<PAGE>   1
                                                                      EXHIBIT 13

                   [PICTURE OF LAND DRILLING RIG IN DISTANCE]

Nabors Industries
         2000 Annual Report

                                    BIG Value



                                        1
<PAGE>   2

      [PICTURE OF TWO LAND DRILLING RIGS, ONE IN DISTANCE, ONE IN CLOSE-UP]

         Nabors has consistently endeavored to deliver increasing value
   to all of our constituencies and the current market and our position in it
        should allow us to do this in a material way in the coming years.


                                  BIGGER Value



                                        2
<PAGE>   3

04   The Upside Potential
27   Financial Highlights
29   Areas of Operation
51   Financial Review
90   Corporate Information
91   Officers and Directors
92   Principal Operating Subsidiaries

                                                           The UPSIDE Potential



                                        3
<PAGE>   4

         THE YEAR 2000, ONE OF THE BEST IN OUR HISTORY, JUST BEGAN TO REVEAL THE
EXTENT OF NABORS' GROWING ABILITY TO CREATE VALUE FOR OUR CUSTOMERS, EMPLOYEES
AND SHAREHOLDERS. The contributions from each of our business units increased
steadily throughout the year, as did our expectations for the future. These
expectations are the result of an increasingly robust market and our expanded
ability to participate in it based upon the actions we took during the weak
market conditions that prevailed throughout 1998 and 1999. These actions



                                       4
<PAGE>   5

included the integration of two sizeable acquisitions, Pool and Bayard, along
with stringent and enduring cost controls. We also continued to invest in ways
that enhanced our safety and overall operating efficiency and we solidified and
reaffirmed many of our vendor alliances to assure availability of long-lead time
components for reactivating and upgrading our stacked rigs. Collectively, these
actions laid the groundwork for fourth quarter 2000 results that approximated
1997's peak quarter at significantly lower levels of global capacity
utilization. Given the factors that are shaping our industry, we believe this
performance is only a harbinger of things to come.

                [CHART SHOWING REVENUE GROWTH FROM 1991 TO 1995]

<TABLE>
<S>      <C>
1991     $264,239

1992     $312,407

1993     $419,406

1994     $484,268

1995     $572,788
</TABLE>

                               [PICTURE OF ACORNS]



                                       5
<PAGE>   6

                [CHART SHOWING REVENUE GROWTH FROM 1996 TO 2000]

<TABLE>
<S>      <C>
1996     $  719,743

1997     $1,115,032

1998     $  968,157

1999     $  642,264

2000     $1,364,614
</TABLE>

                              [PICTURE OF OAK TREE]



                                       6
<PAGE>   7

Ups & downs are inevitable...


         Industry fundamentals indicate a high probability that the improving
market conditions we are now enjoying are not just a temporary reprieve from the
down cycle we have experienced for most of the last two decades, but rather the
beginning of an enduring upcycle. The primary contributing factors are the
convergence of supply and demand for oil and gas brought about by secular global



                                       7
<PAGE>   8

economic growth and the increasing difficulty, expense and long-lead times
involved in adding to supply. This is particularly true for North American
natural gas, demand for which has steadily increased due to its environmental
desirability and its increasing use in electric power generation. Meanwhile, new
sources of supply are not readily apparent since easily accessible and lower
cost reserves are largely developed and new areas for development, like northern
Canada and Alaska, or alternative sources, such as imported liquified natural
gas, are at least several years away.

         The increasing difficulty of finding and developing additional supply
to meet rising demand is exacerbated by diminished rig availability. The
protracted downcycle of the late 1980s and early 1990s has taken its toll on the
US rig fleet, reducing it from a high of 4,200 land rigs in 1982 to less than
1,400 today, many of which require



                                       8
<PAGE>   9

substantial investment to place in service. This attrition has brought the US
land rig market to the point where the demand for rigs has far outstripped the
ready-to-run supply. The same situation exists, to a lesser extent, in our
natural gas-driven Canadian and US offshore markets and is developing in our
oil-driven Alaska and international markets. Strong gas fundamentals in North
America and a lagging, but improving global oil picture would seem to indicate
that worldwide demand for rigs and its positive impact on Nabors should
continue.

         This, of course, is based on our belief that oil and natural gas prices
are likely to remain for some time at levels adequate to ensure attractive
returns for our customers while still permitting economic growth and the
corresponding increase in demand for energy.



                                       9
<PAGE>   10

MARKET LEADERSHIP
         CREATES OPPORTUNITIES

         Nabors strives to continually enhance our value-creating potential. To
that end, we have accumulated a significant portion of the deep premium drilling
rigs in the US Lower 48 and have established drilling market leadership
positions in most of the other strategically important oil and gas areas
throughout the world. These include Alaska, Canada, the US Gulf of Mexico,
Latin America, Africa and the Middle East. In addition to



                                   LEADERSHIP

*    OUR BUSINESS UNITS OCCUPY MARKET-LEADING POSITIONS GAINED THROUGH A
     COMBINATION OF HIGH-QUALITY ASSETS AND WELL-QUALIFIED, EXPERIENCED PEOPLE.



                                       10
<PAGE>   11

                     [PICTURE OF CHESS BOARD AND KING PIECE]



                                       11
<PAGE>   12

drilling rigs, we also have market-leading positions in land well-servicing,
marine transportation, drilling instrumentation and data management, top drive
manufacturing, oilfield construction, rig moving and logistics. Certain
auxiliary businesses like trucking would not be attractive alone, but are
strategically important because of the synergies they provide to our core rig
businesses in satisfying our customer's needs.

         These market positions allow us to participate in all phases of the
growth cycle wherever it occurs, whether it is in North American gas today or
South American crude tomorrow. The diversity and location of our assets also
helps mitigate the impact of a softening in any one market.

         Other notable achievements during the past year solidified our
leadership position financially as well as operationally.



                                       12
<PAGE>   13

Foremost among these was the inclusion of Nabors in the Standard & Poor's
500 Index, which reflects both the increasing prominence Nabors enjoys within
the energy industry and the magnitude of our potential.

         We were also able to capitalize on two attractive opportunities that
further enhanced our capital structure and financial flexibility. In June, we
raised approximately $500 million through the placement of 20-year zero coupon
convertible debentures at a yield to maturity of only two and one-half percent.
In early 2001, we again had an opportunity to place another issue that raised
approximately $830 million with even more attractive terms, among them a
conversion premium which imputes conversion in excess of $97 per share at the
first redemption date in 2006.



                                       13
<PAGE>   14

NABORS HAS THE LARGEST INACTIVE RIG INVENTORY,
         WHICH CAN BE PUT INTO SERVICE IN A SHORT PERIOD
         OF TIME AT RELATIVELY ECONOMICAL COST.

         In addition to our active rig leadership position, we also have the
largest inactive rig inventory, which can be put into service in a short period
of time at relatively economical costs. At the end of 2000, we had nearly 250
drilling rigs unutilized in our various operations, 170 of which reside in our
US Lower 48 unit and constitute nearly 60 percent of the industry's identifiable
remaining capacity. We intend to activate most of these in the next two years at
leading edge margins, which should produce excellent returns on any incremental
capital


<TABLE>
<CAPTION>
    UNIT                         NUMBER OF RIGS                 2000 UTILIZATION
<S>                              <C>                            <C>
   Alaska                              21                              40%

   Canada                              35                              62%

 US Lower 48                          381                              42%

International                         101                              47%

  Offshore                             59                              73%
</TABLE>



                                       14
<PAGE>   15

                                 UTILIZATION %



                                       15
<PAGE>   16

      [GRAPH OF NABORS' RIG UTILIZATION IN THE YEAR 2000 BY OPERATING UNIT]

<TABLE>
<CAPTION>
Unit                     Percent Utilization
----                     -------------------
<S>                      <C>
Alaska                           40%
Canada                           62%
US lower 48                      42%
International                    47%
Offshore                         73%
</TABLE>



                                       16
<PAGE>   17

while providing our customers with additional rigs at dayrates that are less
than those that fully justify replacement cost investments. There is
considerable room for improvements in Nabors' cash flow as these replacement
cost rates are approached, given the fact that new builds not only require
higher capital costs, but also a high degree of certainty regarding adequate
long-term utilization.

         The 80 unutilized rigs in our international, offshore and Alaska
operations can provide similar benefits for both Nabors and our customers.
Excess but less economically meaningful capacity also exists in our US
well-servicing business, with approximately 280 out of 740 units currently
inactive. The combination of deploying this excess capacity and narrowing the
disparity between our current rig dayrates and those required to make new builds
economic is the essence of the potential for significantly higher value that
Nabors possesses.



                                       17
<PAGE>   18

UNLOCKING
         OUR POTENTIAL

         Reactivating the majority of this remaining capacity and bringing
active rigs closer to replacement dayrates is the largest component of the very
significant operating leverage that exists in Nabors. Our North American
gas-exposed businesses appear to be on track to achieve such a position within
the next few years while Alaska is rapidly improving. International land
operations are improving at a more moderate rate, but the anticipated increase
in oil-directed



                                       18
<PAGE>   19
                                   POTENTIAL!

                               [PICTURE OF A KEY]



                                       19
<PAGE>   20

             [GRAPHIC REPRESENTATION OF NABORS THE IMPACT OF HIGHER
                 DAYRATES AND UTILIZATION IN 2000, AND POTENTIAL
                           FOR GROWTH (NOT TO SCALE)]



                                       20
<PAGE>   21

activity should improve this unit's performance substantially and ultimately
extend Nabors' exposure to the current upcycle.

         The effects of higher pricing and utilization on our financial
performance should be further enhanced by anticipated increases in wellsite
content provided by Nabors subsidiaries Canrig and Epoch, both of which are
expected to report strong levels of internal growth for existing and new product
lines. We also expect to invest in new capacity for specific applications, as we
have done in recent years in our Alaska and offshore operations, where our
experience and expertise give us substantial competitive advantage. External
growth is also a possibility as we continue to look at acquisition candidates
that fit our strategic profile.



                                       21
<PAGE>   22

                                      VALUE

                            [PICTURE OF TAPE MEASURE]



                                       22
<PAGE>   23

                                    MEASURING
                            [GRAPHIC OF TAPE MEASURE]
                              in QUANTITATIVE TERMS


         Nabors has consistently endeavored to deliver increasing value to all
of our constituencies, and the current market and our position in it should
allow us to do this in a material way in the coming years.

         For our shareholders, this means continuing to execute in a manner that
maximizes our leverage in this market, allowing us to realize our potential for
higher earnings and returns on capital.



                                       23
<PAGE>   24

              [PICTURE AND FOUR GRAPHICS USING TAPE MEASURE MOTIF,
                 ILLUSTRATING VARIOUS MEASURES OF PERFORMANCE]

                            Share Price Appreciation
                      SOURCE: Year-End Price Per Bloomberg

<TABLE>
<CAPTION>
                                                            Share
               Year                                         Price
               ----                                         ------
<S>                                                         <C>
               1987                                         $ 0.88

               1988                                         $ 1.88

               1989                                         $ 3.50

               1990                                         $ 5.63

               1991                                         $ 6.25

               1992                                         $ 6.50

               1993                                         $ 8.13

               1994                                         $ 6.50

               1995                                         $11.25

               1996                                         $19.25

               1997                                         $31.63

               1998                                         $13.50

               1999                                         $30.94

               2000                                         $59.15
</TABLE>

                              Market Capitalization
                         ($ in millions) SOURCE: Bloomberg, Nabors
<TABLE>
<CAPTION>
                                                  Market capitalization
               Year                                    at year end
               ----                               ---------------------
<S>                                               <C>
               1987                                       $   13

               1988                                       $   52

               1989                                       $  181

               1990                                       $  352

               1991                                       $  557

               1992                                       $  485

               1993                                       $  633

               1994                                       $  557

               1995                                       $1,009

               1996                                       $1,805

               1997                                       $3,542

               1998                                       $1,519

               1999                                       $3,727

               2000                                       $9,015
</TABLE>




                                       24
<PAGE>   25

                             Return to Shareholders
                    SOURCE: The Wall Street Journal 02/26/01

<TABLE>
<S>                                               <C>
                         Three-year
                           average                23.2%

                         Five-year
                           average                39.4%

                         Ten-year
                           average                26.5%
</TABLE>

                           Indexes and Credit Ratings

<TABLE>
<S>                                     <C>
          1992                          National Association of
                                        Insurance Commissioners 2

          1994                          National Association of
                                        Insurance Commissioners 1

          1995                          Nabors included in the Standard
                                        & Poors Mid-Cap 400 Index

          1996                          Standard & Poors "Investment
                                        Grade" Credit Rating
                                        Established as BBB

          1997                          Moody's Investor Services
                                        Credit Rating upgraded to A3

          1999                          Standard & Poors credit rating
                                        upgraded to A-

          2000                          Nabors included in the Standard
                                        & Poors 500 Index
</TABLE>




                                       25
<PAGE>   26

This, in turn, should lead to an appreciating value of your ownership. For our
customers, this means providing you with rigs and synergistic services when and
where you need them, constantly striving for even higher levels of efficiency
and safety to help you hold the line on costs. For our employees, this means a
more stable employment outlook, more favorable working conditions and an ongoing
commitment to your safety, as exemplified by the continuous improvement in our
industry-leading safety record.

         To each of these groups we want to say thank you for your continuing
support. We look forward to delivering ever increasing value that justifies the
confidence you have placed in Nabors Industries.

/s/ E. M. ISENBERG

Eugene M. Isenberg,
Chairman and Chief Executive Officer



                                       26
<PAGE>   27

                            THINGS ARE LOOKING UP...

                 [PICTURE OF NABORS' EXECUTIVE MANAGEMENT TEAM]



                               Eugene M. Isenberg,
                      Chairman and Chief Executive Officer

        Anthony G. Petrello,                                Richard A. Stratton,
President and Chief Operating Officer                           Vice Chairman



                                       27
<PAGE>   28

                                Nabors Industries

                                    FINANCIAL
                                   HIGHLIGHTS


                                 OPERATING DATA



<TABLE>
<CAPTION>
                                                         Twelve
                                                      Months Ended
(In thousands,                                        December 31,
except per share amounts)   Year Ended December 31,    (Unaudited)                    Year Ended September 30,
----------------------------------------------------- ------------- ------------------------------------------------------------
                           2000       1999      1998       1997        1997       1996      1995      1994      1993      1992
<S>                     <C>         <C>       <C>       <C>         <C>         <C>       <C>       <C>       <C>       <C>
Operating revenues
  and Earnings from
  unconsolidated
  affiliates            $1,364,614  $642,264  $968,157  $1,115,032  $1,029,303  $719,743  $572,788  $484,268  $419,406  $312,407

Depreciation and
  amortization             152,413    99,893    84,949      72,350      66,391    46,117    31,042    26,241    22,434    16,526

Income derived from
  operating activities     217,375    58,408   182,338     195,348     154,761    77,099    58,555     9,299    38,257    34,705

Net income                 137,356    27,704   124,988     136,020     114,808    70,500    51,104     1,350    38,558    33,740

Net income per
  diluted share              $ .90  $    .23  $   1.16  $     1.24  $     1.08  $    .75  $    .57  $    .02  $    .50  $    .45

Weighted average
  number of diluted
  shares outstanding       152,417   120,449   112,555     113,793     111,975    93,752    89,655    85,620    77,806    74,666

Capital expenditures
  and acquisitions
  of businesses         $  300,637  $667,517  $313,464  $  381,009  $  396,668  $174,483  $144,560  $ 62,907  $ 84,752  $ 61,124
                        ----------  --------  --------  ----------  ----------  --------  --------  --------  --------  --------
</TABLE>



                                       28
<PAGE>   29

                               BALANCE SHEET DATA


<TABLE>
<CAPTION>
                                                             Twelve
                                                          Months Ended
(In thousands,                                            December 31,
except ratio data)             As of December 31,          (Unaudited)                        As of September 30,
-------------------------------------------------------- ------------- ------------------------------------------------------------
                          2000        1999        1998        1997        1997       1996      1995      1994      1993      1992
<S>                    <C>         <C>         <C>         <C>         <C>         <C>       <C>       <C>       <C>       <C>
Cash and marketable
  securities           $  550,953  $  111,666  $   23,450  $   12,606  $   11,044  $104,027  $ 15,334  $ 45,232  $ 70,458  $ 14,783

Working capital           739,139     195,817      36,822      62,571      70,872   172,091    33,892    77,248   113,653    33,831

Property, plant and
  equipment, net        1,821,392   1,669,466   1,127,154     923,402     861,393   511,203   393,464   283,141   270,865   220,761

Total assets            3,136,868   2,398,003   1,465,907   1,281,306   1,234,232   871,274   593,272   490,273   493,927   339,930

Long-term obligations     854,777     482,600     217,034     226,299     229,507   229,504    51,478    61,879    73,109    49,294

Stockholders' equity   $1,806,468  $1,470,074  $  867,469  $  767,340  $  727,843  $457,822  $368,750  $317,424  $307,583  $201,058

Funded debt to
  capital ratio            0.32:1      0.25:1      0.26:1      0.27:1      0.27:1    0.35:1    0.20:1    0.21:1    0.24:1    0.28:1
                       ----------  ----------  ----------  ----------  ----------  --------  --------  --------  --------  --------
</TABLE>


                 GEOGRAPHIC DISTRIBUTION OF REVENUES AND ASSETS

<TABLE>
<CAPTION>
                                                           Twelve
                                                        Months Ended
                                                        December 31,
(In thousands)             Year Ended December 31,       (Unaudited)                     Year Ended September 30,
------------------------------------------------------  ------------ ------------------------------------------------------------
                        2000        1999        1998        1997        1997       1996      1995      1994      1993      1992
<S>                  <C>         <C>         <C>         <C>         <C>         <C>       <C>       <C>       <C>       <C>
Operating revenues
  and Earnings from
  unconsolidated
  affiliates:
  United States      $1,085,232  $  439,131  $  692,636  $  867,999  $  797,319  $503,622  $383,376  $299,278  $224,401  $138,534
  Foreign               279,382     203,133     275,521     247,033     231,984   216,121   189,412   184,990   195,005   173,873
                     ----------  ----------  ----------  ----------  ----------  --------  --------  --------  --------  --------
                     $1,364,614  $  642,264  $  968,157  $1,115,032  $1,029,303  $719,743  $572,788  $484,268  $419,406  $312,407
                     ----------  ----------  ----------  ----------  ----------  --------  --------  --------  --------  --------

Total assets:
  United States      $2,663,309  $1,917,751  $1,068,193  $  958,026  $  897,453  $593,014  $348,248  $287,390  $277,945  $152,715
  Foreign               473,559     480,252     397,714     323,280     336,779   278,260   245,024   202,883   215,982   187,215
                     ----------  ----------  ----------  ----------  ----------  --------  --------  --------  --------  --------
                     $3,136,868  $2,398,003  $1,465,907  $1,281,306  $1,234,232  $871,274  $593,272  $490,273  $493,927  $339,930
                     ----------  ----------  ----------  ----------  ----------  --------  --------  --------  --------  --------
</TABLE>



                                       29
<PAGE>   30
                                     THE SUM
                                       OF
                                    OUR PARTS

Areas of Operation Nabors is geographically diverse,
         operating in virtually every significant oil and gas area worldwide.

Nabors operates through a group of semi-autonomous business units organized on a
geographic and line-of-business basis. These units occupy market-leading
positions gained through a combination of high-quality assets and
well-qualified, experienced people. The following section elaborates on the
nature of each business, its assets and markets, its accomplishments in 2000 and
its prospects for the future.

                  [GRAPHIC HIGHLIGHTING EACH NABORS' WORLDWIDE
                         OPERATING UNIT (NOT TO SCALE)]



                                       30
<PAGE>   31

               [MAP SHOWING NABORS' WORLDWIDE OPERATING LOCATIONS]


            [GRAPHIC HIGHLIGHTING EACH OPERATING UNIT (NOT TO SCALE)]



                                       31
<PAGE>   32

                 [PICTURE OF TWO OF NABORS' ARCTIC RIGS DRILLING
                           ON THE ALASKA NORTH SLOPE]



                                       32
<PAGE>   33

                                                                          Part 1

                                     NABORS
                                     ALASKA

                                  Nabors Alaska experienced a transitional year
                                  financially, but an active year operationally.


