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

• fluctuations in the demand for our services;

• the existence of competitors, technological changes and developments in the oilfield services industry;

• the existence of operating risks inherent in the oilfield services industry;

• the existence of regulatory and legislative uncertainties;

• the possibility of changes in tax laws;

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

• general economic conditions including the capital and credit markets.

The above description of risks and uncertainties is by no means all-inclusive, but is designed to highlight what we believe are important factors to consider. For a more detailed description of risk factors, please refer to our Annual Report on Form 10-K for the year ended December 31, 2007 filed with the SEC on February 28, 2008, under Part 1, Item 1A, "Risk Factors." Unless the context requires otherwise, references in this Quarterly Report on Form 10-Q to "we," "us," "our," "the Company," or "Nabors" means Nabors Industries Ltd. and, where the context requires, includes our subsidiaries. Management Overview
The following Management's Discussion and Analysis of Financial Condition and Results of Operations is intended to help the reader understand the results of our operations and our financial condition. This information is provided as a supplement to, and should be read in conjunction with our consolidated financial statements and the accompanying notes to our consolidated financial statements.
Nabors is the largest land drilling contractor in the world, with approximately 525 actively marketed land drilling rigs. We conduct oil, gas and geothermal land drilling operations in the U.S. Lower 48 states, Alaska, Canada, South America, Mexico, the Caribbean, the Middle East, the Far East, Russia and Africa. We are also one of the largest land well-servicing and workover contractors in the United States and Canada. We actively market approximately 589 land workover and well-servicing rigs in the United States,

primarily in the southwestern and western United States, and actively market approximately 172 land workover and well-servicing rigs in Canada. Nabors is a leading provider of offshore platform workover and drilling rigs, and actively markets 37 platform rigs, 13 jack-up units and 3 barge rigs in the United States and multiple international markets. These rigs provide well-servicing, workover and drilling services. We have a 51% ownership interest in a joint venture in Saudi Arabia, which owns and actively markets 9 rigs in addition to the rigs we lease to the joint venture. We also offer a wide range of ancillary well-site services, including engineering, transportation, construction, maintenance, well logging, directional drilling, rig instrumentation, data collection and other support services in selected domestic and international markets. We provide logistics services for onshore drilling in Canada using helicopters and fixed-winged aircraft. We manufacture and lease or sell top drives for a broad range of drilling applications, directional drilling systems, rig instrumentation and data collection equipment, pipeline handling equipment and rig reporting software. We also invest in oil and gas exploration, development and production activities and have 49% ownership interests in joint ventures in the U.S., Canada and International areas.
The majority of our business is conducted through our various Contract Drilling operating segments, which include our drilling, workover and well-servicing operations, on land and offshore. Our oil and gas exploration, development and production operations are included in a category labeled Oil and Gas for segment reporting purposes. Our operating segments engaged in drilling technology and top drive manufacturing, directional drilling, rig instrumentation and software, and construction and logistics operations are aggregated in a category labeled Other Operating Segments for segment reporting purposes.
Our businesses depend, to a large degree, on the level of spending by oil and gas companies for exploration, development and production activities. Therefore, a sustained increase or decrease in the price of natural gas or oil, which could have a material impact on exploration, development and production activities, could also materially affect our financial position, results of operations and cash flows.
Natural gas prices are the primary drivers of our U.S. Lower 48 Land Drilling and Canadian drilling operations, while oil prices are the primary driver of our Alaskan, International, U.S. Offshore (Gulf of Mexico), Canadian Well-servicing and U.S. Land Well-servicing operations. The Henry Hub natural gas spot price (per Bloomberg) averaged $9.03 per million cubic feet (mcf) during the period from October 1, 2007 through September 30, 2008, up from a $6.88 per mcf average during the period from October 1, 2006 through September 30, 2007. West Texas intermediate spot oil prices (per Bloomberg) averaged $107.84 per barrel during the period from October 1, 2007 through September 30, 2008, up from a $64.63 per barrel average during the period from October 1, 2006 through September 30, 2007.
However, recently there has been a significant retraction in natural gas and oil prices. Natural gas prices (per Bloomberg) have declined significantly compared to the full year average at September 30, 2008 to an average of $6.76 per mcf during the period October 1, 2008 through October 30, 2008 and had an October 30, 2008 closing price of $6.75. Oil prices (per Bloomberg) have declined to an average price of $77.01 per barrel during the period October 1, 2008 through October 30, 2008 and had an October 30, 2008 closing price of $65.96. This recent decline in commodity prices has primarily been driven by the significant deterioration of the global economic environment including the extreme volatility in the capital and credit markets. All of these factors could have an adverse effect on our customers' spending plans for exploration, production and development activities which, as discussed above, could materially affect our future financial results.
Operating revenues and Earnings from unconsolidated affiliates for the three months ended September 30, 2008 totaled $1.5 billion, representing an increase of $209.5 million, or 17% as compared to the three months ended September 30, 2007 and $4.0 billion for the nine months ended September 30, 2008, representing an increase of $396.7 million, or 11% as compared to the nine months ended September 30, 2007. Adjusted income derived from operating activities for the three and nine months ended September 30, 2008 totaled $365.3 million and $918.4 million, respectively, representing increases of 27% and 1%, respectively, compared to the three and nine months ended September 30, 2007. Net income for the three and nine months ended September 30, 2008 totaled $210.3 million ($.73 per diluted share) and $635.2 million ($2.21 per diluted share), respectively, representing decreases of 4% and 10%, respectively, compared to the three and nine months ended September 30, 2007.
The increase in our operating results during the three and nine months ended September 30, 2008 as compared to the prior year periods primarily resulted from higher revenues realized by essentially all of our operating segments. Revenues increased as a result of higher average dayrates and activity levels resulting from sustained higher natural gas and oil prices partially offset by increased operating costs and increased depreciation expense.
Our operating results for 2008 are expected to slightly exceed the levels realized during 2007. We expect our International operations to show substantial increases resulting from the deployment of additional rigs under long-term contracts and the renewal of

