABLE>

     Other income, net includes the following:

<TABLE>
<CAPTION>
                                             SEPTEMBER 30,
(In thousands)                          1997     1996     1995
-------------------------------------------------------------------
<S>                                 <C>         <C>        <C>
Gains on marketable securities
    and warrants                    $ 11,461    $  4,871   $  2,406
Gains on dispositions of
    long-term assets and business     32,143       7,155      6,053
Dividend income                          572         486        297
Foreign currency gains (losses)          919         510     (3,160)
Other                                 (4,348)        668        394
-------------------------------------------------------------------
                                    $ 40,747    $ 13,690   $  5,990
-------------------------------------------------------------------
</TABLE>


12. UNAUDITED QUARTERLY FINANCIAL INFORMATION

<TABLE>
<CAPTION> 
                             YEAR ENDED SEPTEMBER 30, 1997
                      ------------------------------------------------
(In thousands, except       FIRST     SECOND       THIRD     FOURTH
 per share amounts)       QUARTER(1)  QUARTER     QUARTER    QUARTER
----------------------------------------------------------------------
<S>                     <C>          <C>        <C>          <C>    
Revenues                $   217,077  $ 238,683  $  267,911   $ 305,632
Gross profit(2)              54,439     61,217      80,686      95,181
Operating income             23,612     28,202      45,193      57,754
Net income                   20,115     21,441      31,132      42,120
Earnings per share:
        Primary         $       .20  $     .21  $      .30   $     .40
        Fully diluted   $       .20  $     .21  $      .29   $     .37
----------------------------------------------------------------------
</TABLE>

<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(2)              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
Earnings per share:
        Primary         $       .17  $     .18 $       .20  $    .21
        Fully diluted   $       .17  $     .18 $       .20  $    .21
--------------------------------------------------------------------
</TABLE>
(1)   The results of operations for the first quarter have been retroactively 
      restated to include the results of operations of Adcor, which was merged 
      with the Company during January 1997 (Note 2).
(2)   Gross profit excludes depreciation, general and administrative expenses 
      and merger expenses.
                                       51
<PAGE>   53
--------------------------------------------------------------------------------
                                            NABORS INDUSTRIES 1997 ANNUAL REPORT
--------------------------------------------------------------------------------

13. 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>

                                         YEAR ENDED SEPTEMBER 30,
(In thousands)                   1997              1996              1995
--------------------------------------------------------------------------------
<S>                         <C>                <C>               <C>       

Revenues(1)(2): 
        North America       $   852,368        $  532,638        $  416,475
        International           176,935           187,105           156,313
                            -----------        ----------        ----------
                            $ 1,029,303        $  719,743        $  572,788
                            -----------        ----------        ----------
       
Operating income (loss):        
        North America       $   134,994        $   61,611        $   47,989
        International            36,103            27,848            20,293
        Corporate               (14,581)          (12,360)           (9,727)
        Merger expenses          (1,755)               --                --
                            -----------        ----------        ----------
                            $   154,761        $   77,099        $   58,555
                            -----------        ----------        ----------

Assets: 
        North America       $   899,449        $  496,664        $  354,733
        International           263,787           243,230           217,953
        Corporate                70,996           131,380            20,586
                            -----------        ----------        ----------
                            $ 1,234,232        $  871,274        $  593,272
                            -----------        ----------        ----------
</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.


14. SUBSEQUENT EVENTS (UNAUDITED)

     During November 1997, the Company completed the acquisition of domestic
land drilling assets from Veco Drilling, Inc. ("Veco") and Diamond L Drilling &
Production ("Diamond L") for approximately $25.0 million in cash. The Veco fleet
consisted of six land drilling rigs located in California and Nevada and two
platform labor contracts offshore California. The Diamond L fleet consisted of
three rigs located in east Texas. The acquisitions will be accounted for under
the purchase method of accounting. 

     During December 1997, the Board of Directors approved changing the
Company's fiscal year-end from September 30 to December 31, effective for the
calendar year beginning January 1, 1998. A three-month fiscal transition period
from October 1, 1997 through December 31, 1997 (the "Transition Period") will
precede the start of the new fiscal year period.


                                      52
<PAGE>   54

CORPORATE INFORMATION

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, 1997, there were 100,750,363 shares of Common Stock
outstanding held by 1,803 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
------------------------------------------------------------------
1996
<S>                                     <C>               <C> 
  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    
------------------------------------------------------------------
1997                                                            
  First Quarter                         21 1/2            13 1/4
  Second Quarter                        22                14 3/4
  Third Quarter                         25 1/16           17 3/4
  Fourth Quarter                        40 7/8            24 7/8
------------------------------------------------------------------
</TABLE>

PRINCIPAL 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 A. 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

Nabors Offshore Drilling, Inc.
Houston, Texas
Jerry C. Shanklin, President

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

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

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 Director,
 Deutag Drilling

Myron M. Sheinfeld
Attorney,
 Sheinfeld, Maley & Kay

Jack Wexler
International Business
 Consultant

Martin J. Whitman
Chief Executive Officer,
 M.J. Whitman, Inc.
Chairman, Danielson
 Holding Corporation
Chairman, Third Avenue Trust

OFFICERS

Eugene M. Isenberg
Chairman and Chief                      
 Executive Officer

Anthony G. Petrello
President and
 Chief Operating Officer

Richard A. Stratton
Vice Chairman

Daniel McLachlin
Vice President and                              
 Corporate Secretary

Bruce P. Koch
Vice President of Finance


Design: Savage Design Group, Inc., Houston, Texas