IN 2000, THIS BUSINESS UNIT GEARED UP FOR THE INCREASE IN ACTIVITY that followed
the mid-year purchase of Arco by BP/Amoco and the sale of that entity's North
Slope properties to Phillips Petroleum. Nabors' operating rig count climbed from
two to ten, but results increased less proportionately since most of these rigs
were already receiving standby revenues under long-term contracts.

Several large and challenging projects, including new field development at
Alpine and Northstar, should have a substantial positive impact on this unit's
performance in 2001 and beyond. The company has signed a contract to drill in
remote areas with an air transportable rig, and is in the forefront of the
effort to reach prospects far offshore from land locations by extended reach
drilling, allowing more economical and more environmentally sensitive
development of these resources. We are mobilizing a rig from the US Rocky
Mountains for such a project in Cook Inlet, and we are proposing concepts for a
high Arctic rig to drill super extended reach wells up to eight miles out in the
Arctic Ocean.

Nabors Alaska has proactively developed a North Slope training school to address
the need for qualified rig hands. It is designed for employees returning to the
industry after a long layoff, or for those with less than one year of
experience, and is expected to increase drilling efficiency on Nabors rigs while
further improving safety.



                                       33
<PAGE>   34

                                                                          Part 2

                                     NABORS
                                     CANADA

        Nabors Canada
    had a record year
 financially in 2000,
posting a substantial
    increase over the
          prior year.


THESE RESULTS WOULD HAVE BEEN BETTER YET IF THE WETTEST SPRING AND SUMMER IN
OVER 40 YEARS HAD NOT INHIBITED OPERATIONS, although the company was able to
keep its large rigs working during the spring breakup. The year was highlighted
when Nabors was again named co-winner of the best three-year safety record in
Canada.

The outlook for 2001 continues to be very favorable, with the strong gas market
and a shortage of drilling rigs portending an even better performance for this
operating unit. Canadian operators have budgeted a substantial increase in
drilling expenditures in the coming year using gas price assumptions only
slightly higher than historical averages and much lower than recent highs.

Longer term, Nabors Canada should also benefit from anticipated new developments
in the high Arctic and more northerly latitudes, where the combination of
larger, but less accessible reserves and restrictive weather require innovations
in rig design and environmental sensitivity. Nabors is particularly well-suited
to meet these challenges, given the company's 40 years of experience working on
Alaska's North Slope.



                                       34
<PAGE>   35

           [PICTURE OF NABORS RIG 21-E DRILLING IN THE CANADIAN ROCKY
                               MOUNTAIN FOOTHILLS]



                                       35
<PAGE>   36

                [PICTURE OF LAND DRILLING RIG IN SOUTH LOUISIANA]



                                       36
<PAGE>   37

Part 3

                         2000 was an excellent year for Nabors Drilling
                         USA as the company responded to increased
                         demand for gas-directed drilling.

US LOWER 48

DEMAND FOR READY TO DRILL RIGS FAR OUTSTRIPPED SUPPLY, causing dayrates to climb
correspondingly. In response, the company refurbished and placed in operation an
additional 75 rigs, providing a springboard for what should be an excellent
2001.

Of primary importance during the year was a real improvement in the unit's
already strong safety record in the face of recruiting a mostly inexperienced
work force to staff an active rig fleet that has grown from 73 to 213 rigs in
less than two years. The unit's OSHA recordable rate actually dropped from 4.4
at the end of 1999 to 4.27 at the end of 2000, largely the result of a
comprehensive on the job training program for both rig hands and supervisors.

Going forward, this unit expects to activate between 70 and 100 rigs in the new
year from an inventory of more than 170 stacked rigs, which constitutes a
majority of the remaining industry capacity. Most of these will be mechanical
rigs which are more readily returned to service. We also have immediate access
to a full complement of component parts, allowing the company to put rigs in the
field quickly and economically and forestalling rig replacement dayrates.

Manpower requirements will provide a continuing challenge in 2001 and this unit
has instituted an aggressive recruiting program to staff rigs and develop
additional management infrastructure. NDUSA will also focus on continuing to
improve safety, with programs in place designed to further reduce the OSHA
recordable rate.



                                       37
<PAGE>   38

                                                                          Part 4

International land operations are improving at a more moderate rate than North
America, but the anticipated increase in oil-directed activity should improve
this unit's performance substantially and ultimately extend Nabors' exposure to
the current upcycle.

                                 INTERNATIONAL

ACTIVITY PICKED UP MID-YEAR, HOWEVER, AND THIS UNIT FINISHED STRONG, WITH
EXCELLENT PROSPECTS FOR THE COMING YEAR. The improved performance in the second
half was tied in part to the integration of Pool operations early in the year,
which contributed significantly to increased activity in Oman, Pakistan, Ecuador
and Argentina, and strengthened existing operations in Saudi Arabia.

The modification and deployment of two fast-moving leapfrog rigs in Yemen
further contributed to results.

Going forward, this unit expects to report steady improvement. Particularly
significant will be contributions from operations in Algeria, where five rigs
are being deployed on medium and long-term contracts. Extremely robust bidding
worldwide bodes well for 2001 and beyond.

A number of opportunities are available to Nabors International due to our
expanded geographical presence and the capabilities of other Nabors
subsidiaries. We are contemplating the relocation of underutilized rigs back to
the US, where the market for rigs is strong. We also are evaluating certain
acquisition opportunities which would provide additional quality rigs to meet
customer demand wherever it occurs. We continue to be the leading contractor for
some of the largest and most sophisticated drilling projects, where we believe
Nabors' unique assets, large inventory of high quality, refurbishable rigs and
broad experience give us a competitive advantage.



                                       38
<PAGE>   39

      [PICTURE OF NABORS DRILLING RIG OPERATING IN DESERT CONDITIONS IN THE
                                  MIDDLE EAST]



                                       39
<PAGE>   40

        [PICTURE OF AN OFFSHORE PLATFORM DRILLING RIG AT WORK IN THE U.S.
                                 GULF OF MEXICO]



                                       40
<PAGE>   41

                                                                          Part 5

                                 NABORS OFFSHORE

                        Nabors Offshore was the first unit to respond to the
                        upturn in the market that began in late 1999, ultimately
                        proving to be the largest incremental contributor to
                        Nabors' results throughout early 2000.

BY THE END OF THE THIRD QUARTER, THIS UNIT HAD EXCEEDED 1997 PEAK UTILIZATION
AND PRICING LEVELS IN ALL CATEGORIES EXCEPT API-STYLE PLATFORM DRILLING RIGS.

This unit moved to take advantage of several new business opportunities by
repositioning a number of Sundowner and Super Sundowner type rigs from foreign
markets back to the US Gulf of Mexico on new contracts at better dayrates.
Meanwhile, two of our shallow water workover jackups and a Super Sundowner were
repositioned to Brazil and Trinidad. Another Super Sundowner in Italy was
upgraded and returned to work with a three-year contract extension at a higher
dayrate.

Going forward, this unit expects even better performance in the coming year.
Increased contribution from higher average utilization and prices on working and
reactivated rigs should be realized. Additionally, the inland barge market is
firming up, with all three rigs back in service, and the burgeoning deepwater
market holds promise for API-style rigs, the only asset that lagged in 2000.

Nabors Offshore continues to be recognized for innovative engineering and 2001
should be no exception. We are currently designing modifications to our Super
Sundowner rigs which will allow them to withstand the dynamic forces inherent in
buoyant structures in deeper water applications. When this design enhancement is
implemented, Nabors Offshore expects to be the provider of choice for platform
workover rigs with dynamic capability.



                                       41
<PAGE>   42

              [PICTURE OF A POOL WELL-SERVICING RIG AND ONE OF OUR
                              FLUID-HAULING TRUCKS]



                                       42
<PAGE>   43

Part 6

                              2000 was a very good year for Pool Well Servicing,
                              as both the aggregate number of rig hours and
                              the average hours per rig increased substantially,
                              contributing to improved results.


WELL-SERVICING

INCREASED DEMAND IN ALL OF THIS UNIT'S GEOGRAPHICAL AREAS SPURRED THE ACTIVATION
OF AN ADDITIONAL 40 RIGS, INCREASING THE ACTIVE RIG COUNT FROM 390 TO 430.

Pool also made strides in safety during the year. The total OSHA recordable
incident rate improved from a frequency of 4.29 to 4.19 in the face of an 18
percent increase in total man-hours worked. As a result, this unit received the
Association of Energy Service Companies' Gold Safety Award for the fourth
straight year.

Going forward, Pool expects to report an excellent year in 2001 driven by
further improvements in both utilization and pricing. This unit plans to
refurbish and activate a number of its remaining 280 stacked well-servicing rigs
as market conditions warrant.

Pool has instituted a program to alleviate the shortage of experienced crews
which can impede a sizable rig reactivation program. By investing in certain rig
enhancements and by increasing the compensation to crewmembers, Pool has been
able to implement a smaller crew size in some areas, with the double benefit of
freeing up experienced crewmembers for reactivated rigs, while simultaneously
improving safety and efficiency.



                                       43
<PAGE>   44


OFFSHORE MARINE
     TRANSPORTATION

By any measure, 2000 was a remarkable year for Sea Mar. Vessel utilization at
the beginning of the year was approximately 72 percent, with historically weak
dayrates.

BY MID-YEAR, THE UTILIZATION HAD IMPROVED TO OVER 90 PERCENT WITH DAYRATES
ESCALATING SUBSTANTIALLY. This business unit further enhanced its contribution
when it took delivery of the last five of a ten-vessel, $100 million new
construction program. These new vessels fit well with Nabors' premium asset
strategy and had a positive impact on 2000's results. They are particularly
well-suited for the rigorous deepwater offshore operating environment because of
features far superior to conventional 180-foot supply vessels.

Sea Mar also reactivated several older vessels, which had been stacked. This
ultimately brought the total Sea Mar active fleet to 12 supply vessels, six
mini-supply vessels, one oceanographic research vessel, one anchor handling and
towing vessel and the ten deepwater offshore supply vessels. The size and
diversity of the fleet proved to be important as second and third quarter vessel
demand far exceeded anything predicted for the offshore supply industry.

Going forward, Sea Mar is well positioned to maintain or exceed its current
profitability if, as expected, US offshore drilling activity continues at
present levels. Higher average pricing and utilization, coupled with full
contribution from last year's reactivated and newly constructed vessels should
yield another record year.



                                       44
<PAGE>   45

                                                                          Part 7

        [PICTURE OF ONE OUR NEWLY-CONSTRUCTED SUPPLY VESSELS SERVICING A
                      CUSTOMER IN THE U.S. GULF OF MEXICO]



                                       45
<PAGE>   46

        [PICTURE OF THE DATA DISPLAY FOR AN EPOCH INSTRUMENTATION SYSTEM]



                                       46
<PAGE>   47

Part 8

                                  TECHNOLOGY &
                                  MANUFACTURING

                         In 2000, Canrig and Epoch both successfully
                         positioned themselves to accommodate the
                         significant growth anticipated in the coming
                         year, for both Nabors and third-party sales.

MANUFACTURING CAPACITY INCREASED FROM TWO UNITS PER MONTH TO FOUR, quality
improved significantly as a result of new programs begun in mid-1999 and the
frequency of OSHA recordable incidents was cut in half. Canrig also delivered
its first 750-ton a/c top drive for land application and was named provider of
choice for top drive units by Grey Wolf.

Going forward, Canrig expects to report a record year in both revenues and
earnings if market conditions remain favorable. Production capacity should
expand to five units per month, enabling the unit to reduce the current
eight-month backlog. Additional revenues should be derived from an increased
emphasis on the offshore market, and from servicing a greater number of units
now in the field as a result of our successful sales effort during the last two
years.

EPOCH EXPERIENCED RAPID GROWTH IN 2000 as the number of successfully installed
rig monitoring instrumentation systems (Rigwatch(TM)) climbed from slightly over
100 to well over 300. Meanwhile, Rig Report(TM) - our operations summarizing
software - was also successfully installed on all Nabors rigs, automating
payroll and a number of other functions. Epoch added what has the potential to
be a significant product line in the near future with the launching of its
myWells.com(TM) Internet site. This product allows operators anytime, anywhere
access to rig and well information, improving drilling efficiency and reducing
down time.

Prospects for 2001 are excellent with the number of installed Rigwatch(TM)
systems expected to exceed 500. The unit also plans to further expand
internationally and to launch real-time applications through myWells.com(TM).



                                       47
<PAGE>   48

        [PICTURE OF PEAK OILFIELD SERVICES VACUUM TANKER AND RIG MOVING
                              TRUCK IN PRUDHOE BAY]

                                 TRANSPORTATION
                                 & CONSTRUCTION



                                       48
<PAGE>   49

                                                                          Part 9

                              Both Peak Oilfield Service Company
                              and Peak USA saw significant increases
                              in activity and results in 2000.

THE CONTRIBUTION FROM OUR ALASKAN CONSTRUCTION AND LOGISTICS JOINT-VENTURE
BUSINESS WAS THE BEST EVER IN 2000, while revenues from our wholly-owned Peak
USA subsidiary more than doubled.

In Alaska, preparation of the Northstar field for initial drilling and the
construction of attendant production facilities constituted a majority of the
results derived from AIC, our heavy civil construction joint-venture. Peak
Oilfield Service Company (Alaska) also benefited from Northstar activities, but
the bulk of its record results were derived from expansion of its core business
activities and from construction and logistics work related to the development
of the Alpine field.

Peak Oilfield Service Company had a number of notable developments during the
year. The unit constructed the longest ice road ever built in Alaska and used it
to transport the heaviest module ever moved over sea ice to the Alpine field.
Peak also completed the turnaround of a large Cook Inlet petrochemical complex
and was recently awarded a design-build contract for a British Petroleum
gas-to-liquids test facility in Kenai.

Going forward, Peak Oilfield Service Company should post an even better year in
2001, fueled by the busiest exploration market in Alaska in the last 20 years
and a number of bids for civil construction projects. Peak already has received
several ice road contracts in support of exploration programs in the National
Petroleum Reserve, for further delineation of the Alpine field, and for other
exploration projects west of the Kaparuk River field.

Our Peak USA Lower 48 trucking unit also had a much improved year, primarily due
to increased demand for rig moving services from sister company Nabors Drilling
USA. This unit also made significant strides in improving safety, lowering its
OSHA recordable incident rate below 1.0 for the first time. Other
accomplishments included the expansion and upgrading of the fleet and a dramatic
reduction in costs, positioning this operation to be even more profitable in the
burgeoning rig transportation market that is resulting from increases in
domestic land drilling.



                                       49
<PAGE>   50

                                      FLEET
                                   COMPONENTS

                        RIG FLEET STATUS AS OF MARCH 2001



<TABLE>
<CAPTION>
LAND RIG FLEET - 537 RIGS      < 900 HP      900-1200 HP     1400-1700 HP   2000 HP and >    Total
--------------------------------------------------------------------------------------------------
                              SCR    Mech    SCR     Mech     SCR    Mech    SCR     Mech
<S>                           <C>    <C>     <C>     <C>      <C>    <C>     <C>     <C>     <C>
Alaska
  North Slope(1)                 1       3       6                               7              17
  Kenai/Cook Inlet                                               2               1               3

International land
  Latin America(2)               1      25       2      11       4       2       7              52
  Middle East/Africa/CIS         1      10       9       1      11               8              40
  Joint ventures(3)                      7       1                               1               9

US Lower 48
  Southern Division
    East Texas District          4       8      18       8      12       1       5              56
    South Texas District         1               3       3      10       3       9       1      30
    Gulf Coast District                                  2       3       1      19       1      26
  Southwest Division
    California District          4       4                       2               4              14
    West Texas District                  8       4       4       1       2       2              21
    Mid-Continent District              18       3      14       5       3       8       2      53
    North Dakota                         2       1       9               1                      13
    Wyoming                      4       6       2       2       1               1              16
US Lower 48 stacked rigs                                                                       152

Canada                           3      19       2       2       5               4              35
                            ------  ------  ------  ------  ------  ------  ------  ------  ------
TOTAL LAND RIGS                                                                                537
                            ------  ------  ------  ------  ------  ------  ------  ------  ------
</TABLE>

(1)  Includes one coiled tubing drilling rig at 50 percent ownership.

(2)  Includes 19 primarily workover rigs located in Argentina which were
     formerly owned by our Argentine joint-venture which was acquired in early
     2001.

(3)  Represents the net quantity of rigs owned by Nabors at 50 percent interest.

(4)  Includes five offshore rigs operated by other Nabors' subsidiaries; Alaska
     - one 2,000 HP platform drilling rig in Cook Inlet, US land well-servicing
     - one 1,000 HP platform workover rig offshore California, International
     land - one 2,000 HP platform drilling rig offshore Ecuador, two offshore
     drilling jackups in the Persian Gulf, one of which is owned by our Pool
     Arabia joint-venture.



                                       50
<PAGE>   51

Nabors operates a large, high-quality and diverse fleet of land and offshore
rigs in numerous areas around the globe. Many of these rigs are rated for
deeper, more sophisticated drilling applications and several are highly
specialized, advanced models designed for the world's most challenging
environments. We also have a majority of the industry's premium electric (SCR)
rigs, which are generally preferred for directional and horizontal wells. With
most of the remaining industry excess capacity, we are well-positioned to add to
our active rig fleet both quickly and economically.