existing contracts at higher current market rates. However, our North American natural gas driven operations are expected to remain relatively flat. In our U.S. Lower 48 Land Drilling operations, we expect a certain number of expiring term contracts for older rigs to rollover in 2008 at lower margins and to stack other legacy rigs. Any decreases should be offset by the remaining new rig deployments at higher margins and improved margins of the previously deployed new rigs. We expect our Canadian operations to decrease as a result of the depressed market conditions there.
The following tables set forth certain information with respect to our reportable segments and rig activity:

                                                               Three Months Ended                                                      Nine Months Ended
                                                                 September 30,                         Increase                          September 30,                         Increase
(In thousands, except percentages and rig activity)         2008               2007                   (Decrease)                    2008               2007                   (Decrease)
Reportable segments:
Operating revenues and Earnings from unconsolidated
affiliates from continuing operations: (1)
Contract Drilling: (2)
U.S. Lower 48 Land Drilling                              $   505,197        $   416,525        $  88,672              21 %       $ 1,351,106        $ 1,295,908        $  55,198               4 %
U.S. Land Well-servicing                                     204,029            180,370           23,659              13 %           557,392            544,998           12,394               2 %
U.S. Offshore                                                 68,581             48,895           19,686              40 %           185,759            164,986           20,773              13 %
Alaska                                                        38,496             30,854            7,642              25 %           137,979            115,467           22,512              19 %
Canada                                                       125,335            132,434           (7,099 )            (5 %)          371,969            400,802          (28,833 )            (7 %)
International                                                368,418            296,219           72,199              24 %         1,014,882            781,963          232,919              30 %

Subtotal Contract Drilling (3)                             1,310,056          1,105,297          204,759              19 %         3,619,087          3,304,124          314,963              10 %
Oil and Gas (4) (5)                                           29,532             35,770           (6,238 )           (17 %)           54,924             67,009          (12,085 )           (18 %)
Other Operating Segments (6) (7)                             171,208            163,397            7,811               5 %           509,855            433,771           76,084              18 %
Other reconciling items (8)                                  (48,301 )          (51,476 )          3,175               6 %          (147,597 )         (165,342 )         17,745              11 %

Total                                                    $ 1,462,495        $ 1,252,988        $ 209,507              17 %       $ 4,036,269        $ 3,639,562        $ 396,707              11 %