<TABLE>
<CAPTION>
OFFSHORE RIG FLEET - 59 RIGS                        Platform Rigs                             Barge  Jackup  Total
------------------------------------------------------------------------------------------------------------------
                              Concentric                                           Super
                                Tubing    < 750 HP  Sundowner(R)  > 750 HP      Sundowner(R)
<S>                           <C>         <C>       <C>           <C>           <C>           <C>    <C>     <C>
Gulf of Mexico                         3         3             8         4                 4      2       9     33
California                                                               1(4)                                    1
International                                                            2                 3              2      7
                              ----------  --------  ------------  --------      ------------  -----  ------  -----
TOTAL OFFSHORE WORKOVER RIGS                                                                                    41
                              ----------  --------  ------------  --------      ------------  -----  ------  -----
</TABLE>


<TABLE>
<CAPTION>
                                                     Platform Rigs                           Barge         Jackup         Total
-------------------------------------------------------------------------------------------------------------------------------
                                     MASE(R)         Self Erecting         API-Style
<S>                                  <C>             <C>                   <C>               <C>           <C>            <C>
Gulf of Mexico                             2                     5                 5             1                           13
Alaska                                                           1(4)                                                         1
International                              1                     1(4)                                         1.5(3)(4)     3.5
                                     -------         -------------         ---------         -----         ------         -----
TOTAL OFFSHORE DRILLING RIGS                                                                                               17.5
                                     -------         -------------         ---------         -----         ------         -----
</TABLE>


<TABLE>
<CAPTION>
US LAND WELL-SERVICING/WORKOVER RIGS - 743 RIGS                                                                    Total
------------------------------------------------------------------------------------------------------------------------
                                                               < 300 HP   300-350 HP   400-450 HP   500 HP and >
<S>                                                            <C>        <C>          <C>          <C>            <C>
California                                                           63           71           54              3     191
Central                                                              14           99          132             31     276
Stacked                                                              32          173           55             16     276
                                                               --------   ----------   ----------   ------------   -----
TOTAL WELL SERVICE RIGS                                                                                              743
                                                               --------   ----------   ----------   ------------   -----
</TABLE>



                                       51
<PAGE>   52

54 Selected Financial Data

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

66 Report of Independent Accountants

67 Consolidated Balance Sheets

68 Consolidated Statements of Income

69 Consolidated Statements of Cash Flows

70 Consolidated Statements of
   Changes in Stockholders' Equity

72 Notes to Consolidated Financial Statements




                                       52




<PAGE>   53


                                FINANCIAL REVIEW



                                       53



<PAGE>   54
                                Nabors Industries

                             Selected Financial Data

                              OPERATING DATA(1)(2)

<TABLE>
<CAPTION>
                                                                                Twelve        Three
                                                                             Months Ended     Months
(In thousands,                                                               December 31,     Ended
except per share amounts)               Year Ended December 31,               (Unaudited)  December 31,    Year Ended September 30,
------------------------------------------------------------------------------------------------------------------------------------
                                   2000          1999          1998             1997(3)        1997           1997          1996
                               ------------  ------------  ------------      ------------  ------------   ------------  ------------
<S>                            <C>           <C>           <C>               <C>           <C>            <C>           <C>
Revenues and other income:

  Operating revenues           $  1,327,124  $    638,507  $    968,462      $  1,114,758  $    302,831   $  1,028,853  $    719,604
  Earnings (losses) from
    unconsolidated affiliates        37,490         3,757          (305)              274           (25)           450           139
  Interest income                    20,581         8,756         1,480             1,936            93          3,422         2,695
  Other income, net                  24,121         8,860        31,626            28,502         2,303         40,747        13,690
                               ------------  ------------  ------------      ------------  ------------   ------------  ------------
    Total revenues and
      other income                1,409,316       659,880     1,001,263         1,145,470       305,202      1,073,472       736,128
                               ------------  ------------  ------------      ------------  ------------   ------------  ------------
Costs and other deductions:
  Direct costs                      888,322       418,675       623,844           774,856       199,714        737,780       539,665
  General and administrative
    expenses                        106,504        65,288        77,026            72,478        18,580         68,616        56,862
  Depreciation and
    amortization                    152,413        99,893        84,949            72,350        20,313         66,391        46,117
  Interest expense                   35,370        30,395        15,463            16,323         3,979         16,520        11,884
  Merger expenses                        --            --            --                --            --          1,755            --
  Provision for reduction in
    carrying value of assets             --            --            --                --            --             --            --
                               ------------  ------------  ------------      ------------  ------------   ------------  ------------
    Total costs and
      other deductions            1,182,609       614,251       801,282           936,007       242,586        891,062       654,528
                               ------------  ------------  ------------      ------------  ------------   ------------  ------------
Income before income taxes
  and extraordinary gain            226,707        45,629       199,981           209,463        62,616        182,410        81,600
Income taxes                         91,233        17,925        74,993            73,443        21,289         67,602        11,100
                               ------------  ------------  ------------      ------------  ------------   ------------  ------------
Income before
  extraordinary gain                135,474        27,704       124,988           136,020        41,327        114,808        70,500
Extraordinary gain, net               1,882            --            --                --            --             --            --
                               ------------  ------------  ------------      ------------  ------------   ------------  ------------
Net income                     $    137,356  $     27,704  $    124,988      $    136,020  $     41,327   $    114,808  $     70,500
                               ------------  ------------  ------------      ------------  ------------   ------------  ------------
Net income per
  diluted share                $        .90  $        .23  $       1.16      $       1.24  $        .37   $       1.08  $        .75
Weighted average number of
  diluted shares outstanding        152,417       120,449       112,555           113,793       116,427        111,975        93,752
Income derived from
  operating activities(5)           217,375        58,408       182,338           195,348        64,199        154,761        77,099
Capital expenditures and
  acquisitions of businesses   $    300,637  $    667,517  $    313,464      $    381,009  $     84,038   $    396,668  $    174,483
                               ------------  ------------  ------------      ------------  ------------   ------------  ------------
</TABLE>

<TABLE>
<CAPTION>
(In thousands,
except per share amounts)                        Year Ended September 30,
----------------------------------------------------------------------------------------
                                   1995          1994             1993          1992
                               ------------  ------------     ------------  ------------
<S>                            <C>           <C>              <C>           <C>
Revenues and other income:

  Operating revenues           $    572,788  $    484,268     $    419,406  $    312,407
  Earnings (losses) from
    unconsolidated affiliates            --            --               --            --
  Interest income                     1,694         2,459            1,191         1,383
  Other income, net                   5,990         2,718           11,593         5,559
                               ------------  ------------     ------------  ------------
    Total revenues and
      other income                  580,472       489,445          432,190       319,349
                               ------------  ------------     ------------  ------------
Costs and other deductions:
  Direct costs                      434,097       369,677          313,458       215,939
  General and administrative
    expenses                         49,094        47,770           45,257        45,237
  Depreciation and
    amortization                     31,042        26,241           22,434        16,526
  Interest expense                    7,611         8,237            8,924         5,732
  Merger expenses                        --         1,595               --            --
  Provision for reduction in
    carrying value of assets             --        29,686(4)            --            --
                               ------------  ------------     ------------  ------------
    Total costs and
      other deductions              521,844       483,206          390,073       283,434
                               ------------  ------------     ------------  ------------
Income before income taxes
  and extraordinary gain             58,628         6,239           42,117        35,915
Income taxes                          7,524         4,889            3,559         2,175
                               ------------  ------------     ------------  ------------
Income before
  extraordinary gain                 51,104         1,350           38,558        33,740
Extraordinary gain, net                  --            --               --            --
                               ------------  ------------     ------------  ------------
Net income                     $     51,104  $      1,350     $     38,558  $     33,740
                               ------------  ------------     ------------  ------------
Net income per
  diluted share                $        .57  $        .02     $        .50  $        .45
Weighted average number of
  diluted shares outstanding         89,655        85,620           77,806        74,666
Income derived from
  operating activities(5)            58,555         9,299           38,257        34,705
Capital expenditures and
  acquisitions of businesses   $    144,560  $     62,907     $     84,752  $     61,124
                               ------------  ------------     ------------  ------------
</TABLE>

                                       54


<PAGE>   55

                            BALANCE SHEET DATA(1)(2)


<TABLE>
<CAPTION>
                                                           Twelve
                                                         Months Ended
(In thousands,                                           December 31,
except ratio data)              As of December 31,       (Unaudited)                       As of September 30,
-----------------------------------------------------------------------------------------------------------------------------------
                          2000        1999        1998        1997        1997       1996      1995      1994      1993      1992
<S>                    <C>         <C>         <C>         <C>         <C>         <C>       <C>       <C>       <C>       <C>
Cash and market-
  able securities      $  550,953  $  111,666  $   23,450  $   12,606  $   11,044  $104,027  $ 15,334  $ 45,232  $ 70,458  $ 14,783

Working capital           739,139     195,817      36,822      62,571      70,872   172,091    33,892    77,248   113,653    33,831

Property, plant and
  equipment, net        1,821,392   1,669,466   1,127,154     923,402     861,393   511,203   393,464   283,141   270,865   220,761

Total assets            3,136,868   2,398,003   1,465,907   1,281,306   1,234,232   871,274   593,272   490,273   493,927   339,930

Long-term obligations     854,777     482,600     217,034     226,299     229,507   229,504    51,478    61,879    73,109    49,294

Stockholders' equity    1,806,468   1,470,074     867,469     767,340     727,843   457,822   368,750   317,424   307,583   201,058

Funded debt to
  capital ratio            0.32:1      0.25:1      0.26:1      0.27:1      0.27:1    0.35:1    0.20:1    0.21:1    0.24:1    0.28:1
                       ----------  ----------  ----------  ----------  ----------  --------  --------  --------  --------  --------
</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 acquired
    by us during October 1994. Other acquisitions' results of operations and
    financial position have been included beginning on the respective dates of
    acquisition and include Pool Energy Services Co. (November 1999), Bayard
    Drilling Technologies, Inc. (April 1999), New Prospect Drilling Company (May
    1998), Can-Tex Drilling & Exploration, Ltd. land rigs (May 1998), Veco
    Drilling, Inc. land rigs (November 1997), Diamond L Drilling & Production
    land rigs (November 1997), Cleveland Drilling Company, Inc. (August 1997),
    Chesley Pruet Drilling Company (April 1997), Adcor-Nicklos Drilling Company
    (January 1997, retroactive to October 1996), Noble Drilling Corporation land
    rigs (December 1996), Exeter Drilling Company and its subsidiary, J.W.
    Gibson Well Services Company (April 1996), Delta Drilling Company (January
    1995) and Grace Drilling Company (June 1993). The results of operations also
    reflect the disposition of our UK North Sea (November 1996) and J.W. Gibson
    (January 1998) operations.

(2) We changed our fiscal year end from September 30 to December 31, effective
    for the fiscal year beginning January 1, 1998. The three month transition
    period from October 1, 1997 through December 31, 1997 preceded the start of
    the new fiscal year.

(3) Represents unaudited recast financial data for the twelve months ended
    December 31, 1997. This data was derived by adjusting the audited results
    for the year ended September 30, 1997 to exclude the unaudited results for
    the quarter ended December 31, 1996 and to include the audited results for
    the three months ended December 31, 1997.

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

(5) "Income derived from operating activities" has historically been referred to
    as "operating income" by us. It is computed by subtracting direct costs,
    general and administrative expenses, depreciation and amortization expense,
    merger expenses and provision for reduction in carrying value of assets from
    Operating revenues and then adding (subtracting) Earnings (losses) from
    unconsolidated affiliates.




                                       55


<PAGE>   56

                                Nabors Industries

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



Results of operations
--------------------------------------------------------------------------------

                  Fiscal Year 2000 Compared to Fiscal Year 1999

    Operating revenues and Earnings from unconsolidated affiliates for fiscal
year 2000 totaled $1.4 billion, representing an increase of $722.4 million, or
112%, as compared to fiscal year 1999. Income derived from operating activities
and net income for 2000 totaled $217.4 million and $137.4 million ($.90 per
diluted share), respectively, representing increases of 272% and 396% as
compared to 1999.

    The significant increase in our operating results is due to substantial
year-over-year improvements in all of our business units and to the addition of
the Pool Energy Services Co. operations acquired in November 1999. In accordance
with the purchase method of accounting, Pool's results of operations have been
included in our financial statements commencing on the effective date of the
acquisition. Therefore, only 37 days of Pool's operating results were included
in our 1999 results. The improvement in our business units' performance reflects
the continuation of a positive trend that began during the third quarter of 1999
in response to higher average natural gas and oil prices. Natural gas prices,
which averaged $2.19 per mcf during 1999, increased steadily over the year and
averaged $4.17 per mcf during 2000. Oil prices also increased significantly with
average prices of $30.37 per barrel during 2000, up from $19.30 per barrel on
average during 1999. The increase in natural gas and oil prices has resulted in
increased capital spending by our customers for services provided by Nabors.
This increased spending has been especially evident in our US Lower 48, Canada
and Gulf of Mexico operations for natural gas-related drilling and workover
activities. The increase in North American land drilling activity is illustrated
by the increase in the total US active land rig count which averaged 726 working
rigs during 2000 compared to 502 working rigs during 1999. Additionally, the
Canadian land rig count averaged 340 working rigs during 2000 compared to 240
working rigs during 1999 and the US offshore rig count averaged 140 rigs during
2000 compared to 106 rigs during 1999. Looking forward into 2001, we expect
continued improvement in both dayrates and utilization in virtually all areas of
our operations. Our optimism is based on the positive supply and demand
fundamentals for natural gas and oil that are currently in place and expected to
continue for the near term, barring any major unforeseen event.



                                       56
<PAGE>   57

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

<TABLE>
<CAPTION>
(In thousands, except percentages)                        Year Ended December 31,                 Increase (Decrease)
------------------------------------------------------------------------------------------------------------------------------------
                                                        2000        1999       1998        2000 to 1999           1999 to 1998
<S>                                                  <C>          <C>        <C>        <C>         <C>       <C>           <C>
Reportable Segments:
Operating revenues and Earnings
  from unconsolidated affiliates:
  Contract drilling(1)                               $1,266,902   $605,271   $872,717   $661,631       109%   $ (267,446)      (31%)
  Manufacturing and logistics(2)                        167,093     49,220    111,188    117,873       239%      (61,968)      (56%)
  Other(3)                                              (69,381)   (12,227)   (15,748)   (57,154)     (467%)       3,521        22%
                                                     ----------   --------   --------   --------    ------    ----------    ------
                                                     $1,364,614   $642,264   $968,157   $722,350       112%   $ (325,893)      (34%)
                                                     ----------   --------   --------   --------    ------    ----------    ------

Income (loss) derived from operating activities:(4)
  Contract drilling(1)                               $  204,543   $ 70,759   $181,793   $133,784       189%   $ (111,034)      (61%)
  Manufacturing and logistics(2)                         41,075      2,758     15,861     38,317        (5)      (13,103)      (83%)
  Other(6)                                              (28,243)   (15,109)   (15,316)   (13,134)      (87%)         207         1%
                                                     ----------   --------   --------   --------    ------    ----------    ------
                                                     $  217,375   $ 58,408   $182,338   $158,967       272%   $ (123,930)      (68%)
                                                     ----------   --------   --------   --------    ------    ----------    ------
</TABLE>

(1) Includes Earnings from unconsolidated affiliates, accounted for by the
    equity method, of $18.0 million and $.8 million for 2000 and 1999,
    respectively.

(2) Includes Earnings (losses) from unconsolidated affiliates, accounted for by
    the equity method, of $19.5 million, $3.0 million and $(.3) million for
    2000, 1999 and 1998, respectively.

(3) Elimination of inter-segment manufacturing and logistics sales.

(4) "Income derived from operating activities" has historically been referred to
    as "operating income" by us. It is computed by subtracting direct costs,
    general and administrative expenses, and depreciation and amortization
    expense from Operating revenues and then adding Earnings from unconsolidated
    affiliates.

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

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


<TABLE>
<CAPTION>
                                               Year Ended December 31,                     Increase (Decrease)
------------------------------------------------------------------------------------------------------------------------------------
                                        2000           1999          1998          2000 to 1999             1999 to 1998
<S>                                    <C>            <C>            <C>         <C>         <C>          <C>        <C>
Rig activity:(1)
  Rig years(2)                         253.7          149.5          204.1       104.2       70%          (54.6)     (27%)
  Rig utilization                         46%            31%            48%         15%      48%            (17%)    (35%)
</TABLE>

(1) Excludes labor contracts, land well-servicing rigs and rigs owned by joint
    ventures.

(2) Rig years represent a measure of the number of equivalent rigs operating
    during a given period. For example, one rig operating 182.5 days during a
    365-day period represents 0.5 rig years.


<TABLE>
<CAPTION>
                                                                    Year Ended December 31,              Increase (Decrease)
------------------------------------------------------------------------------------------------------------------------------------
                                                              2000           1999           1998     2000 to 1999     1999 to 1998
<S>                                                      <C>            <C>              <C>          <C>             <C>
INDUSTRY DATA:
  Average West Texas intermediate crude oil
    spot price ($/bbl)(1)                                    $30.37         $19.30         $14.38         $11.07         $ 4.92
  Average US natural gas spot price ($/mcf)(1)               $ 4.17         $ 2.19         $ 2.00         $ 1.98         $  .19
  Average US land rig count(2)                                  726            502            699            224           (197)
  Average International land rig count(2)                       466            408            504             58            (96)
  Average Canadian land rig count(2)                            340            240            256            100            (16)
  Average US offshore rig count(2)                              140            106            124             34            (18)
</TABLE>

(1) Source: Bloomberg

(2) Source: Baker Hughes




                                       57
<PAGE>   58


    CONTRACT DRILLING This segment includes our drilling, workover and
well-servicing operations, on land and offshore. Operating revenues and Earnings
from unconsolidated affiliates for the contract drilling segment totaled $1.3
billion and income derived from operating activities totaled $204.5 million
during 2000, representing increases of 109% and 189%, respectively, compared to
the prior year. Equivalent rig years (excluding labor contracts, land
well-servicing rigs and rigs owned by joint ventures) increased to 253.7 years
during 2000 from an average of 149.5 years during the prior year. Most of our
contract drilling operations recorded higher revenues in 2000 compared to 1999
as a result of increased drilling and workover activity, higher average dayrates
due to higher natural gas and oil prices and the addition of the Pool rigs
acquired on November 24, 1999.

    Alaskan revenues increased during 2000 due to higher equivalent rig years
resulting from the addition of working Pool rigs and higher average dayrates.
Equivalent rig years in Alaska increased to 8.5 years during 2000 from 5.8
years during 1999.

   Canadian revenues were higher during 2000 due to higher equivalent rig years
and dayrates associated with continued strong demand for natural gas drilling
services throughout the Canadian market. Equivalent rig years in Canada
increased to 21.5 years during 2000 from 12.9 years during 1999.

    US Lower 48 drilling revenues increased dramatically during 2000 as a
result of increased demand for drilling services. The prolonged strength of the
North American natural gas market has resulted in significant increases in both
equivalent rig years and dayrates. US Lower 48 equivalent rig years increased to
158.2 years during 2000 from 97.3 years during 1999.

    US land well-servicing operations improved during 2000 due to increased
activity and rates per hour resulting from higher natural gas and oil prices. US
land well-servicing hours were 1.8 million hours during 2000. Because this unit
was acquired in November 1999, only 37 days of operations were included in our
prior year results.

    International revenues increased during 2000 due to the addition of Pool
operations in South America and the Middle East, and rigs working in Colombia,
Kenya, Qatar and Yemen under new contracts. This was partially offset by
decreased revenues due to lower activity in certain areas, such as Bolivia,
Kazakhstan and the United Arab Emirates. Additionally, effective January 1,
2000, our Saudi Arabia rigs began operating as part of Pool Arabia Company,
Ltd., a joint venture with a Saudi Arabian partner. The joint venture is
accounted for using the equity method of accounting and accordingly, its results
of operations are included in earnings from unconsolidated affiliates.
International equivalent rig years increased to 31.7 years during 2000 from 16.6
years during 1999.

    Offshore revenues increased during 2000 both in the Gulf of Mexico and
internationally. The increase in revenues in the Gulf of Mexico resulted from
the addition of the active Pool rigs and increased platform, jackup and barge
workover activity and higher average dayrates. However, drilling revenues and
activity were essentially flat. Internationally, offshore revenues increased due
to the addition of the active Pool rigs. Offshore equivalent rig years increased
to 33.8 years during 2000 from 16.9 years during 1999.

   MANUFACTURING AND LOGISTICS This segment includes our supply vessel, top
drive manufacturing, rig instrumentation and software, and construction and
transportation operations. Manufacturing and logistics Operating revenues and
Earnings from unconsolidated affiliates were $167.1 million during 2000,
representing an increase of 239% compared with the prior year. Income derived
from operating activities increased to $41.1 million compared to $2.8 million in
the prior year. Increases in this segment resulted from increased top drive
sales and a strong construction season on the North Slope of Alaska by our joint
venture construction entity. The inclusion of our US Lower 48 trucking
operations which became 100% owned by Nabors in November 1999, and our supply
vessel operation acquired as part of the Pool transaction, also contributed to
the increases. Equivalent supply vessel years were 21.1 years during 2000.





                                       58
<PAGE>   59


    Nabors' gross margin percentage is affected by changes in the mix of
revenues derived from our various areas of operations. For example, contracts in
our US Lower 48 operation typically earn a lower gross margin percentage than
Alaska, international and offshore contracts. Gross margin percentage is
calculated by dividing gross margin by operating revenues. Gross margin is
calculated by subtracting direct costs from operating revenues. The gross margin
percentage decreased slightly during 2000 primarily due to a higher percentage
of revenues being generated from our US Lower 48 operations than in the
comparable prior year period. As a result of the addition of Pool's US land
well-servicing operations and the increase in activity in the US Lower 48
drilling operations, combined revenues from our US Lower 48 drilling and
well-servicing operations, as a percentage of our total revenues, equaled 55.9%
during 2000 compared to 44.7% in 1999 for our US Lower 48 drilling operations
and 37 days of our well-servicing operations. This decrease in gross margin
percentage has been somewhat offset by increasing gross margin percentages in
most of our business units due to higher average dayrates.

    General and administrative expenses and depreciation and amortization
expense as a percentage of operating revenues decreased during 2000 due to the
increase in our revenues, as these expenses were spread over a larger revenue
base.

    Interest expense increased during 2000 primarily due to higher average debt
outstanding, including the issuance of the $825 million zero coupon convertible
senior debentures in June 2000 and the addition of the Pool 8.625% senior
subordinated notes when Pool was acquired in November 1999. These increases were
partially offset by several debt reduction transactions that were completed
during 2000 and 1999. See further discussion under "Liquidity and Capital
Resources". Interest income increased during 2000 primarily due to higher
average cash and marketable securities balances resulting from our receipt of
proceeds from the issuance of the $825 million zero coupon debentures.

    Other income increased during 2000 due to higher gains on sales of our
marketable securities. We recorded realized gains on sales of marketable
securities totaling $16.1 million and unrealized holding gains on marketable
securities classified as trading totaling $2.7 million during 2000.

    Our effective income tax rate equaled 40.2% during 2000 compared to 39.3% in
the prior year. This increase is primarily due to the amortization of
non-deductible goodwill that was recorded as part of the acquisitions of Pool
and Bayard Drilling Technologies, Inc. during 1999.

                 Fiscal Year 1999 Compared to Fiscal Year 1998

    Operating revenues and Earnings from unconsolidated affiliates for 1999
totaled $642.3 million, representing a decrease of $325.9 million, or 34%, as
compared to 1998. Income derived from operating activities and net income for
1999 totaled $58.4 million and $27.7 million ($.23 per diluted share),
respectively, representing decreases of 68% and 78% compared to 1998.

    The significant reduction in our 1999 operating results was a direct result
of reduced capital spending by our customers for land drilling and offshore
drilling and workover services following the decline in crude oil and gas prices
that began during the fourth quarter of 1997 and reversed beginning in March of
1999. This customer reaction resulted in a reduction in our rig utilization and
dayrates during 1999 in most of our operating units as compared to the prior
year. These lower activity and pricing levels in our various business units
leveled off during the middle to latter part of 1999 and generally began to
increase in response to higher average oil prices, which rose from a low of
$11.37 per barrel in February 1999 to an average of $24.52 per barrel during the
fourth quarter of 1999. Natural gas prices have been much more stable than oil
prices during the past two years, but also increased during 1999.

    The increase in North American activity is illustrated by the increase in
the total US active land rig count during 1999. The rig count declined
throughout 1998, reaching a more than 50-year low of 380 working rigs during
April 1999. Since then, it had improved to 633 working rigs at December 31,
1999. This improvement was driven almost exclusively by rigs drilling for
natural gas. Nabors benefited directly from this increase in rig activity. It
ended six consecutive quarters of declining income derived from operating
activities and net income with Nabors recording increased operating results
beginning with the third quarter and continuing with the fourth quarter of 1999.





                                       59


<PAGE>   60


    We completed our acquisition of Pool on November 24, 1999. The acquisition
was accounted for using the purchase method of accounting, and our fourth
quarter results included 37 days of Pool's operating results. Pool's operations,
although profitable, were insignificant to Nabors' fourth quarter results.
Although not yet complete, the integration of Pool into Nabors is occurring
rapidly and smoothly. Nabors is on schedule to realize the anticipated cost
savings created from integrating the areas of overlap. The largest savings are
being derived from consolidation of the various corporate functions and of the
duplicate business unit headquarters of the Alaska, International and Offshore
units (including the regional operations in Saudi Arabia). In addition to these
cost efficiencies, there was improvement in all of Pool's operations, including
noticeable increases in utilization and pricing in both the land workover and
well-servicing, and marine transport businesses.

    CONTRACT DRILLING Contract drilling Operating revenues and Earnings from
unconsolidated affiliates totaled $605.3 million during 1999, representing a 31%
decrease compared with 1998. Equivalent rig years decreased to 149.5 years
during 1999 compared to 204.1 years during 1998. Most of our contract drilling
operations experienced significant declines in drilling activity and dayrates
during 1999 as compared to 1998. These declines resulted from reduced demand for
drilling and workover services caused by reduced customer spending resulting
from lower crude natural gas and oil prices throughout 1998 and the first
quarter of 1999.

    Alaskan revenues were lower during 1999 as a result of lower equivalent rig
years as compared to 1998. A number of rig contracts in Alaska were not renewed
during 1999, as had been expected, due to prevailing market conditions. This
reduction in drilling activity was partially offset by the contribution of two
newly constructed drilling rigs (7ES and 9ES), with an initial investment of
approximately $50.0 million, which commenced five-year contracts during the
fourth quarter of 1998.

    Canadian revenues were lower during 1999 as a result of lower equivalent rig
years and dayrates associated with the reduced demand for drilling services.

    US Lower 48 revenues decreased during 1999 as a result of reduced demand for
drilling services. The decline in active rigs was more prevalent for our
shallower mechanical rig fleet; however, all rig categories were adversely
impacted. Dayrates for all classes of rigs also decreased compared to 1998. The
impact of reduced activity levels and lower dayrates on US Lower 48 margins was
somewhat mitigated because an increased percentage of our working rigs were
deep-drilling SCR rigs. These rigs typically command higher dayrates than
shallower, mechanical rigs. US Lower 48 operations during 1999 reflect the
addition of 87 rigs (73 of which are actively marketed) in connection with the
acquisition of Bayard during April 1999.

    International operations revenues decreased during 1999, primarily as a
result of reduced drilling activity in the Middle East and South America. Middle
Eastern revenues declined primarily as a result of reductions in drilling
activity and dayrates in Saudi Arabia. Additionally, a jackup drilling rig did
not operate until the fourth quarter of 1999. This rig had operated in the
Persian Gulf for six months during 1998 at a significantly higher dayrate. South
America revenues were down from 1998 as a result of lower drilling activity in
Venezuela and Colombia. These decreases in South America were partially offset
by the contribution of four rigs that commenced operations in Bolivia during the
second half of 1998.

    Offshore revenues decreased during 1999 as compared to 1998 as a result of
lower drilling and workover activity in the Gulf of Mexico. Our platform
drilling and workover rigs and jackup workover rigs had fewer operating days and
lower dayrates during 1999 as a result of the decrease in demand.
Internationally, platform workover revenues increased during 1999 as a result of
the deployment of three Super Sundowner(R) rigs, which began operations
internationally during the fourth quarter of 1998 and operated during all of
1999.

    MANUFACTURING AND LOGISTICS Manufacturing and logistics revenues totaled
$49.2 million during 1999, representing a decrease of 56% compared with 1998.
This decrease was primarily attributable to a change in the method of
accounting for our investments in several 50% owned joint ventures, including
Peak Oilfield Service Company, an Alaskan construction and logistics joint
venture. Beginning January 1, 1999, these joint ventures have been accounted for
using the equity method of accounting, with our equity in the net



                                       60


<PAGE>   61

income of the joint ventures recorded as a component of revenues and other
income in the consolidated statements of income. During 1998, these investments
were accounted for using the proportionate consolidation method whereby our pro
rata share of the joint venture's revenues and expenses were recorded as
corresponding revenues and expenses of Nabors. Additionally, revenues for Peak
Oilfield Service Company were lower during 1999 as a result of reduced activity.
Canrig revenues were relatively unchanged during 1999. Revenues for Epoch, our
drilling operation software and instrumentation provider, were lower during 1999
as a result of decreased industry activity.

    General and administrative expenses as a percentage of revenues increased
during 1999 due to the decline in our revenues, as these expenses were spread
over a smaller revenue base. We effected significant reductions in overhead
costs in response to the poor market environment and, as a result, general and
administrative expenses decreased in terms of absolute dollars during 1999.
Depreciation expense and goodwill amortization as a percentage of revenues
increased during 1999 as a result of the decrease in revenues during 1999, as
well as significant capital expenditures and a number of acquisitions completed
during 1998 and 1999.

    Interest expense increased during 1999, primarily as a result of the March
1999 issuance of $325.0 million 6.8% senior unsecured notes due April 15, 2004.
Additionally, interest expense during 1999 includes interest on Bayard's $100.0
million 11% senior notes due 2005 from April 1999 through August 1999, when the
11% notes were purchased by us in connection with a tender offer. These
increases were partially offset by several debt reduction transactions that were
completed during July and August 1999. Interest income increased during 1999 as
a result of interest income earned on the remaining proceeds from the 6.8%
notes.

    Other income decreased significantly during 1999 as compared to 1998. During
1999, other income consisted primarily of realized and unrealized holding gains
recognized on investments in marketable equity securities, and from gains on
physical damage insurance claims. During 1998, gains were recognized on the
January 1998 sale of J.W. Gibson, a land workover and well-servicing operation,
and on physical damage insurance claims.

    The effective tax rate during 1999 was 39.3% compared to an effective tax
rate of 37.5% during 1998.

LIQUIDITY AND CAPITAL RESOURCES
--------------------------------------------------------------------------------

    We generate significant cash from operations over the course of a
twelve-month period. We also have substantial borrowing capacity under various
credit facility arrangements and have access to public debt and equity capital
markets. Our senior unsecured debt ratings as provided by Moody's Investor
Service and Standard & Poor's are "A3" and "A-", respectively. Nabors was
admitted as a member of the Standard & Poor's 500 Index on October 17, 2000.

    During December 2000, we purchased $25.0 million of our 6.8% senior
unsecured notes due April 15, 2004 in the open market at 99.85%. We recognized
an insignificant extraordinary gain resulting from the repurchase of the notes
for less than the amount recorded on our books. As of December 31, 2000, $300.0
million of the notes remained outstanding.

    During June 2000, we completed a private placement of zero coupon
convertible senior debentures due 2020. The aggregate principal amount of the
debentures at maturity will be $825 million. The debentures were issued at a
discount with net proceeds to Nabors, after expenses, totaling approximately
$495.0 million. The yield to maturity of the debentures is 2.5% compounded
semi-annually with no periodic cash payments of interest. At the holder's
option, the debentures can be converted at any time prior to maturity or their
earlier redemption, into Nabors common stock at a conversion rate of 10.738
shares per $1,000 principal amount at maturity. The conversion rate may be
adjusted from time to time, upon the occurrence of specified events. Instead of
delivering shares of common stock upon conversion of any debentures, we may
elect to pay the holder cash for all or a portion of the debentures. The
debentures can be put to us on June 20, 2003, June 20, 2008 and June 20, 2013
for a purchase price equal to the issue price plus accrued original issue
discount to the date of repurchase. We may elect to pay all or a portion of the
purchase price in common stock instead of cash. We cannot redeem the debentures
before June 20, 2003. On and after June 20, 2003, we may redeem all or a portion
of the debentures for cash at any time at their accreted value. The proceeds
from the issuance of the debentures will be used for general corporate purposes,
including but not limited to, working capital, investment in subsidiaries and
possible future



                                       61


<PAGE>   62


business acquisitions. As of December 31, 2000, the proceeds are included in
cash and marketable securities on our balance sheet. On September 8, 2000,
Nabors' registration statement with respect to resales of these debentures
became effective.

    During 2000, various employees and directors exercised options to acquire
9.7 million shares of Nabors common stock at prices ranging from $1.07 to $31.04
per share. This amount includes 7.5 million shares of common stock exercised by
three of our senior officers in March 2000. Our proceeds from all option
exercises totaled $111.5 million. Additionally, during the period, various
holders exercised Bayard warrants to purchase approximately 70,000 shares of
Nabors common stock at prices ranging from $22.81 to $28.74 per share. We
received proceeds totaling $1.6 million from these warrant exercises.

    As a result of the Pool acquisition, Nabors Holding Company, the successor
by merger to Pool, completed a mandatory change of control cash tender offer to
purchase the Pool 8.625% senior subordinated notes due 2008 at a redemption
price of 101%. During 2000, a total of $107.8 million of the notes were
purchased pursuant to the offer and in the open market at prices ranging from
100.5% to 102.0%. As of December 31, 2000, $42.2 million of the notes remained
outstanding. We recognized a $1.9 million ($.01 per share) extraordinary gain,
net of income taxes, during 2000 resulting from the repurchase of the notes for
less than the amount recorded on our books.

    We had working capital of $739.1 million as of December 31, 2000,
representing a $543.3 million increase compared to December 31, 1999. The
increase in working capital is primarily attributable to our receipt of proceeds
from the issuance of the zero coupon debentures due 2020 as well as an increase
in accounts receivable resulting from the increase in rig activity.

    Our ratio of funded debt to funded debt plus stockholders' equity, commonly
referred to as the funded debt to capital ratio, was 0.32:1 as of December 31,
2000, as compared to 0.25:1 as of December 31, 1999. This increase is primarily
due to the issuance of the zero coupon debentures due 2020 partially offset by
repurchases of other debt noted above.

    Net cash provided by operating activities totaled $220.9 million during
2000, compared to $134.0 million during the prior year. During 2000, net income
was increased for non-cash items such as depreciation, amortization and deferred
taxes and decreased for earnings from unconsolidated affiliates and gains on
sales of marketable securities. Cash was used by an overall increase in our
working capital accounts, primarily accounts receivable. During the prior year,
net income was increased for non-cash items such as depreciation, amortization
and deferred taxes and cash was provided by an overall decrease in our working
capital accounts.

    Net cash used for investing activities totaled $577.5 million during 2000,
compared to $90.3 million during the prior year. We used cash primarily for
purchases of marketable securities and for capital expenditures during both 2000
and 1999. The sale of marketable securities and the disposition of long-term
assets during both 2000 and 1999 provided cash from investing activities.

    Financing activities provided cash totaling $473.3 million during 2000,
compared to $20.1 million during the prior year. During 2000, cash was primarily
provided by the proceeds from our issuance of the $825 million zero coupon
convertible senior debentures during June 2000 and our receipt of proceeds from
the exercise of options and warrants to acquire 9.7 million shares of our common
stock. This was partially offset by cash used for the repurchase of
approximately $107.8 million of the Pool 8.625% notes and $25.0 million of our
6.8% notes. During the prior year, cash was provided by the issuance of our
6.8% notes and cash was used to reduce long-term and short-term borrowings.

    Our cash and cash equivalents and investments in short-term marketable
securities totaled $551.0 million as of December 31, 2000. We currently have
credit facility arrangements with various banks with total availability of
$241.3 million. As of December 31, 2000, remaining availability, after
borrowings on the facilities and outstanding letters of credit, totaled
approximately $217.9 million. The loans are guaranteed by certain subsidiaries
of Nabors and contain affirmative and negative covenants regarding, among other
things, limitation on liens and maintenance of financial ratios regarding funded
debt to capitalization, interest coverage and minimum net worth.




                                       62


<PAGE>   63


    During February and March 2001, we completed a private placement of zero
coupon convertible senior debentures due 2021. The aggregate principal amount of
the debentures at maturity will be $1.381 billion. The debentures were issued at
a discount with net proceeds to Nabors, after expenses, totaling approximately
$828.0 million. The yield to maturity of the debentures is 2.5% compounded
semi-annually with no periodic cash payments of interest. At the holder's
option, the debentures can be converted at any time prior to maturity or their
earlier redemption, into Nabors common stock at a conversion rate of 7.0745
shares per $1,000 principal amount at maturity. The conversion rate may be
adjusted from time to time, upon the occurrence of specified events. Instead of
delivering shares of common stock upon conversion of any debentures, we may
elect to pay the holder cash for all or a portion of the debentures. The
debentures can be put to us on February 5, 2006, February 5, 2011 and February
5, 2016 for a purchase price equal to the issue price plus accrued original
issue discount to the date of repurchase. We may elect to pay all or a portion
of the purchase price in common stock instead of cash. We cannot redeem the
debentures before February 5, 2006. On and after February 5, 2006, we may redeem
all or a portion of the debentures for cash at any time at their accreted value.
The proceeds from the issuance of the debentures will be used for general
corporate purposes, including but not limited to, working capital, investment in
subsidiaries and possible future business acquisitions. The proceeds have been
invested in cash and marketable securities. The issuance of the debentures
caused a default of the debt to capitalization ratio covenant under our $200
million unsecured revolving credit facility and a related $30 million letter of
credit facility. The debt to capitalization ratio covenant has been amended so
that we are now in compliance and the default has been waived by the banks in
the syndicate and under the letter of credit facility.

    As of December 31, 2000, we had outstanding capital expenditure purchase
commitments of approximately $47.0 million, primarily for drill pipe,
refurbishment of rigs to be reactivated and rig related sustaining capital
expenditures.

    Projected capital expenditures for 2001 for sustaining and known new
construction and enhancement projects are expected to total approximately
$350-$400 million. We have historically completed a number of acquisitions and
will continue to evaluate opportunities to acquire assets or businesses to
enhance our operations. Several of the previous acquisitions were paid for by
issuing our common stock. Future acquisitions may be paid for using existing
cash, borrowings under lines of credit or issuance of debt or Nabors stock. Such
capital expenditures and acquisitions are at our discretion and will depend on
our view of market conditions and other factors.

    Historical capital expenditures and acquisitions of businesses are
classified as follows:


<TABLE>
<CAPTION>
(In thousands)                             Year Ended December 31,
-------------------------------------------------------------------------------
                                         2000           1999           1998
<S>                                  <C>            <C>            <C>
New construction                     $   64,512     $    5,297     $   51,205
Enhancement                              79,251         16,481        105,138
Acquisitions                             28,388        591,141         52,883
Sustaining                              128,486         54,598        104,238
                                     ----------     ----------     ----------
                                     $  300,637     $  667,517     $  313,464
                                     ----------     ----------     ----------
</TABLE>

    Our current cash equivalents, short-term investments, credit facility
position and projected cash flow generated from current operations are expected
to adequately finance our sustaining capital expenditures and debt service
requirements for the next twelve months.






                                       63


<PAGE>   64



Other matters
--------------------------------------------------------------------------------

                           Forward-Looking Statements

    The statements in this document that relate to matters that are not
historical facts are "forward-looking statements" within the meaning of Section
27A of the Securities Exchange Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. When used in this document, words such as "anticipate",
"believe", "expect", "plan", "intend", "estimate", "project", "will", "should",
"could", "may", "predict" and similar expressions are intended to identify
forward-looking statements. Future events and actual results may differ
materially from the results set forth in or implied in the forward-looking
statements. Factors that might cause such a difference include:

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

o   fluctuations in levels of oil and gas exploration and development
    activities;

o   fluctuations in the demand for contract drilling and workover services;

o   the existence of competitors, technological changes and developments in the
    industry;

o   the existence of operating risks inherent in the contract drilling and
    workover industries;

o   the existence of regulatory uncertainties;

o   the possibility of political instability in any of the countries in which we
    do business; and

o   general economic conditions.

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


                      Financial Instruments and Market Risk

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

    FOREIGN CURRENCY RISK We operate in a number of international areas and are
involved in transactions denominated in currencies other than US dollars, which
exposes us to foreign exchange rate risk. The most significant exposures arise
in connection with our operations in Canada and Saudi Arabia, which usually are
substantially unhedged. At various times, we utilize forward exchange contracts,
local currency borrowings and the payment structure of customer contracts to
selectively hedge exposure to exchange rate fluctuations in connection with
monetary assets, liabilities and cash flows denominated 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 exchange
contracts are deferred and recognized as foreign currency gains or losses over
the term of the related contract. The remaining forward exchange contract
matured on June 30, 1999. A hypothetical 10% decrease in the value of all
foreign currencies relative to the US dollar as of December 31, 2000 would
result in a $2.7 million decrease in the fair value of our net monetary assets
denominated in currencies other than US dollars. We do not hold or issue forward
exchange contracts or other derivative instruments for speculative purposes.

   CREDIT RISK Financial instruments that potentially subject us to
concentrations of credit risk consist primarily of deposits and temporary cash
investments that we have with a variety of financial institutions. We believe
that the credit risk in such instruments is minimal. In addition, our 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.



                                       64


<PAGE>   65


                INTEREST RATE AND MARKETABLE SECURITY PRICE RISK

Our financial instruments that are potentially sensitive to changes in interest
rates include our variable rate short-term borrowings, our $825 million zero
coupon convertible senior notes, 6.8% senior unsecured notes, 8.625% senior
subordinated notes and our investments in debt securities including corporate,
asset-backed, US Government and mortgage-backed debt securities. As of December
31, 2000, we did not have any variable rate short-term borrowings outstanding.

    Our $825 million zero coupon convertible senior notes, which are due June
20, 2020, have a stated interest rate of zero and an effective interest rate of
2.5%. The fair market value of these notes, based on quoted market prices, was
approximately $622.5 million, compared to a carrying amount of approximately
$508.6 million, at December 31, 2000.

    Our senior unsecured notes, due April 15, 2004, have a stated interest rate
of 6.8%. The fair market value of these notes, based on quoted market prices,
was approximately $302.0 million, compared to a carrying amount of approximately
$300.0 million, at December 31, 2000.