Adjusted income (loss) derived from operating
activities from continuing operations: (1)(9)
Contract Drilling:
U.S. Lower 48 Land Drilling                              $   176,819        $   130,761        $  46,058              35 %       $   438,012        $   458,354        $ (20,342 )            (4 %)
U.S. Land Well-servicing                                      42,433             42,291              142               0 %           104,287            125,752          (21,465 )           (17 %)
U.S. Offshore                                                 18,456              9,245            9,211             100 %            42,897             43,500             (603 )            (1 %)
Alaska                                                        10,159              4,214            5,945             141 %            41,408             29,006           12,402              43 %
Canada                                                        13,396             16,920           (3,524 )           (21 %)           41,043             62,056          (21,013 )           (34 %)
International                                                111,048             88,574           22,474              25 %           303,450            240,001           63,449              26 %

Subtotal Contract Drilling (3)                               372,311            292,005           80,306              28 %           971,097            958,669           12,428               1 %
Oil and Gas (4)(5)                                            17,577             17,868             (291 )            (2 %)           11,080             22,370          (11,290 )           (50 %)
Other Operating Segments (6)(7)                               18,375             10,297            8,078              78 %            49,815             28,630           21,185              74 %
Other reconciling items (10)                                 (42,945 )          (32,837 )        (10,108 )           (31 %)         (113,612 )         (101,777 )        (11,835 )           (12 %)

Total                                                        365,318            287,333           77,985              27 %           918,380            907,892           10,488               1 %
Interest expense                                             (25,506 )          (13,450 )        (12,056 )           (90 %)          (65,291 )          (40,235 )        (25,056 )           (62 %)
Investment income (loss)                                     (22,235 )          (27,466 )          5,231              19 %            29,004             (8,029 )         37,033             461 %
(Losses) gains on sales of long-lived assets,
impairment charges and other income (expense), net           (10,875 )          (30,524 )         19,649              64 %           (22,130 )           (4,775 )        (17,355 )          (363 %)

Income from continuing operations before income
taxes                                                    $   306,702        $   215,893        $  90,809              42 %       $   859,963        $   854,853        $   5,110               1 %


Rig activity:
Rig years: (11)
U.S. Lower 48 Land Drilling                                    263.3              221.6             41.7              19 %             243.8              231.0             12.8               6 %
U.S. Offshore                                                   19.2               14.4              4.8              33 %              17.5               16.4              1.1               7 %
Alaska                                                          11.0                8.4              2.6              31 %              10.6                8.9              1.7              19 %
Canada                                                          35.8               37.0             (1.2 )            (3 %)             34.0               37.8             (3.8 )           (10 %)
International (12)                                             121.3              117.9              3.4               3 %             120.2              115.6              4.6               4 %

Total rig years                                                450.6              399.3             51.3              13 %             426.1              409.7             16.4               4 %

Rig hours: (13)
U.S. Land Well-servicing                                     290,680            274,084           16,596               6 %           822,258            864,602          (42,344 )            (5 %)
Canada Well-servicing                                         67,141             72,593           (5,452 )            (8 %)          186,535            211,794          (25,259 )           (12 %)

Total rig hours                                              357,821            346,677           11,144               3 %         1,008,793          1,076,396          (67,603 )            (6 %)

(1) All segment information excludes the Sea Mar business, which has been classified as a discontinued operation.

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

(3) Includes earnings (losses), net from unconsolidated affiliates, accounted for by the equity method, of $.1 million and $3.4 million for the three months ended September 30, 2008 and 2007, respectively, and $9.7 million and $5.9 million for the nine months ended September 30, 2008 and 2007, respectively.

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

(5) Includes earnings (losses), net from unconsolidated affiliates, accounted for by the equity method, of $7.1 million and ($2.0) million for the three months ended September 30, 2008 and 2007, respectively, and ($17.6) million and ($2.8) million for the nine months ended September 30, 2008 and 2007, respectively.

(6) Includes our drilling technology and top drive manufacturing, directional drilling, rig instrumentation and software, and construction and logistics operations.

(7) Includes earnings (losses), net from unconsolidated affiliates, accounted for by the equity method, of $.7 million and $1.3 million for the three months ended September 30, 2008 and 2007, respectively, and $7.4 million and $15.5 million for the nine months ended September 30, 2008 and 2007, respectively.