    Our senior subordinated notes, due 2008, have a stated interest rate of
8.625%. The fair market value of these notes, based on quoted market prices, was
approximately $44.1 million, compared to a carrying amount of approximately
$42.2 million, at December 31, 2000.

    At December 31, 2000, the fair market value of our investment in corporate
debt securities was approximately $154.9 million. These securities bear interest
at rates ranging from 5.5% to 9.625% with a weighted average life of 2.0 years
and are readily marketable.

    At December 31, 2000, the fair market value of our investment in
asset-backed debt securities was approximately $73.6 million. These securities
bear interest at rates ranging from 5.78% to 7.75% with a weighted average life
of 1.2 years and are readily marketable.

    At December 31, 2000, the fair market value of our investment in US
Government debt securities was approximately $17.7 million. These securities
bear interest at rates ranging from 4.875% to 6.875% with a weighted average
life of 1.3 years and are readily marketable.

    At December 31, 2000, the fair market value of our investment in
mortgage-backed debt securities was approximately $11.6 million. These
securities bear interest at a rate of 7.5% with a weighted average life of 1.8
years and are readily marketable.

    We maintain an investment portfolio of marketable securities that
potentially exposes us to price risk. The marketable securities are carried at
fair market value and include $5.5 million in securities classified as trading
and $348.1 million in securities classified as available-for-sale as of December
31, 2000. A hypothetical 10% decrease in the market prices for all securities
would decrease the fair market value of our trading securities and
available-for-sale securities by $.6 million and $34.8 million, respectively.


                        Recent Accounting Pronouncements

    During June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities", which
requires that companies recognize all derivative instruments as either assets or
liabilities on the balance sheet and measure those instruments at fair value.
SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No. 133", deferred the
implementation of SFAS 133 until the fiscal year ending December 31, 2001. We
implemented SFAS 133 effective January 1, 2001. Due to our limited use of
derivative instruments, the impact of adopting SFAS No. 133 will not be material
to our financial statements.

    In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements". SAB
No. 101, as amended, was implemented in the fourth quarter of 2000 and did not
have a material effect on our consolidated financial position, results of
operations or cash flows.




                                       65


<PAGE>   66

                               Nabors Industries
                       Report of Independent Accountants



To the Board of Directors and Stockholders
of Nabors Industries, Inc.
--------------------------------------------------------------------------------

    In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, cash flows and changes in stockholders'
equity present fairly, in all material respects, the financial position of
Nabors Industries, Inc. and its subsidiaries at December 31, 2000 and 1999, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 2000 in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.



/s/ PRICEWATERHOUSECOOPERS LLP

Houston, Texas
January 25, 2001,
except for Note 15, as to which the date is March 13, 2001



                                       66

<PAGE>   67



                                Nabors Industries

                           CONSOLIDATED BALANCE SHEETS


<TABLE>
<CAPTION>
(In thousands, except per share amounts)                                             December 31,
-----------------------------------------------------------------------------------------------------------
                                                                                2000               1999
<S>                                                                        <C>              <C>
Assets
Current assets:
     Cash and cash equivalents                                             $     197,312      $      80,580
     Marketable securities                                                       353,641             31,086
     Accounts receivable, net                                                    350,302            205,643
     Inventory and supplies                                                       18,029             25,758
     Deferred income taxes                                                        27,816             39,074
     Prepaid expenses and other current assets                                    71,218             79,152
                                                                           -------------      -------------
        TOTAL CURRENT ASSETS                                                   1,018,318            461,293

Property, plant and equipment, net                                             1,821,392          1,669,466
Goodwill, net                                                                    192,181            169,054
Other long-term assets                                                           104,977             98,190
                                                                           -------------      -------------
        TOTAL ASSETS                                                       $   3,136,868      $   2,398,003
                                                                           -------------      -------------

Liabilities and Stockholders' Equity
Current liabilities:
     Current portion of long-term obligations                              $       3,554      $       3,599
     Trade accounts payable                                                      139,162             80,343
     Accrued liabilities                                                         113,010            160,546
     Income taxes payable                                                         23,453             20,988
                                                                           -------------      -------------
        TOTAL CURRENT LIABILITIES                                                279,179            265,476

Long-term obligations                                                            854,777            482,600
Other long-term liabilities                                                       99,147             86,849
Deferred income taxes                                                             97,297             93,004
                                                                           -------------      -------------
        TOTAL LIABILITIES                                                      1,330,400            927,929
                                                                           -------------      -------------

Commitments and contingencies (Note 11)

Stockholders' equity:
     Capital stock, par value $.10 per share:
       Authorized common shares 400,000 and 200,000;
        issued 147,155 and 137,421                                                14,715             13,742
     Capital in excess of par value                                            1,145,847            958,704
     Accumulated other comprehensive income (loss)                                 7,094             (3,828)
     Retained earnings                                                           643,629            506,273
     Less treasury stock, at cost, 589 common shares                              (4,817)            (4,817)
                                                                           -------------      -------------
        TOTAL STOCKHOLDERS' EQUITY                                             1,806,468          1,470,074
                                                                           -------------      -------------
        TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                         $   3,136,868      $   2,398,003
                                                                           -------------      -------------
</TABLE>




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





                                       67

<PAGE>   68

                               Nabors Industries

                        CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
(In thousands, except per share amounts)                                           Year Ended December 31,
-------------------------------------------------------------------------------------------------------------------------
                                                                       2000                1999                  1998
<S>                                                              <C>                 <C>                  <C>
Revenues and other income:
  Operating revenues                                             $     1,327,124     $       638,507      $       968,462
  Earnings (losses) from unconsolidated affiliates                        37,490               3,757                 (305)
  Interest income                                                         20,581               8,756                1,480
  Other income, net                                                       24,121               8,860               31,626
                                                                 ---------------     ---------------      ---------------
   Total revenues and other income                                     1,409,316             659,880            1,001,263
                                                                 ---------------     ---------------      ---------------
Cost and other deductions:
  Direct costs                                                           888,322             418,675              623,844
  General and administrative expenses                                    106,504              65,288               77,026
  Depreciation and amortization                                          152,413              99,893               84,949
  Interest expense                                                        35,370              30,395               15,463
                                                                 ---------------     ---------------      ---------------
   Total costs and other deductions                                    1,182,609             614,251              801,282
                                                                 ---------------     ---------------      ---------------
Income before income taxes and extraordinary gain                        226,707              45,629              199,981
                                                                 ---------------     ---------------      ---------------
Income taxes (benefits):
  Current                                                                 19,594              (2,478)              40,256
  Deferred                                                                71,639              20,403               34,737
                                                                 ---------------     ---------------      ---------------
   Total income taxes                                                     91,233              17,925               74,993
                                                                 ---------------     ---------------      ---------------
Income before extraordinary gain                                         135,474              27,704              124,988
Extraordinary gain, net                                                    1,882                  --                   --
                                                                 ---------------     ---------------      ---------------
Net income                                                       $       137,356     $        27,704      $       124,988
                                                                 ---------------     ---------------      ---------------
Earnings per share:
  Basic:
   Before extraordinary gain                                     $           .94     $           .25      $          1.24
   Extraordinary gain, net                                                   .01                  --                   --
                                                                 ---------------     ---------------      ---------------
   Net income                                                    $           .95     $           .25      $          1.24
                                                                 ---------------     ---------------      ---------------
  Diluted:
   Before extraordinary gain                                     $           .89     $           .23      $          1.16
   Extraordinary gain, net                                                   .01                  --                   --
                                                                 ---------------     ---------------      ---------------
   Net income                                                    $           .90     $           .23      $          1.16
                                                                 ---------------     ---------------      ---------------
Weighted average number of shares outstanding:
  Basic                                                                  144,344             111,395              100,807
                                                                 ---------------     ---------------      ---------------
  Diluted                                                                152,417             120,449              112,555
                                                                 ---------------     ---------------      ---------------
</TABLE>



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



                                       68

<PAGE>   69
                                Nabors Industries

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
(In thousands)                                                                                 Year Ended December 31,
------------------------------------------------------------------------------------------------------------------------------
                                                                                           2000          1999          1998
<S>                                                                                   <C>           <C>           <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income                                                                              $  137,356    $   27,704    $  124,988
Adjustments to net income:
     Depreciation and amortization                                                         152,413        99,893        84,949
     Deferred income taxes                                                                  71,639        20,403        34,737
     Discount amortization on zero coupon debentures                                         6,625            --            --
     Gains on disposition of long-term assets and businesses                                (1,713)       (2,915)      (34,126)
     (Gains) losses on marketable securities and warrants                                  (18,800)       (3,656)        4,324
     Foreign currency transaction (gains) losses                                            (1,441)           37          (216)
     Equity in (earnings) losses from unconsolidated affiliates, net of dividends          (21,540)          343           305
     Gains on early extinguishment of debt, net                                             (1,882)           --            --
     Other                                                                                   3,617           241          (211)
Increase (decrease), net of effects from acquisitions
     and dispositions, from changes in:
     Accounts receivable                                                                  (144,659)       33,005        62,165
     Inventory and supplies                                                                  7,729         9,996        (4,721)
     Prepaid expenses and other current assets                                              17,688        (3,399)         (541)
     Other long-term assets                                                                (20,325)       (8,031)       (6,803)
     Trade accounts payable and accrued liabilities                                         11,283       (15,346)      (21,233)
     Income taxes payable                                                                   10,661       (10,497)        2,395
     Other long-term liabilities                                                            12,298       (13,730)       35,731
                                                                                        ----------    ----------    ----------
Net cash provided by operating activities                                                  220,949       134,048       281,743
                                                                                        ----------    ----------    ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
     Purchases of marketable securities, available-for-sale                               (325,286)      (25,375)      (18,531)
     Sales of marketable securities, available-for-sale                                     42,450         6,602            --
     Sales of marketable securities, trading                                                   401            --            --
     Cash received from disposition of long-term assets and businesses                       5,545         5,650        48,828
     Cash received from (paid for) acquisitions of businesses, net                              --         6,332       (28,208)
     Capital expenditures                                                                 (300,637)      (82,126)     (276,471)
     Investments in unconsolidated affiliates                                                   --        (1,425)       (1,952)
                                                                                        ----------    ----------    ----------
Net cash used for investing activities                                                    (577,527)      (90,342)     (276,334)
                                                                                        ----------    ----------    ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
     Decrease (increase) in restricted cash                                                  1,634        (1,060)         (946)
     Proceeds from long-term borrowings                                                    501,941       324,707            --
     Reduction of long-term obligations                                                   (136,434)     (232,864)      (10,805)
     Debt issuance costs                                                                    (6,810)       (2,779)           --
     (Decrease) increase in short-term borrowings, net                                          --       (73,565)       18,205
     Common stock and treasury stock transactions                                          112,979         5,687          (738)
                                                                                        ----------    ----------    ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES                                                  473,310        20,126         5,716
                                                                                        ----------    ----------    ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS                                                  116,732        63,832        11,125
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                              80,580        16,748         5,623
                                                                                        ----------    ----------    ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD                                                $  197,312    $   80,580    $   16,748
                                                                                        ----------    ----------    ----------
</TABLE>



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


                                       69

<PAGE>   70

                               Nabors Industries

                           CONSOLIDATED STATEMENTS OF
                        CHANGES IN STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                                                 Accumulated
                                               Capital Stock          Capital        Other                                Total
                                           ----------------------    in Excess   Comprehensive  Retained   Treasury   Stockholders'
(In thousands)                               Shares     Par Value   of Par Value Income (Loss)  Earnings     Stock       Equity
----------------------------------------------------------------------------------------------------------------------------------
<S>                                        <C>          <C>          <C>          <C>          <C>         <C>          <C>
BALANCES, DECEMBER 31, 1997                  101,325    $  10,133    $ 400,120    $   6,670    $ 353,581   $  (3,164)  $  767,340
                                           ---------    ---------    ---------    ---------    ---------   ---------   ----------
Comprehensive income:
  Net income                                                                                     124,988                  124,988
  Translation adjustment                                                             (3,724)                               (3,724)
  Unrealized losses on marketable
   securities, net of tax                                                           (13,929)                              (13,929)
                                           ---------    ---------    ---------    ---------    ---------   ---------   ----------
     Total comprehensive income                   --           --           --      (17,653)     124,988          --      107,335
                                           ---------    ---------    ---------    ---------    ---------   ---------   ----------
Issuance of common shares for stock
  options exercised                              126           12          903                                                915
Return and retirement of common
  shares held in escrow in connection
  with the Adcor acquisition                     (69)          (7)      (1,315)                                            (1,322)
Issuance of warrants in  connection
  with the New Prospect acquisition                                      1,452                                              1,452
Conversion of 5% notes                                                       2                                                  2
Repurchase of common shares                                                                                   (1,653)      (1,653)
Reduction of tax benefit on stock
  option deductions                                                     (6,600)                                            (6,600)
                                           ---------    ---------    ---------    ---------    ---------   ---------   ----------
     Subtotal                                     57            5       (5,558)          --           --      (1,653)      (7,206)
                                           ---------    ---------    ---------    ---------    ---------   ---------   ----------
BALANCES, DECEMBER 31, 1998                  101,382    $  10,138    $ 394,562    $ (10,983)   $ 478,569   $  (4,817)  $  867,469
                                           ---------    ---------    ---------    ---------    ---------   ---------   ----------
Comprehensive income:
  Net income                                                                                      27,704                   27,704
  Translation adjustment                                                              1,541                                 1,541
  Unrealized gains on marketable
   securities, net of tax:
   Unrealized holding gains
    arising during the period                                                         7,999                                 7,999
   Less: reclassification adjustment for
    gains included in net income                                                     (2,385)                               (2,385)
                                           ---------    ---------    ---------    ---------    ---------   ---------   ----------
    Total comprehensive income                    --           --           --        7,155       27,704          --       34,859
                                           ---------    ---------    ---------    ---------    ---------   ---------   ----------
Issuance of common shares for stock
  options exercised                              633           63        6,282                                              6,345
Issuance of common shares in connection
  with the Bayard acquisition                  6,167          617       74,230                                             74,847
Issuance of common shares in
  connection with the Pool acquisition        19,743        1,974      282,879                                            284,853
Return and retirement of common
  shares held in escrow in connection
  with the Adcor acquisition                     (12)          (1)           1                                                 --
Conversion of 5% notes, net of
  issuance costs                               9,508          951      169,436                                            170,387
Tax benefit on stock option deductions                                  31,314                                             31,314
                                           ---------    ---------    ---------    ---------    ---------   ---------   ----------
   Subtotal                                   36,039        3,604      564,142           --           --          --      567,746
                                           ---------    ---------    ---------    ---------    ---------   ---------   ----------
BALANCES, DECEMBER 31, 1999                  137,421    $  13,742    $ 958,704    $  (3,828)   $ 506,273   $  (4,817)  $1,470,074
                                           ---------    ---------    ---------    ---------    ---------   ---------   ----------
</TABLE>



                                       70

<PAGE>   71


<TABLE>
<CAPTION>
                                                                                Accumulated
                                              Capital Stock           Capital      Other                                 Total
                                          ----------------------    in Excess  Comprehensive   Retained   Treasury   Stockholders'
(In thousands)                             Shares      Par Value  of Par Value  Income (Loss)  Earnings    Stock        Equity
---------------------------------------------------------------------------------------------------------------------------------
<S>                                       <C>        <C>          <C>          <C>          <C>         <C>          <C>
BALANCES, DECEMBER 31, 1999                 137,421    $  13,742    $  958,704   $  (3,828)   $ 506,273   $  (4,817)   $1,470,074
                                          ---------    ---------    ----------   ---------    ---------   ---------    ----------
Comprehensive income:
 Net income                                                                                     137,356                   137,356
 Translation adjustment                                                             (2,490)                                (2,490)
 Unrealized gains on marketable
  securities, net of tax:
  Unrealized holding gains
    arising during the period                                                       23,448                                 23,448
  Less: reclassification adjustment for
    gains included in net income                                                   (10,036)                               (10,036)
                                          ---------    ---------    ----------   ---------    ---------   ---------    ----------
    Total comprehensive income                   --           --            --      10,922      137,356          --       148,278
                                          ---------    ---------    ----------   ---------    ---------   ---------    ----------
Issuance of common shares for
  stock options exercised                     9,664          966       110,532                                            111,498
Issuance of common shares in connection
  with the Bayard warrants exercised             70            7         1,636                                              1,643
Tax benefit on stock option deductions                                  75,137                                             75,137
Other                                                                     (162)                                              (162)
                                          ---------    ---------    ----------   ---------    ---------   ---------    ----------
   Subtotal                                   9,734          973       187,143          --           --          --       188,116
                                          ---------    ---------    ----------   ---------    ---------   ---------    ----------
BALANCES, DECEMBER 31, 2000                 147,155    $  14,715    $1,145,847   $   7,094    $ 643,629   $  (4,817)   $1,806,468
                                          ---------    ---------    ----------   ---------    ---------   ---------    ----------
</TABLE>


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



                                       71


<PAGE>   72

                                Nabors Industries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS






Summary of significant accounting policies
--------------------------------------------------------------------------------

                              Nature of Operations                         1

    Nabors is the largest land drilling contractor in the world, with over 500
land drilling rigs as of December 31, 2000. Nabors conducts oil, gas and
geothermal land drilling operations in the US Lower 48 states, Alaska and
Canada, and internationally, primarily in South and Central America and the
Middle East. Nabors also is one of the largest land well-servicing and workover
contractors in the United States. We own and operate approximately 740 land
workover and well-servicing rigs, primarily in the southwestern and western
United States and in certain international markets. Nabors also is a leading
provider of offshore platform workover and drilling rigs. Nabors markets 43
platform, 13 jackup and three barge rigs in the Gulf of Mexico and international
markets. These rigs provide well-servicing, workover and drilling services. We
own and operate 39 of these land rigs through international joint ventures as of
December 31, 2000. To further supplement our primary business, we offer a number
of ancillary wellsite services, including oilfield management, engineering,
transportation, construction, maintenance, well logging and other support
services, in selected domestic and international markets. Our land
transportation and hauling fleet includes 240 rig and oilfield equipment hauling
tractor-trailers, over 300 fluid hauling trucks, approximately 950 fluid storage
tanks, 12 saltwater disposal wells and other auxiliary equipment used in
domestic drilling and well-servicing operations. We market a fleet of 30 marine
transportation and supply vessels in the Gulf of Mexico that provides
transportation of drilling materials, supplies and crews for offshore rig
operations and support for other offshore operations. In addition, we
manufacture and lease or sell top drives for a broad range of drilling rig
applications and we manufacture and lease or sell rig instrumentation and data
collection equipment and rig reporting software.

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


                           Principles of Consolidation

    Our consolidated financial statements include the accounts of Nabors and all
subsidiaries. All significant intercompany accounts and transactions are
eliminated in consolidation.

    Investments in entities where we have the ability to exert significant
influence, but where we do not control their operating and financial policies,
are accounted for using the equity method. Our share of the net income of these
entities is recorded as earnings from unconsolidated affiliates in the
consolidated statements of income, and our investment in these entities is
carried as a single amount in the consolidated balance sheets.

    Investments in net assets of affiliated entities accounted for using the
equity method totaled $47.3 million and $54.1 million as of December 31, 2000
and 1999, respectively, and are included in other long-term assets in the
consolidated balance sheet.


                            Cash and Cash Equivalents

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



                                       72

<PAGE>   73





                              Marketable Securities

    Marketable securities consist of equity securities, certificates of deposit,
corporate debt securities, US Government debt securities, mortgage-backed debt
securities and asset-backed debt securities. Securities classified as
available-for-sale or trading are stated at fair value. Unrealized holding gains
and 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 and realized 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
specific identification method is used. In accordance with this method, the cost
of the equity securities sold is determined using the specific cost of the
security when originally purchased.

                             Inventory and Supplies

    Inventory and supplies are composed of replacement parts and supplies held
for use in our operations and top drives and drilling instrumentation systems
that are manufactured by our subsidiaries for resale. Inventory and supplies are
valued at the lower of weighted average cost or market value.

                          Property, Plant and Equipment

    Property, plant and equipment, including renewals and betterments, are
stated at cost, while maintenance and repairs are expensed currently. Interest
costs applicable to the construction of qualifying assets are capitalized as a
component of the cost of such assets. We provide for the depreciation of our
drilling and workover rigs using the units-of-production method over a 4,200-day
period after provision for salvage value. When our rigs are not operating, a
depreciation charge is provided using the straight-line method over an assumed
depreciable life of 20 years. Depreciation on buildings, well-servicing rigs,
oilfield hauling and mobile equipment, marine transportation and supply
vessels, and other machinery and equipment is computed using the straight-line
method over the estimated useful life of the asset after provision for salvage
value (buildings - 10 to 30 years; well-servicing rigs - 15 to 35 years; marine
transportation and supply vessels - 15 to 25 years; oilfield hauling and mobile
equipment and other machinery and equipment - 3 to 10 years). Amortization of
capitalized leases is included in depreciation and amortization expense. Upon
retirement or other disposal of fixed assets, the cost and related accumulated
depreciation are removed from the respective accounts and any gains or losses
are included in our results of operations.

                                    Goodwill

    Goodwill represents the cost in excess of fair value of the net assets of
companies acquired (Note 2). Goodwill is amortized using the straight-line
method over 30 years and is recorded net of accumulated amortization of $8.9
million and $3.0 million as of December 31, 2000 and 1999, respectively.
Amortization of goodwill for the years ended December 31, 2000, 1999 and 1998
amounted to $5.9 million, $1.9 million and $1.3 million, respectively. The
carrying amount of unamortized goodwill is reviewed for potential impairment
loss when events or changes in circumstances indicate that the carrying amount
of goodwill may not be recoverable.

                                  Income Taxes

    United States deferred income taxes have not been provided on unremitted
earnings of foreign subsidiaries as such earnings are considered permanently
reinvested. Unremitted earnings totaled approximately $125.0 million as of
December 31, 2000.

    Nabors realizes an income tax benefit associated with certain stock options
issued under our stock option plans. This benefit results in a reduction in
income taxes payable and an increase in capital in excess of par value.

                               Revenue Recognition

    Revenues and costs on daywork contracts are recognized daily and revenues
and costs applicable to footage and turnkey contracts are recognized when the
well is completed (completed contract method). Revenues and related costs for
the manufacturing operations 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 and therefore translation gains or
losses are accumulated in a separate section of stockholders' equity. For our
other international subsidiaries, the US dollar is the functional currency and
transaction and translation gains and losses are included in our results of
operations.



                                       73


<PAGE>   74


                             Changes in Presentation

    We have changed the presentation of our consolidated statements of income to
the single-step format during 2000. For comparative purposes, we have changed
the presentation of the comparable prior year periods.

                               Earnings Per Share

    Basic earnings per share for all periods presented equals net income divided
by the weighted average number of shares of common stock outstanding during the
period, excluding shares of common stock held in treasury. Diluted earnings per
share for 1998 reflects the assumed conversion of our $172.5 million 5%
convertible subordinated notes due 2006, as conversion in that period would have
been dilutive. As a result of the assumed conversion, net income is adjusted to
add back interest expense relating to the notes totaling $5.4 million on an
after tax basis. This adjusted net income is divided by the sum of: (1) the
weighted average number of shares of common stock outstanding used for the basic
computation; (2) the net effect of dilutive stock options and warrants; and (3)
9.5 million shares of common stock assumed to be issued upon conversion of the
notes. Basic and diluted earnings per share for 1999 reflects the weighted
average effect of 9.5 million shares of common stock issued in connection with
the conversion of $172.3 million aggregate principal amount of the notes based
upon the actual date of conversion during the third quarter of 1999 (Note 7).
Diluted earnings per share for 2000, does not reflect the assumed conversion of
our zero coupon convertible senior debentures due 2020, as this conversion would
be anti-dilutive.

                            Stock-Based Compensation

    We account for stock-based compensation using the intrinsic value method
prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees. Accordingly, compensation cost for stock options is
measured as the excess, if any, of the quoted market price of Nabors common
stock at the date of grant over the amount an employee must pay to acquire the
common stock.


                       Cash Flow Supplemental Information

    The cash flow supplemental information for 2000, 1999 and 1998 is as
follows:

<TABLE>
<CAPTION>
(In thousands)                                                 Year Ended December 31,
---------------------------------------------------------------------------------------------
                                                             2000          1999          1998
<S>                                                    <C>           <C>           <C>
Cash paid for income taxes                             $   10,619    $    9,506    $   36,331
Cash paid for interest, net of capitalized interest        30,775        25,047        14,707
Acquisition of businesses:
Fair value of assets acquired less negative goodwill           --       734,335        39,034
  Goodwill                                                     --       162,700         4,873
  Liabilities assumed or created                               --      (500,235)      (14,222)
  Common stock of acquired company previously owned            --       (26,463)           --
  Equity consideration issued                                  --      (359,700)       (1,452)
                                                       ----------    ----------    ----------
  Cash paid for acquisitions                                   --        10,637        28,233
  Cash acquired in acquisitions                                --       (16,969)          (25)
                                                       ----------    ----------    ----------
  Cash (received) paid for acquisitions, net                   --        (6,332)       28,208
                                                       ----------    ----------    ----------
Disposition of businesses:
  Equity consideration received                                --            --         1,000
                                                       ----------    ----------    ----------
</TABLE>



                                       74


<PAGE>   75


                  Financial Instruments and Risk Concentration

    The fair value of our fixed rate long-term debt is estimated based on quoted
market prices, where applicable, or based on the present value of expected cash
flows relating to the debt discounted at rates currently available to us for
long-term borrowings with similar terms and maturities. The fair value of Nabors
long-term debt, including the current portion thereof, is as follows:

<TABLE>
<CAPTION>
(In thousands)                                            December 31,
------------------------------------------------------------------------------------------
                                              2000                           1999
                                Carrying Value    Fair Value    Carrying Value  Fair Value
<S>                              <C>            <C>            <C>            <C>
$825 million zero
  coupon convertible
  senior notes                   $    508,566   $    622,463   $         --   $         --
6.8% senior
  unsecured notes                     300,000        302,040        325,000        313,203
8.625% senior
  subordinated notes                   42,165         44,062        150,000        154,140
Other long-term
  obligations                           7,600          7,600         11,199         11,199
                                 ------------   ------------   ------------   ------------
                                 $    858,331   $    976,165   $    486,199   $    478,542
                                 ------------   ------------   ------------   ------------
</TABLE>



    FOREIGN CURRENCY RISK We operate in a number of international areas and are
involved in transactions denominated in currencies other than US dollars, which
exposes us to foreign exchange rate risk. The most significant exposures arise
in connection with our operations in Canada and Saudi Arabia, which usually are
substantially unhedged. At various times, we utilize forward exchange contracts,
local currency borrowings and the payment structure of customer contracts to
selectively hedge exposure to exchange rate fluctuations in connection with
monetary assets, liabilities and cash flows denominated 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 exchange
contracts are deferred and recognized as foreign currency gains or losses over
the term of the contract. The remaining forward exchange contract matured on
June 30, 1999. A hypothetical 10% decrease in the value of all foreign
currencies relative to the US dollar as of December 31, 2000 would result in a
$2.7 million decrease in the fair value of our net monetary assets denominated
in currencies other than US dollars. We do not hold or issue forward exchange
contracts or other derivative instruments for speculative purposes.

    CREDIT RISK Financial instruments that potentially subject us to
concentrations of credit risk consist primarily of deposits and temporary cash
investments that we have with a variety of financial institutions. We believe
that the credit risk in such instruments is minimal. In addition, our 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.

    INTEREST RATE AND MARKETABLE SECURITY PRICE RISK Our financial instruments
that are potentially sensitive to changes in interest rates include our variable
rate short-term borrowings, our $825 million zero coupon convertible senior
notes, 6.8% senior unsecured notes, 8.625% senior subordinated notes and our
investments in debt securities including corporate, asset-backed, US Government
and mortgage-backed debt securities. As of December 31, 2000, we did not have
any variable rate short-term borrowings outstanding.

    We maintain an investment portfolio of marketable securities that
potentially exposes us to price risk. The marketable securities are carried at
fair market value and include $5.5 million in securities classified as trading
and $348.1 million in securities classified as available-for-sale as of December
31, 2000. A hypothetical 10% decrease in the market prices for all securities
would decrease the fair market value of our trading securities and
available-for-sale securities by $.6 million and $34.8 million, respectively.


                                Use of Estimates

    The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. These estimates and assumptions affect the reported amounts of
assets and liabilities, 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 these
estimates.




                                       75
<PAGE>   76


                        Recent Accounting Pronouncements

    During June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities", which
requires that companies recognize all derivative instruments as either assets
or liabilities on the balance sheet and measure those instruments at fair value.
SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No. 133," deferred the
implementation of SFAS 133 until the fiscal year ending December 31, 2001. We
implemented SFAS 133 effective January 1, 2001. Due to our limited use of
derivative instruments, the impact of adopting SFAS No. 133 will not be material
to our financial statements.

    In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements". SAB
No. 101, as amended was implemented in the fourth quarter of 2000 and did not
have a material effect on our consolidated financial position, results of
operations or cash flows.

Acquisitions, capital expenditures and dispositions
-------------------------------------------------------------------------------

                                                                            2

    During November 1999, we completed our acquisition of Pool Energy Services
Co. Each of the approximately 19.2 million shares of Pool not owned by Nabors
prior to the merger were exchanged for 1.025 shares of our common stock
(approximately 19.7 million shares). Pool owned five drilling rigs in Alaska, 57
drilling and workover and well-servicing rigs in international areas (including
39 rigs operated through joint ventures), 22 offshore platform drilling rigs in
the Gulf of Mexico, and 650 active and 104 stacked workover and well-servicing
rigs in the United States. Pool also owned and operated 27 marine transportation
and support vessels, more than 300 fluid hauling trucks and a large quantity of
fluid storage tanks.

    During April 1999, we completed our acquisition of Bayard Drilling
Technologies, Inc. Each of the approximately 18.3 million shares of Bayard
common stock were exchanged for .3375 shares of our common stock and $.30 per
share in cash (approximately 6.2 million shares and $5.5 million in cash in the
aggregate). The acquisition of Bayard added 87 drilling rigs, 73 of which were
actively marketed. The majority of the rigs were located in Oklahoma and south
Texas, with the balance of the fleet located throughout east Texas and
Louisiana. In addition, Bayard had a significant inventory of new component
equipment including drill pipe, engines and high horsepower mud pumps. Bayard
also owned and operated a fleet of oilfield hauling equipment.

    The Pool and Bayard acquisitions were accounted for using the purchase
method of accounting and, accordingly, Pool's and Bayard's results of operations
have been included in our consolidated financial statements commencing on the
effective date of each respective acquisition. The purchase price for both the
Pool and Bayard acquisitions was initially allocated based on preliminary
estimates of the fair market value of the assets acquired and the liabilities
assumed as of the respective acquisition dates. The Bayard and Pool purchase
price allocations were finalized during 1999 and 2000, respectively. The final
purchase price allocated for the Pool and Bayard acquisitions resulted in
goodwill of approximately $161.3 million and $27.7 million, respectively, which
is being amortized on a straight-line basis over 30 years.

    The following unaudited pro forma summary of financial information presents
our consolidated results of operations as if the acquisitions of Pool and Bayard
had occurred at the beginning of the periods presented, after including the
impact of certain adjustments including: (1) the elimination of nonrecurring
merger related costs, (2) reduced depreciation expense reflecting the reduction
in value assigned to property, plant and equipment, (3) increased amortization
of goodwill, (4) reduced interest expense associated primarily with the
elimination of certain financing costs and (5) the related income tax effects of
these adjustments.





                                       76


<PAGE>   77
<TABLE>
<CAPTION>
(In thousands,
except per share amounts)                 Year ended December 31,
-----------------------------------------------------------------------------
                                       1999                     1998
                            As reported   Pro forma   As reported   Pro forma
<S>                         <C>          <C>         <C>            <C>
Operating revenues
  and Earnings from
  unconsolidated
  affiliates                $  642,264   $  949,994   $  968,157   $1,520,838
                            ----------   ----------   ----------   ----------
Net income before
  extraordinary items       $   27,704   $   15,759   $  124,988   $  147,826
                            ----------   ----------   ----------   ----------
Net income                  $   27,704   $   15,759   $  124,988   $  147,488
                            ----------   ----------   ----------   ----------
Net income before
  extraordinary items
  per diluted share         $      .23   $      .11   $     1.16   $     1.11
                            ----------   ----------   ----------   ----------
Net income per
  diluted share             $      .23   $      .11   $     1.16   $     1.10
                            ----------   ----------   ----------   ----------
Weighted average
  number of diluted
  shares outstanding           120,449      141,757      112,555      138,488
                            ----------   ----------   ----------   ----------
</TABLE>

    The pro forma financial information presented does not purport to indicate:
(1) what the combined results of operations would have been had the acquisitions
occurred at the beginning of the periods presented or (2) the results of
operations that may be obtained in the future. Additionally, the pro forma
financial information presented does not reflect any anticipated cost savings
resulting from the integration of Nabors', Pool's and Bayard's operations.

    During November 1999, we purchased the remaining 50% of our US Lower 48
transportation joint venture from our partner for approximately $5.1 million in
cash and recorded approximately $2.8 million of goodwill.

    During May 1998, we completed the acquisitions of the stock of New Prospect
Drilling Company and certain assets of Can-Tex Drilling & Exploration, Ltd. for
approximately $28.0 million in cash and the issuance of warrants to purchase
200,000 shares of Nabors common stock (Note 9), which were valued at their
estimated fair market value. The New Prospect fleet consisted of six rigs and
other equipment located in Arkansas and Oklahoma, and the Can-Tex fleet
consisted of seven rigs and other equipment located in Alberta, Canada. We
accounted for these acquisitions using the purchase method of accounting.

    During January 1998, we completed the sale of all of the capital stock of
our wholly-owned subsidiary, J.W. Gibson Well Service Company, to a subsidiary
of Key Energy Group, Inc. The assets of Gibson consisted of 74 active
well-servicing and workover rigs, associated auxiliary equipment, trucks,
inventory and several yards and related facilities. As consideration for the
sale of Gibson, we received approximately $20.0 million plus the value of
Gibson's working capital in cash, 100,000 shares of Key common stock and
warrants to acquire 265,000 shares of Key common stock at an exercise price of
$18.00 per share, and recorded a pre-tax gain of approximately $16.0 million.
The warrants were subsequently converted to Key common stock.

Marketable securities
--------------------------------------------------------------------------------

    Our marketable securities consist of the following :                    3

<TABLE>
<CAPTION>
(In thousands)                                                     December 31,
-----------------------------------------------------------------------------------------------------
                                                                       2000
                                                                 Gross Unrealized    Gross Unrealized
                                               Fair Value         Holding Gains       Holding Losses
<S>                                       <C>                    <C>                 <C>
Trading:
    Equity securities                        $         5,500     $         2,378      $            --
Available-for-sale:
    Equity securities                                 80,370              24,955                 (700)
    Certificates of deposit                           10,017                  12                   --
    Corporate debt securities                        154,904               1,170               (1,067)
    US Government debt securities                     17,648                 175                   --
    Mortgage-backed debt securities                   11,584                  60                   --
    Asset-backed debt securities                      73,618                 576                   --
                                             ---------------     ---------------      ---------------
                                             $       353,641     $        29,326      $        (1,767)
                                             ---------------     ---------------      ---------------
</TABLE>

<TABLE>
<CAPTION>
(In thousands)                                                     December 31,
-----------------------------------------------------------------------------------------------------
                                                                       1999
                                                                 Gross Unrealized     Gross Unrealized
                                                Fair Value         Holding Gains        Holding Losses
<S>                                          <C>                 <C>                  <C>
Trading:
    Equity securities                        $         3,930     $            --      $          (352)
                                             ---------------     ---------------      ---------------
Available-for-sale:
    Equity securities                                 27,156               5,095               (1,150)
                                             ---------------     ---------------      ---------------
                                             $        31,086     $         5,095      $        (1,502)
                                             ---------------     ---------------      ---------------
</TABLE>

                                       77


<PAGE>   78



    The estimated fair value of our corporate, US Government, mortgage-backed
and asset-backed debt securities at December 31, 2000, by contractual maturity,
are shown below. Expected maturities will differ from contractual maturities
because the issuers of the securities may have the right to repay obligations
without prepayment penalties and we may elect to sell the securities prior to
the maturity date.


<TABLE>
<CAPTION>
                                                                    Estimated
(In thousands)                                                      Fair Value
-------------------------------------------------------------------------------
                                                                          2000
<S>                                                                <C>
Debt securities:
  Due in one year or less                                           $   43,036
  Due after one year through five years                                214,718
                                                                    ----------
                                                                    $  257,754
                                                                    ----------
</TABLE>



    We recorded unrealized holding gains (losses) on equity securities
classified as trading totaling $2.7 million, $1.3 million and $(4.3) million
during 2000, 1999 and 1998, respectively.

    During 2000, we received $.4 million of proceeds and realized gains of $.16
million resulting from the sale of certain investments in equity securities
classified as trading.

    During 2000, we received $42.5 million of proceeds and realized gains of
$15.9 million, and during 1999 we received $6.6 million of proceeds and realized
gains of $2.4 million resulting from the sale of certain investments in
marketable securities classified as available-for-sale.




Property, plant and equipment
--------------------------------------------------------------------------------

                                                                             4

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


<TABLE>
<CAPTION>

(In thousands)                                           December 31,
--------------------------------------------------------------------------------
                                                      2000                1999
<S>                                           <C>                  <C>
Land                                          $     14,149         $     9,253
Buildings                                           23,117              20,489
Drilling, workover and well-servicing rigs,
  and related equipment                          2,160,097           1,940,665
Marine transportation and support vessels          150,636             108,227
Oilfield hauling and mobile equipment               48,442              52,305
Other machinery and equipment                       21,045              21,383
                                              ------------         -----------
                                                 2,417,486           2,152,322
Less: accumulated depreciation
and amortization(1)                                596,094             482,856
                                              ------------         -----------
                                              $  1,821,392         $ 1,669,466
                                              ------------         -----------
</TABLE>


(1) Includes, as of December 31, 2000 and 1999, reserves of $40.6 million and
    $50.9 million, respectively, resulting from the permanent impairment of
    certain asset values.

    Repair and maintenance expense included in direct costs in the consolidated
statements of income totaled $149.6 million, $68.7 million and $102.1 million
for 2000, 1999 and 1998, respectively.

    Interest expense of $2.0 million, $.2 million and $2.6 million was
capitalized during 2000, 1999 and 1998, respectively.


Investments in unconsolidated affiliates
--------------------------------------------------------------------------------
                                                                           5


    Our principal operations accounted for using the equity method include a
construction operation (40%) and logistics operation (50%) in Alaska, and
drilling and workover operations located in Saudi Arabia (50%), Oman (49%) and
Argentina (51%). On January 1, 2001 we purchased our partner's 49% interest in
the Argentina operation for $4.5 million and now own 100% of the operation.

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


<TABLE>
<CAPTION>
(In thousands)                                                    December 31,
--------------------------------------------------------------------------------
                                                                          2000
<S>                                                                <C>
Current assets                                                     $    67,701
Long-term assets                                                       114,319
Current liabilities                                                     31,790
Long-term liabilities                                                   47,044
                                                                   -----------
</TABLE>


<TABLE>
<CAPTION>
                                                                   Year Ended
(In thousands)                                                    December 31,
--------------------------------------------------------------------------------
                                                                          2000
<S>                                                                <C>
Gross revenues                                                     $   292,472
Gross margin                                                            82,273
Net income                                                              53,272
Nabors' Earnings from unconsolidated affiliates(1)                      37,490
                                                                   -----------
</TABLE>

(1) Differences between the equity in earnings of unconsolidated affiliates
    reported by Nabors and our proportionate share of the combined earnings of
    the related unconsolidated affiliates have resulted principally from
    accounting differences in the recognition of income and the elimination of
    intercompany transactions.