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

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

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

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

(12) International rig years include our equivalent percentage ownership of rigs owned by unconsolidated affiliates which totaled 3.3 years and 4.0 years during the three months ended September 30, 2008 and 2007, respectively, and 3.6 years and 4.0 years during the nine months ended September 30, 2008 and 2007, respectively.

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

Segment Results of Operations
Contract Drilling
   Our Contract Drilling operating segments contain one or more of the following
operations: drilling, workover and well-servicing, on land and offshore.
   U.S. Lower 48 Land Drilling. The results of operations for this reportable
segment are as follows:

                                                                Three Months Ended                                                           Nine Months Ended
                                                                   September 30,                          Increase                             September 30,                             Increase
(In thousands, except percentages and rig activity)          2008                2007                    (Decrease)                     2008                  2007                      (Decrease)
Operating revenues and Earnings from unconsolidated
affiliates                                                $ 505,197           $ 416,525           $ 88,672             21 %         $ 1,351,106           $ 1,295,908           $  55,198              4 %
Adjusted income derived from operating activities         $ 176,819           $ 130,761           $ 46,058             35 %         $   438,012           $   458,354           $ (20,342 )           (4 %)
Rig years                                                     263.3               221.6               41.7             19 %               243.8                 231.0                12.8              6 %

The increase in operating results during the three months ended September 30, 2008 compared to the prior year period is due to overall increases in rig activity and increases in average dayrates, driven by higher natural gas prices. This increase is only partially offset by higher operating costs and an increase in depreciation expense related to capital expansion projects.
Operating revenues and Earnings from unconsolidated affiliates increased during the nine months ended September 30, 2008 compared to the prior year period due to increased rig activity partially offset by a marginal decline in average dayrates. Adjusted income derived from operating activities decreased during the nine months ended September 30, 2008 compared to the prior year period due to overall higher operating costs and an increase in depreciation expense related to capital expansion projects.

U.S. Land Well-servicing. The results of operations for this reportable segment are as follows:

                                                                Three Months Ended                                                         Nine Months Ended
                                                                   September 30,                          Increase                           September 30,                           Increase
(In thousands, except percentages and rig activity)          2008                2007                    (Decrease)                    2008                2007                     (Decrease)
Operating revenues and Earnings from unconsolidated
affiliates                                                $ 204,029           $ 180,370           $ 23,659             13 %         $ 557,392           $ 544,998           $  12,394               2 %
Adjusted income derived from operating activities         $  42,433           $  42,291           $    142              0 %         $ 104,287           $ 125,752           $ (21,465 )           (17 %)
Rig hours                                                   290,680             274,084             16,596              6 %           822,258             864,602             (42,344 )            (5 %)

Operating revenues and Earnings from unconsolidated affiliates increased during the three months ended September 30, 2008 over the prior year period as a result of higher average dayrates and increased drilling activity, driven by the sustained level of high oil prices. These increases were offset by higher operating costs and higher depreciation expense related to capital expansion projects completed during 2007.
Operating revenues and Earnings from unconsolidated affiliates increased during the nine months ended September 30, 2008 over the prior year period as a result of higher average dayrates, driven by the sustained level of high oil prices. Adjusted income derived from operating activities decreased during the nine months ended September 30, 2008 over the prior year period due to higher operating costs and higher depreciation expense, as discussed above.
U.S. Offshore. The results of operations for this reportable segment are as follows:

                                                               Three Months Ended                                                         Nine Months Ended
                                                                  September 30,                          Increase                           September 30,                          Increase
(In thousands, except percentages and rig activity)          2008               2007                    (Decrease)                    2008                2007                    (Decrease)
Operating revenues and Earnings from unconsolidated
affiliates                                                $ 68,581           $ 48,895           $ 19,686              40 %         $ 185,759           $ 164,986           $ 20,773             13 %
Adjusted income derived from operating activities         $ 18,456           $  9,245           $  9,211             100 %         $  42,897           $  43,500           $   (603 )           (1 %)
Rig years                                                     19.2               14.4                4.8              33 %              17.5                16.4                1.1              7 %

Operating results increased during the three months ended September 30, 2008 as compared to the prior year period primarily resulting from higher average dayrates and increased drilling activity, driven by sustained higher oil prices. . . .