                                       78


<PAGE>   79






Short-term borrowings and letters of credit
--------------------------------------------------------------------------------

                                                                            6

    We have available lines of credit with various banks that permit borrowing
at interest rates generally not to exceed, at our option, each bank's prime rate
or LIBOR, plus .25%. We did not have any short-term borrowings outstanding at
December 31, 2000 and 1999.

    We have a $200 million unsecured revolving credit facility with a syndicate
of banks. The credit facility is a committed facility with a term of five years
that expires on September 5, 2002. Loans under the credit facility bear
interest, at our option, at the agent bank's prime rate or LIBOR, plus a margin
(.25% at December 31, 2000) that varies depending on our senior unsecured debt
rating. A commitment fee (.085% at December 31, 2000) is charged based on the
average daily unused portion of the credit facility. The loans are guaranteed by
certain subsidiaries of Nabors' 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. The issuance of our $1.381 billion zero coupon convertible
senior debentures due 2021 during February and March 2001 caused a default of
the debt to capitalization ratio covenant under our $200 million unsecured
revolving credit facility and a related $30 million letter of credit facility
(Note 15). The debt to capitalization ratio covenant has been amended so that we
are now in compliance and the default has been waived by the banks in the
syndicate and under the letter of credit facility.

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


<TABLE>
<CAPTION>
(In thousands)                                           December 31,
--------------------------------------------------------------------------------
                                                      2000                1999
<S>                                           <C>                 <C>
Lines of credit available                     $    241,332         $   232,051
Short-term borrowings outstanding                       --                  --
Letters of credit outstanding                      (23,467)            (17,402)
                                              ------------         -----------
Remaining availability                        $    217,865         $   214,649
                                              ------------         -----------
</TABLE>


Long-term obligations
--------------------------------------------------------------------------------
                                                                           7

    Long-term obligations consist of the following:


<TABLE>
<CAPTION>
(In thousands)                                              December 31,
--------------------------------------------------------------------------------
                                                      2000                1999
<S>                                           <C>                 <C>
$825 million zero coupon
  senior convertible
  debentures due June 2020                    $    508,566         $        --
6.8% senior unsecured
  notes due April 2004                             300,000             325,000
8.625% senior subordinated notes
  due April 2008                                    42,165             150,000
Medium-term notes payable, maturing from
  2000 to 2003, from 5.56% to 9.5%(1)                7,600              11,199
                                              ------------         -----------
                                                   858,331             486,199
Less: current portion                                3,554               3,599
                                              ------------         -----------
                                              $    854,777         $   482,600
                                              ------------         -----------
</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 $4.7 million and $6.3 million as of December 31, 2000 and
    1999, respectively.


   During June 2000, we completed a private placement of zero coupon convertible
senior debentures due 2020. The aggregate principal amount of the debentures at
maturity will be $825 million. The debentures were issued at a discount with net
proceeds to Nabors, after expenses, totaling approximately $495.0 million. The
yield to maturity of the debentures is 2.5% compounded semi-annually with no
periodic cash payments of interest. At the holder's option, the debentures can
be converted at any time prior to maturity or their earlier redemption, into
Nabors common stock at a conversion rate of 10.738 shares per $1,000 principal
amount at maturity. The conversion rate may be adjusted from time to time, upon
the occurrence of specified events. Instead of delivering shares of common stock
upon conversion of any debentures, we may elect to pay the holder cash for all
or a portion of the debentures. The debentures can be put to us on June 20,
2003, June 20, 2008 and June 20, 2013 for a purchase price equal to the issue
price plus accrued original issue discount to the date of repurchase. We may
elect to pay all or a portion of the purchase price in common stock instead of
cash. We cannot redeem the debentures before June 20, 2003. On and after



                                       79



<PAGE>   80

June 20, 2003, we may redeem all or a portion of the debentures for cash at any
time at their accreted value. The proceeds from the issuance of the debentures
will be used for general corporate purposes, including but not limited to,
working capital, investment in subsidiaries and possible future business
acquisitions. As of December 31, 2000, the proceeds are included in cash and
marketable securities on our balance sheet. On September 8, 2000, Nabors'
registration statement with respect to resales of these debentures became
effective.

    During March 1999, we issued $325.0 million of 6.8% senior unsecured notes
due April 15, 2004. Interest on the notes is payable semi-annually on April 15
and October 15, commencing on October 15, 1999. We can redeem the notes in whole
or in part, at any time, at a redemption price equal to the greater of (1) 100%
of their principal amount or (2) the sum of the present values of the remaining
scheduled payments of principal and interest discounted to the date of
redemption on a semi-annual basis using the comparable treasury security yield
plus 25 basis points together in either case with accrued and unpaid interest.
Certain restrictions have been imposed on us as a result of the issuance of the
notes, including limitations on the incurrence of liens and certain
sale-leaseback transactions. A portion of the proceeds from the issuance of the
notes was used to repay certain short-term and long-term borrowings of Nabors,
including the repayment of our 9.18% senior secured notes and Bayard's 11%
senior notes. During December 2000, we purchased $25.0 million of our 6.8% notes
in the open market at 99.85%. We recognized an insignificant extraordinary gain
resulting from the repurchase of the notes for less than the amount recorded on
our books.

    Prior to its acquisition by Nabors, Pool had issued 8.625% senior
subordinated notes in the aggregate principal amount of $150.0 million. The
notes are redeemable at the option of Nabors, in whole or in part, at any time
on or after April 1, 2003 at a redemption price equal to 104.313% of the
principal amount thereof, plus accrued interest, declining ratably to par on
April 1, 2006. As a result of the Pool acquisition, Nabors Holding Company, the
successor by merger to Pool, completed a mandatory change of control cash tender
offer to purchase the notes due 2008 at a redemption price of 101% in February
2000. When we made the change of control offer, we also solicited the consent of
the remaining holders of the notes to amend the terms of the indenture governing
the notes to generally conform to the covenants contained in Nabors' 6.8% notes
and to add Nabors as a guarantor of the obligations thereunder. Holders of over
75% of the principal amount of the notes consented, the amendments were adopted
and the full and unconditional guarantee was entered into as of February 14,
2000. The notes contain certain covenants that, among other things, limit the
ability of Nabors to incur additional liens. In addition, during 2000, Nabors
Holding Company purchased additional notes in the open market at prices ranging
from 100.5% to 102.0%. During 2000, a total of $107.8 million of the notes were
acquired as a result of these transactions leaving $42.2 million outstanding as
of December 31, 2000. We recognized a $1.9 million ($.01 per share)
extraordinary gain, net of income taxes, during 2000 resulting from the
repurchase of the notes for less than the amount recorded on our books.

    Bayard had issued 11% senior notes due 2005 in the principal amount of
$100.0 million prior to being acquired by Nabors. During July 1999, we made a
cash tender offer to the holders of the notes that expired on August 3, 1999.
The price offered was $1,110 per $1,000 note plus interest on such amount from
July 2, 1999 to the date of payment, at a per annum rate of 5.0%. In connection
with the offer, we acquired the entire issue of notes. As a result of the
transaction, we recognized a pre-tax extraordinary gain of $4.7 million
resulting from the repayment of the notes at less than the amount recorded on
our books. This gain was netted against the extraordinary loss on the 9.18%
notes described below and was included in our consolidated statements of income
as other income.

    On May 28, 1996, we issued $172.5 million of 5% convertible subordinated
notes due May 15, 2006. During June 1999, we called our notes for mandatory
redemption on July 15, 1999. The redemption price was $1,035 per $1,000 note,
together with accrued and unpaid interest from May 15, 1999 to the redemption
date. Alternatively, holders of the notes could



                                       80


<PAGE>   81

elect to convert their notes prior to redemption, at a rate of 55.1724 shares of
Nabors' common stock per $1,000 note. Holders of $172.3 million aggregate
principal amount of the notes elected to convert to 9.5 million shares of common
stock. We redeemed the remaining notes for $.2 million. As a result of these
transactions, the notes were cancelled during July 1999 and ceased to be
outstanding.

    We issued 9.18% notes in the principal amount of $40.0 million to the John
Hancock Mutual Life Insurance Company and an affiliate, pursuant to a note
purchase agreement dated October 1, 1992. During July 1999, we prepaid the
entire $40.0 million aggregate principal amount of these notes due July 31,
2006, at par plus a make-whole premium of approximately $4.5 million. In
connection with the transaction, we recognized a pre-tax extraordinary loss of
$4.7 million resulting from the make-whole premium paid and the recognition of
certain deferred financing costs.

    During June 1999, we filed a shelf registration statement on Form S-3 with
the Securities and Exchange Commission to allow us to offer, from time to time,
up to $500.0 million in debt securities, preferred stock, common stock,
depository shares or warrants. The Commission declared the registration
statement effective on June 28, 1999. We currently have not issued any
securities registered under this registration statement.

    As of December 31, 2000, the maturities of long-term obligations for each
of the five years after 2000 and thereafter are as follows:

<TABLE>
<CAPTION>
(In thousands)
--------------------------------------------------------------------------------
<S>                                                            <C>
2001                                                           $         3,554
2002                                                                     2,510
2003                                                                     1,536
2004                                                                   300,000
2005                                                                        --
Thereafter(1)                                                          867,165
                                                               ---------------
                                                               $     1,174,765
                                                               ---------------
Less: discount                                                        (316,434)
                                                               ---------------
                                                               $       858,331
                                                               ---------------
</TABLE>

(1) Includes $42.2 million of our 8.625% notes due 2006 and $825.0 million of
    our zero coupon convertible senior debentures due 2020.



Income taxes
--------------------------------------------------------------------------------

                                                                           8

    Nabors' income tax, reconciled to the US federal income tax using the
federal statutory rate, and an analysis of the income tax provision are as
follows:

<TABLE>
<CAPTION>
(In thousands)                                                     Year Ended December 31,
-------------------------------------------------------------------------------------------------
                                                             2000            1999            1998
<S>                                                    <C>             <C>             <C>
Total pre-tax income(1)                                $  226,707      $   45,629      $  199,981
                                                       ----------      ----------      ----------
Expected federal income tax using the 35%
    statutory rate                                         79,347          15,970          69,993
State income taxes                                          1,987            (416)          3,974
Foreign taxes and other                                     9,899           2,371           1,026
                                                       ----------      ----------      ----------
     Total income tax                                  $   91,233      $   17,925      $   74,993
                                                       ----------      ----------      ----------
Analysis of the income tax provision:
     Current:
         US federal                                    $    1,176      $  (11,000)     $   22,780
         State                                                844             168           2,610
         Foreign                                           17,574           8,354          14,866
                                                       ----------      ----------      ----------
                                                           19,594          (2,478)         40,256
                                                       ----------      ----------      ----------
     Deferred:
         US federal                                        68,413          19,266          29,384
         State                                              2,213            (808)          3,504
         Foreign                                            1,013           1,945           1,849
                                                       ----------      ----------      ----------
                                                           71,639          20,403          34,737
                                                       ----------      ----------      ----------
     Total income tax                                  $   91,233      $   17,925      $   74,993
                                                       ----------      ----------      ----------
</TABLE>


(1) Includes foreign income before taxes of $77.6 million, $48.1 million and
    $56.4 million for 2000, 1999 and 1998, respectively.





                                       81


<PAGE>   82
   The components of the Nabors' net deferred tax assets and liabilities are as
follows:

<TABLE>
<CAPTION>
(In thousands)                                            December 31,
------------------------------------------------------------------------------
                                                     2000                1999
<S>                                          <C>               <C>
Deferred tax assets:
  Net operating loss carryforwards           $     99,016      $       76,430
  Accrued liabilities and other                   141,862             110,716
  General tax credits                              15,054              19,186
                                             ------------      --------------
Deferred tax asset                                255,932             206,332
                                             ------------      --------------
Deferred tax liabilities:
  Excess tax over book depreciation              (316,440)           (258,819)
  Unrealized gain on marketable securities         (8,973)             (1,443)
                                             ------------      --------------
Deferred tax liability                           (325,413)           (260,262)
                                             ------------      --------------
Net deferred tax liability                        (69,481)            (53,930)
Less current asset portion                         27,816              39,074
                                             ------------      --------------
Net deferred tax liability                   $    (97,297)     $      (93,004)
                                             ------------      --------------
</TABLE>

    In conjunction with the acquisitions of Pool, Bayard and Peak USA (Note 2),
deferred tax assets (liabilities) of $(30.9) million, $45.1 million and $(1.9)
million, respectively, were recorded in the year of acquisition.

    For US federal income tax purposes, we have net operating loss
carryforwards of approximately $259.2 million that, if not utilized, will expire
from 2002 to 2020. The net operating loss carryforwards for alternative minimum
tax purposes are approximately $123.3 million. There are alternative minimum tax
credit carryforwards of $15.0 million available to offset future regular tax
liabilities.

    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 Nabors and our subsidiaries. The utilization
of such carryforwards could be limited or effectively lost upon certain changes
in ownership. Accordingly, although we believe substantial loss carryforwards
are available to us, no assurance can be given concerning such loss
carryforwards, or whether or not such loss carryforwards will be available in
the future.

Capital stock and stock options
--------------------------------------------------------------------------------

                                                                       9

                                  Capital Stock

    At the June 6, 2000 annual meeting of Nabors Industries, Inc., the
stockholders approved an increase in Nabors' authorized common stock from 200
million to 400 million shares.

    During November 1999, we acquired all of the outstanding shares of Pool in
exchange for approximately 19.7 million newly issued shares of Nabors common
stock (Note 2).

    During June and July 1999, we issued 9.5 million shares in connection with
the conversion of $172.3 million aggregate principal amount of the 5%
convertible subordinated notes (Note 7).

    During April 1999, we acquired all of the outstanding shares of Bayard
common stock in exchange for approximately 6.2 million newly issued shares of
Nabors common stock (Note 2). We also issued warrants to acquire an aggregate of
133,988 shares of Nabors common stock in exchange for Bayard warrants that had
been previously issued to acquire shares of Bayard common stock. The warrants
issued by Nabors have an exercise price of $21.33 per share and expire May 1,
2003.

    During July 1998, we repurchased 100,000 shares in the open market at a cost
of $1.7 million, or at an average cost of $16.53 per share.

    During May 1998, we issued warrants to purchase 200,000 shares at an
exercise price of $30.00 per share. The warrants were issued in connection with
the New Prospect acquisition (Note 2) and expire on April 30, 2003.

    We are authorized to issue up to 10.0 million 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 December 31, 2000, there were warrants outstanding to purchase
237,800 shares of Nabors common stock at prices ranging from $21.33 per share to
$30.00 per share. The remaining warrants expire April 30 and May 1, 2003.

                                       82


<PAGE>   83


                               Stock Option Plans

    As of December 31, 2000, we have several stock option plans under which
options to purchase shares of Nabors common stock may be granted to key
officers, directors and managerial employees of Nabors and its subsidiaries.
Options granted under the plans are at prices equal to the fair market value of
the stock on the date of the grant. Options granted under the plans generally
are exercisable in varying cumulative periodic installments after one year. In
the case of certain key executives, options granted under the plans are subject
to accelerated vesting related to targeted common 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 5.5
million and 9.1 million shares of Nabors common stock remained available for
grant as of December 31, 2000 and 1999, respectively.

    On December 11, 1998, certain options previously granted to employees of
Nabors were re-priced to the closing price of Nabors shares on that date.
Options to purchase 11.2 million shares with exercise prices ranging from $16.00
to $40.25 were re-priced to $12.50. As a condition of the re-pricing, certain
employees forfeited 25% of the options previously granted, or 3.6 million
options, and none of the re-priced options were able to be exercised for a
one-year period from the re-pricing date.

    A summary of stock option transactions is as follows:

<TABLE>
<CAPTION>
(In thousands, except exercise price)
--------------------------------------------------------------------------------
                                                                   Weighted
                                                                   Average
                                                                  Exercise
                                                    Shares          Price
<S>                                               <C>           <C>
Options outstanding as of December 31, 1997         15,039      $       18.67
     Granted                                         6,927              18.49
     Exercised                                        (126)              7.24
     Forfeited                                      (3,726)             22.34
                                                  --------      -------------
Options outstanding as of December 31, 1998         18,114      $       11.77
     Granted                                         5,394              21.95
     Exercised                                        (633)             10.04
     Forfeited                                        (197)             24.21
                                                  --------      -------------
Options outstanding as of December 31, 1999         22,678      $       14.13
     Granted                                         6,199              45.63
     Exercised                                      (9,664)             11.54
     Forfeited                                        (140)             18.51
                                                  --------      -------------
Options outstanding as of December 31, 2000         19,073      $       25.65
                                                  --------      -------------
</TABLE>

    Of the options outstanding, 16.8 million, 19.3 million and 6.0 million were
exercisable at weighted average exercise prices of $26.28, $13.49 and $10.40, as
of December 31, 2000, 1999 and 1998, respectively.

    A summary of stock options outstanding at December 31, 2000 is as follows:

<TABLE>
<CAPTION>
(In thousands, except contractual
life and exercise price)                      Options Outstanding
--------------------------------------------------------------------------------
                                                   Weighted
                                                    Average          Weighted
                                                   Remaining          Average
                                   Number         Contractual        Exercise
                                 Outstanding         Life             Price
<S>                              <C>              <C>             <C>
Range of exercise prices:
$  4.77 -  7.16                       354              3.3          $     6.04
   7.87 - 11.81                       861              7.8               11.33
  12.20 - 18.30                     8,011              6.7               12.63
  18.94 - 28.41                     3,586              8.9               24.82
  30.25 - 45.38                       352              9.0               36.56
  45.55 - 68.33                     5,909              7.8               46.43
                                 --------          -------          ----------
                                   19,073              7.5          $    25.65
                                 --------          -------          ----------
</TABLE>


    A summary of stock options exercisable at December 31, 2000 is as follows:

<TABLE>
<CAPTION>

(In thousands, except contractual
life and exercise price)                           Options Exercisable
--------------------------------------------------------------------------------
                                                                     Weighted
                                                                      Average
                                                Number               Exercise
                                             Exercisable              Price
<S>                                          <C>                 <C>
Range of exercise prices:
$ 4.77 -  7.16                                      354            $      6.04
  7.87 - 11.81                                      146                  10.48
 12.20 - 18.30                                    7,514                  12.56
 18.94 - 28.41                                    2,912                  24.85
 30.25 - 45.38                                      209                  37.84
 45.55 - 68.33                                    5,692                  46.36
                                             ----------            -----------
                                                 16,827            $     26.28
                                             ----------            -----------
</TABLE>

    The weighted average fair value of options granted during 2000, 1999 and
1998 was $17.37, $7.12 and $5.05, respectively.

    In accordance with SFAS 123, the fair value of each stock option granted has
been estimated on the date of grant using the Black-Scholes option-pricing model
with the following weighted average assumptions for grants during 2000, 1999 and
1998, respectively: risk-free interest rates of 6.01%, 5.76% and 4.95%; dividend
yield of 0.0% for all periods; expected life of 3.5 years, 2.97 years and 2.2
years; and volatility of 42.38%, 42.0% and 38.9%.




                                       83


<PAGE>   84


    Had compensation cost for Nabors' stock-based compensation plans been
recognized in accordance with SFAS 123, our net income (loss) and diluted
earnings (loss) per share for 2000, 1999 and 1998, would have been $68.4 million
and $.45 per share, $(1.7) million and $(.01) per share and $99.7 million and
$.93 per share, respectively. 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.


Pension, postretirement and
postemployment benefits
--------------------------------------------------------------------------------

                                                                      10

                                  Pension Plans

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

   Summarized information on the Pool pension plan is as follows:


<TABLE>
<CAPTION>
Pension benefits
(In thousands)                                    Year Ended December 31,
--------------------------------------------------------------------------------
                                                       2000               1999
<S>                                            <C>                 <C>
Change in benefit obligation:
Benefit obligation at beginning of year        $     13,051        $        --
Acquisition                                              --             13,024
Interest cost                                           847                 86
Actuarial loss                                          117                 --
Benefit payments                                       (620)               (59)
                                               ------------        -----------
Benefit obligation at end of year                    13,395             13,051
                                               ------------        -----------
Change in plan assets:
Fair value of plan assets at beginning of year       12,447                 --
Acquisition                                              --             12,172
Actual return on plan assets                           (172)               334
Benefit payments                                       (620)               (59)
                                               ------------        -----------
Fair value of plan assets at end of year             11,655             12,447
                                               ------------        -----------
Funded status:
Funded status at end of year                         (1,740)              (604)
Unrecognized net actuarial loss (gain)                  834               (254)
                                               ------------        -----------
Net amount recognized                                  (906)              (858)
                                               ------------        -----------
Net liability recognized                       $       (906)       $      (858)
                                               ------------        -----------
</TABLE>


<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
                                                       2000               1999
<S>                                           <C>                 <C>
Weighted average assumptions:
Pool retirement income plan:
  Weighted average discount rate                       6.50%              6.50%
  Expected long-term rate of return on
    plan assets                                        6.50%              6.50%
                                               ------------        -----------
</TABLE>


<TABLE>
<CAPTION>
Pension benefits
(In thousands)                                         Year Ended December 31,
--------------------------------------------------------------------------------
                                                          2000            1999
<S>                                                  <C>            <C>
Components of net periodic benefit cost:
Service cost                                         $      --      $       --
Interest cost                                              847              86
Expected return on plan assets                            (799)            (80)
                                                     ---------      ----------
Net periodic benefit cost                            $      48      $        6
                                                     ---------      ----------
</TABLE>



    Certain of Nabors' employees are covered by defined contribution plans. Our
contributions to the plans are based on employee contributions and totaled $7.9
million, $3.9 million and $6.4 million, for 2000, 1999 and 1998, respectively.
Nabors does not provide postemployment benefits to its employees.


                   Postretirement Benefits Other Than Pensions

    Prior to the date of the acquisition, Pool provided certain postretirement
healthcare and life insurance benefits to eligible retirees who had attained
specific age and years of service requirements. Nabors terminated this plan at
the date of acquisition, November 24, 1999. A liability of approximately $1.3
million is recorded on our balance sheet at December 31, 2000 to cover the
estimated costs of beneficiaries in the plan at the date of acquisition.





                                       84
<PAGE>   85
Commitments and contingencies
--------------------------------------------------------------------------------

                                                                        11

                                Operating Leases

    Nabors and its subsidiaries occupy various facilities and lease certain
equipment under various lease agreements. The minimum rental commitments under
non-cancelable operating leases, with lease terms in excess of one year
subsequent to December 31, 2000, are as follows:


<TABLE>
<CAPTION>
(In thousands)
-------------------------------------------------------------------------------
<S>                                                              <C>
2001                                                             $      13,522
2002                                                                    12,683
2003                                                                     7,454
2004                                                                     6,510
2005                                                                     2,940
Thereafter                                                                 463
                                                                 -------------
                                                                 $      43,572
                                                                 -------------
</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 $15.2 million, $5.1
million and $3.8 million for 2000, 1999 and 1998, respectively.


                              Employment Contracts

    We have entered into employment contracts with certain of our employees. Our
minimum salary and bonus obligations under these contracts as of December 31,
2000 total $1.7 million for 2001.

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


                              Capital Expenditures

    As of December 31, 2000, we had outstanding capital expenditure purchase
commitments of approximately $47.0 million, primarily for drill pipe,
refurbishment of rigs to be reactivated and rig-related sustaining capital
expenditures.

                                  Contingencies

    A purported class action lawsuit is pending against Bayard Drilling
Technologies, Inc., a wholly-owned subsidiary of Nabors, certain directors and
officers of Bayard, the managing underwriters of Bayard's initial public
offering and certain former stockholders of Bayard, alleging violations of
federal securities laws in connection with its initial public offering that
occurred prior to Nabors acquisition of Bayard. The lawsuit, Yuan v. Bayard
Drilling Technologies, Inc., et al., which consolidates two previously filed
actions, was filed on February 3, 1998 in the United States District Court for
the Western District of Oklahoma. Bayard is a named defendant and may have
further liability under certain indemnification agreements with the other
persons who have been named as defendants in the suit.

    The plaintiffs in this lawsuit purport to sue on their own behalf and on
behalf of all persons who purchased shares of Bayard common stock in or
traceable to the initial public offering. In the lawsuit, plaintiffs allege
claims against all defendants under the Securities Act of 1933. The plaintiffs
allege, among other things, that the registration statement and prospectus for
Bayard's initial public offering contained materially false and misleading
information and omitted material facts.

    The parties have reached a preliminary agreement to settle the lawsuit,
subject to the negotiation of mutually acceptable settlement documents and court
approval. The proposed settlement amounts to be paid by Bayard (either directly
or as a result of its indemnification obligations) are not material to Bayard or
Nabors.

    In the event the settlement is not finalized, Nabors and Bayard continue to
believe the allegations in this lawsuit are without merit and Bayard will defend
vigorously the claims brought against it. In such event, neither Nabors nor
Bayard is able, however, to predict the outcome of this lawsuit or the costs to
be incurred in connection with their defense and there can be no assurance that
this litigation will be resolved in Bayard's favor. An adverse result or
prolonged litigation could have an adverse effect on the financial position,
results of operations or cash flow of Bayard.




                                       85
<PAGE>   86


    Certain subsidiaries of Nabors are defendants in Verdin v. R&B Falcon
Drilling USA, Inc., et al., Civil Action No. G-00-488, in the United States
District Court for the Southern District of Texas, Galveston Division. The
original plaintiff and proposed representative of a purported class of offshore
workers has been replaced as plaintiff and proposed representative by Thomas
Bryant, who claims to be an "offshore worker" previously employed by Global
Marine Drilling Company, Atwood Oceanics, Inc., Hercules (which was subsequently
acquired by Parker Drilling Company) and Sedco Forex (which was subsequently
acquired by Transocean Offshore, Inc.) and by Jeremy Richardson, who is
identified as a resident of Louisiana. The plaintiffs allege that the
defendants, which plaintiffs claim are offshore drilling contractors, including
our subsidiaries, have engaged in a conspiracy to depress wages and benefits
paid to their offshore employees. The plaintiffs contend that this alleged
conduct violates federal and state antitrust laws. The plaintiffs seek
injunctive relief, and up to $5 billion in damages from all defendants, trebled
under antitrust law, plus attorneys' fees and costs on behalf of themselves and
an alleged class of offshore workers. Nabors' subsidiaries vigorously deny these
allegations.

    This action is in a very preliminary stage, and neither Nabors nor any of
its subsidiaries named as defendants is able to predict the outcome of this
lawsuit or the costs to be incurred in connection with their defense and there
can be no assurance that this litigation will be resolved in favor of Nabors and
its subsidiaries. An adverse result or prolonged litigation could have an
adverse effect on the financial position, cash flows or results of operations of
the subsidiaries involved.

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


Supplemental balance sheet and
income statement information
--------------------------------------------------------------------------------
                                                                         12

    Accounts receivable is net of an allowance for doubtful accounts of $5.4
million and $5.0 million as of December 31, 2000 and 1999, respectively.

    Accrued liabilities include the following:

<TABLE>
<CAPTION>
(In thousands)                                             December 31,
--------------------------------------------------------------------------------
                                                      2000                1999
<S>                                           <C>                 <C>
Accrued compensation                          $     43,461        $     34,221
Deferred revenue                                    15,911              12,614
Workers' compensation liabilities                   18,136              10,624
Merger liabilities                                      --              43,265
Other accrued liabilities                           35,502              59,822
                                              ------------        ------------
                                              $    113,010        $    160,546
                                              ------------        ------------
</TABLE>


    Other income, net includes the following:

<TABLE>
<CAPTION>
(In thousands)                                   Year Ended December 31,
--------------------------------------------------------------------------------
                                             2000         1999          1998
<S>                                      <C>          <C>           <C>
Gains (losses) on marketable
  securities and warrants                $ 18,800     $  3,656      $ (4,324)
Gains on disposition of long-term
  assets and businesses                     1,713        2,915        34,126
Foreign currency gains (losses)             1,441          (37)          216
Dividend income                                70          496         4,119
Other                                       2,097        1,830        (2,511)
                                         --------     --------      --------
                                         $ 24,121     $  8,860      $ 31,626
                                         --------     --------      --------
</TABLE>





                                       86

<PAGE>   87





Unaudited quarterly financial information
--------------------------------------------------------------------------------

                                                                          13

<TABLE>
<CAPTION>
(In thousands,
except per share amounts)                       Year Ended December 31, 2000
------------------------------------------------------------------------------------------
                                                        Quarter Ended
                                    March 31,     June 30,    September 30,   December 31,
<S>                               <C>           <C>           <C>             <C>
Operating revenues
     and Earnings from
     unconsolidated affiliates      $ 289,684    $  301,468     $ 354,039     $ 419,423
Gross profit(1)                        96,222       104,662       123,547       151,861
Income derived from
     operating activities(2)           33,153        40,835        59,297        84,090
Income before
     extraordinary gain                17,931        24,103        38,560        54,880
Extraordinary gain, net                 1,703            --           147            32
Net income                             19,634        24,103        38,707        54,912
Earnings per share before
     extraordinary gain:(3)
     Basic                          $     .13    $      .17     $     .26     $     .37
     Diluted                        $     .12    $      .16     $     .25     $     .35
</TABLE>


<TABLE>
<CAPTION>
(In thousands,
except per share amounts)                        Year Ended December 31, 1999
-------------------------------------------------------------------------------------------
                                                        Quarter Ended
                                    March 31,     June 30,    September 30,   December 31,
<S>                               <C>           <C>           <C>             <C>
Operating revenues
     and Earnings from
     unconsolidated affiliates     $ 152,987    $ 129,939     $ 142,390     $ 216,948
Gross profit(1)                       59,687       48,644        48,899        66,359
Income derived from
     operating activities(2)          21,966        9,800        10,022        16,620
Net income                            11,964        3,298         4,741         7,701
Earnings per share:(3)
     Basic                         $     .12    $     .03     $     .04     $     .06
     Diluted                       $     .12    $     .03     $     .04     $     .06
</TABLE>


(1) Gross profit represents Operating revenues and Earnings from unconsolidated
    affiliates minus direct costs.

(2) "Income derived from Operating activities" has historically been referred to
    as "operating income" by us. It is computed by subtracting direct costs,
    general and administrative expenses, and depreciation and amortization
    expense from Operating revenues and then adding Earnings from unconsolidated
    affiliates.

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


Segment information
--------------------------------------------------------------------------------

                                                                        14

    Nabors' 11 business units (eight in 1998) have been aggregated into two
reportable segments, specifically (1) contract drilling, including drilling,
workover and well-servicing, and (2) manufacturing and logistics, based on the
nature of the services provided, the class of customers, the methods used to
provide services and other economic characteristics. The contract drilling
segment consists of our Alaska, Canada, US Lower 48, International and Offshore
operations. These units provide oil and gas drilling, workover and
well-servicing on land and offshore. The manufacturing and logistics segment
consists of our Canrig, Epoch, Peak Oilfield Service Company, Peak USA and Sea
Mar operating units. These units manufacture top drives, manufacture drilling
instrumentation systems, provide construction and logistics services, provide
trucking and logistics services and provide marine transportation and supply
services, respectively.

    The accounting policies of the segments are the same as those described in
the Summary of Significant Accounting Policies (Note 1). Inter-segment sales are
recorded at cost or cost plus a profit margin. Nabors evaluates the performance
of its segments based on income derived from operating activities.





                                       87
<PAGE>   88


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

<TABLE>
<CAPTION>
(In thousands)                                                                    Years Ended December 31,
-----------------------------------------------------------------------------------------------------------------------
                                                                               2000              1999              1998
<S>                                                                     <C>               <C>               <C>
Operating revenues and Earnings from unconsolidated affiliates:(1)
  Contract drilling(2)                                                  $ 1,266,902       $   605,271       $   872,717
  Manufacturing and logistics(3)                                            167,093            49,220           111,188
  Other(4)                                                                  (69,381)          (12,227)          (15,748)
                                                                        -----------       -----------       -----------
   Total revenues                                                       $ 1,364,614       $   642,264       $   968,157
                                                                        -----------       -----------       -----------
Depreciation and amortization:
  Contract drilling                                                     $   138,786       $    96,422       $    79,976
  Manufacturing and logistics                                                14,904             3,766             5,402
  Other(5)                                                                   (1,277)             (295)             (429)
                                                                        -----------       -----------       -----------
   Total depreciation and amortization                                  $   152,413       $    99,893       $    84,949
                                                                        -----------       -----------       -----------
Income (loss) derived from operating activities:
  Contract drilling(2)                                                  $   204,543       $    70,759       $   181,793
  Manufacturing and logistics(3)                                             41,075             2,758            15,861
  Other(5)                                                                  (28,243)          (15,109)          (15,316)
                                                                        -----------       -----------       -----------
   Total income (loss) derived from operating activities                $   217,375       $    58,408       $   182,338
  Interest expense                                                          (35,370)          (30,395)          (15,463)
  Interest income                                                            20,581             8,756             1,480
  Other income, net                                                          24,121             8,860            31,626
                                                                        -----------       -----------       -----------
   Income before income taxes and extraordinary gain                    $   226,707       $    45,629       $   199,981
                                                                        -----------       -----------       -----------
Total assets:
  Contract drilling(6)                                                  $ 2,232,340       $ 1,920,129       $ 1,334,378
  Manufacturing and logistics(7)                                            305,770           286,501            83,980
  Other(5)                                                                  598,758           191,373            47,549
                                                                        -----------       -----------       -----------
   Total assets                                                         $ 3,136,868       $ 2,398,003       $ 1,465,907
                                                                        -----------       -----------       -----------
Capital expenditures and acquisition of businesses:
  Contract drilling                                                     $   234,368       $   539,994       $   305,620
  Manufacturing and logistics                                                70,348           125,036             8,530
  Other(5)                                                                   (4,079)            2,487              (686)
                                                                        -----------       -----------       -----------
   Total capital expenditures                                           $   300,367       $   667,517       $   313,464
                                                                        -----------       -----------       -----------
</TABLE>

(1)  One customer represented approximately 11% of consolidated revenues during
     1998. Both of our reportable segments recorded sales to this customer.

(2)  Includes Earnings from unconsolidated affiliates, accounted for by the
     equity method, of $18.0 million and $.8 million for 2000 and 1999,
     respectively.

(3)  Includes Earnings (losses) from unconsolidated affiliates, accounted for by
     the equity method, of $ 19.5 million, $3.0 million and $(.3) million for
     2000, 1999 and 1998, respectively.

(4)  Elimination of inter-segment manufacturing and logistics sales.

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

(6)  Includes $22.8 million and $28.2 million of investments in unconsolidated
     affiliates accounted for by the equity method for 2000 and 1999,
     respectively.

(7)  Includes $24.5 million and $25.9 million of investments in unconsolidated
     affiliates accounted for by the equity method for 2000 and 1999,
     respectively.


                                       88

<PAGE>   89


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

<TABLE>
<CAPTION>
(In thousands)                                                               Year Ended December 31,
---------------------------------------------------------------------------------------------------------------
                                                                           2000            1999            1998
<S>                                                                  <C>             <C>             <C>
Operating revenues and Earnings from unconsolidated affiliates:
  United States                                                      $1,085,232      $  439,131      $  692,636
  Foreign                                                               279,382         203,133         275,521
                                                                     ----------      ----------      ----------
                                                                     $1,364,614      $  642,264      $  968,157
                                                                     ----------      ----------      ----------
Property, plant and equipment, net:
  United States                                                      $1,469,632      $1,326,929      $  823,561
  Foreign                                                               351,760         342,537         303,593
                                                                     ----------      ----------      ----------
                                                                     $1,821,392      $1,669,466      $1,127,154
                                                                     ----------      ----------      ----------
</TABLE>

Subsequent events
--------------------------------------------------------------------------------

                                                                           15

     During February and March 2001, we completed a private placement of zero
coupon convertible senior debentures due 2021. The aggregate principal amount of
the debentures at maturity will be $1.381 billion. The debentures were issued at
a discount with net proceeds to Nabors, after expenses, totaling approximately
$828.0 million. The yield to maturity of the debentures is 2.5% compounded
semi-annually with no periodic cash payments of interest. At the holder's
option, the debentures can be converted at any time prior to maturity or their
earlier redemption, into Nabors common stock at a conversion rate of 7.0745
shares per $1,000 principal amount at maturity. The conversion rate may be
adjusted from time to time, upon the occurrence of specified events. Instead of
delivering shares of common stock upon conversion of any debentures, we may
elect to pay the holder cash for all or a portion of the debentures. The
debentures can be put to us on February 5, 2006, February 5, 2011 and February
5, 2016 for a purchase price equal to the issue price plus accrued original
issue discount to the date of repurchase. We may elect to pay all or a portion
of the purchase price in common stock instead of cash. We cannot redeem the
debentures before February 5, 2006. On and after February 5, 2006, we may redeem
all or a portion of the debentures for cash at any time at their accreted value.
The proceeds from the issuance of the debentures will be used for general
corporate purposes, including but not limited to, working capital, investment in
subsidiaries and possible future business acquisitions. The proceeds have been
invested in cash and marketable securities.



                                       89

<PAGE>   90

                             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 our Corporate Secretary at
Nabors' corporate office.

                                 Transfer Agent

EquiServe
Mail Suite 4694
525 Washington Boulevard
Jersey City, New Jersey 07310

                                Investor Contact

Dennis A. Smith
Director of Corporate Development

                             Independent Accountants

PricewaterhouseCoopers LLP
Houston, Texas

                              Price of Common Stock

     As of December 31, 2000, there were 146,565,404 shares of common stock
outstanding held by 2,629 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 calendar quarters indicated.

<TABLE>
<CAPTION>
                                                Stock Price
---------------------------------------------------------------
Calendar Year                                 High          Low
<S>                                          <C>          <C>
1998 First quarter                           31.56        19.94
     Second quarter                          27.38        19.75
     Third quarter                           21.44        11.75
     Fourth quarter                          20.69        12.06
                                             -----        -----
1999 First quarter                           19.00        10.75
     Second quarter                          25.31        15.50
     Third quarter                           29.50        21.56
     Fourth quarter                          31.25        19.75
                                             -----        -----
2000 First quarter                           40.56        28.13
     Second quarter                          44.25        34.00
     Third quarter                           53.81        38.56
     Fourth quarter                          60.47        40.50
                                             -----        -----
</TABLE>


                                       90



<PAGE>   91


                             Officers and Directors

                                    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 - Administration and Corporate Secretary

BRUCE P. KOCH
Vice President - Finance

                                    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.

JAMES L. PAYNE
Chief Executive Officer,
Payne Enterprises
Retired Chief Executive Officer,
Santa Fe Snyder Corporation

HANS W. SCHMIDT
Former Director,
Deutag Drilling

MYRON M. SHEINFELD
Counsel,
Sheinfeld, Maley & Kay PC

JACK WEXLER
International Business Consultant

MARTIN J. WHITMAN
Chief Executive Officer,
M.J. Whitman, Inc.
Chairman,
Danielson Holding Corporation

Chairman,
Third Avenue Trust


                                       91

<PAGE>   92

                        Principal Operating Subsidiaries

NABORS ALASKA DRILLING, INC.
Anchorage, Alaska
James Denney, President

NABORS DRILLING LIMITED
Nisku, Alberta
Duane A. Mather, President

NABORS DRILLING USA, INC.
Houston, Texas
Larry P. Heidt, President

POOL WELL SERVICES CO.
    AND POOL COMPANY TEXAS, LTD.
Houston, Texas
Nicholas Petronio, President

NABORS DRILLING INTERNATIONAL LIMITED
Hamilton, Bermuda
Siegfried Meissner, President

NABORS OFFSHORE CORPORATION
Houston, Texas
Jerry C. Shanklin, President

CANRIG DRILLING TECHNOLOGY, LTD.
Magnolia, Texas
Christopher P. Papouras, President

EPOCH WELL SERVICES, INC.
Houston, Texas
Christopher P. Papouras, President

PEAK USA ENERGY SERVICES LTD.
Houston, Texas
Steve Adam, President

PEAK OILFIELD SERVICE COMPANY
Anchorage, Alaska
Michael R. O'Connor, President

SEA MAR INC.
Houston, Texas
Al Gonsoulin, President


                                       92


<PAGE>   93



                                   [GRAPHIC]

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




                                       93