ISRAMCO INC
GENERAL  Isramco, Inc. ("Isramco" or the "Company") is engaged in the exploration for and production of oil and gas in Israel and in the United States. In Israel, the Company holds a participation interest in two long- term off-shore leases and serves as the operator of one of those leases. See "Summary of exploration efforts in Israel".  In the United States, the Company, through its wholly-owned subsidiaries, Jay Petroleum LLC ("Jay Petroleum") and Jay Management LLC ("Jay Management"), is involved in oil and gas exploration and production in the United States. Jay Petroleum owns varying working interests in oil and gas wells in Louisiana, Texas, Oklahoma and Wyoming. Independent estimates of the reserves held by Jay Petroleum as of December 31, 2005 are approximately 106,638 net barrels of proved developed producing oil and 1,645 MMCFs of proved developed producing natural gas. See "Summary of Exploration Efforts in United States".  Isramco was incorporated in Delaware in 1982.  THE OPERATOR OF THE MED ASHDOD LEASE  The Company is currently the operator of the Med Ashdod Lease under a joint operating agreement (the "JOA") entered into among the participants in the lease, As operator, the Company carries out all the operations contemplated in the JOA, including directing the oil exploration and drilling activities of the venture, within the framework of work programs and budgets approved by the participants in the venture. The Company may be removed as operator for cause by notice in writing given by two or more of the other parties representing at least 65% of the total interests in the lease.  Under the JOA, each participant is responsible for the costs, expenses and obligations incurred in relation to the lease area in proportion to its rights and interests in the lease.  As operator, the Company charges the venture participant for all costs incurred in connection with the exploration and drilling activities conducted by the Med Ashdod venture and is entitled to receive a fee for its administrative overhead equal to 6% of all direct charges or minimum monthly compensation of $6,000 per the lease. During the year ended December 31, 2005, the Company was paid a total of $977,000 as operator fees.  With respect to the Med Yavne Lease, the Company furnishes to BG International Limited, a member of the British Gas Group ("BG"), the operator of the lease, consulting services of an administrative and technical nature for which it receives a monthly fee equal to $10,000.  GENERAL PARTNER OF THE ISRAMCO NEGEV 2 LIMITED PARTNERSHIP  In 1989 the Company transferred a substantial portion of its working interest in certain oil and gas assets in Israel to Isramco Negev 2 Limited Partnership, an Israeli limited partnership organized for the purpose of the exploration and the production of oil and gas in Israel (the "Limited Partnership") In exchange for the working interests, the Limited Partnership granted to the Company certain overriding royalties. In 1992, the Company transferred to the Limited Partnership additional rights in exchange for additional overriding royalties and reimbursement of expenses. The Company formed Isramco Oil and Gas Ltd. ("IOG"), an Israeli company and the company's wholly-owned subsidiary to act as the general partner for the Limited Partnership and also formed Isramco Management (1988) Ltd., an Israeli company and the company's wholly-owned subsidiary to act as the limited partner. The limited partner is the nominee of Limited Partnership units held by public investors in Israel.                                          1   Pursuant to the Limited Partnership Agreement and the Trust Agreement, a supervisor was appointed on behalf of the Limited Partnership unit holders, with sole authority to appoint the sole director for Isramco Management (1988) Ltd. and to supervise its activities on behalf of and for the benefit of the Limited Partnership unit holders. Although control and management of the Limited Partnership rests with the general partner matters involving certain rights of the Limited Partnership unit holders are subject to the approval of the supervisor and in certain instances the approval of the Limited Partnership unit holders. The firm of Igal Brightman & Co., Accountants and Mr. David Valiano, Accountant have been appointed as supervisors.  Through IOG the Company currently receives a management fee of $40,000 per month from the Limited Partnership for office space, management and other services.  The Company currently holds 6.65% of the issued Limited Partnership units and IOG holds an additional 0.008% of the Limited Partnership units. On December 31, 2005, the Limited Partnership had cash, cash equivalents, certificates of deposit and marketable securities with a value of approximately $127 million.  Additionally, IOG (as the general partner of the Limited Partnership) is entitled to 5% overriding royalties in certain petroleum assets held by the Limited Partnership.  NON-OIL AND GAS PROPERTIES  In June 2002, the Company purchased non-oil and gas producing real estate located in Israel at an aggregate cost of $1,887,000. In January 2004, the Company entered into an agreement with a related entity pursuant to which the property was leased to such entity for a 24 month period at a monthly rent of $7,000. On January 1, 2006, the Company entered into a new agreement with a related entity pursuant to which a significantly smaller part of the property is leased to such entity for a 24-month period at a monthly rent of $550.  In March 2004, the Company purchased a luxury cruise liner for aggregate consideration of $8,050,000. The vessel, a Bahamas registered ship, contains 270 passenger cabins on nine decks. The Company, through its wholly owned subsidiary, Magic 1 Cruise Line Corp., a British Virgin Island corporation leased the vessel to European based tour operator from April 2005 through October 2005.  In February 2006, the vessel was leased to the same tour operator for three specific periods. The first one is scheduled to commence on April 6, 2006 and terminate on November 5, 2006, the period thereafter to commence on March 29, 2007 and terminate on October 28, 2007 and the third period to commence on April 8, 2008 and terminate on November 7, 2008.                                          2   OIL AND GAS VENTURES AND PETROLEUM ASSETS                        OIL AND GAS LEASES LOCATED IN ISRAEL  The table below sets forth the Working Interests of the Company and all affiliated and non-affiliated participants in the leases in Israel, the total acreage of each lease, and the expiration dates of each of the leases as of December 31, 2005. The Company also holds Overriding Royalties in the leases. See "Table of Overriding Royalties".                               TABLE OF WORKING INTEREST                                 IN THE LEASES(1)                               (% Interest of 100%)   Name of Participant              Med Yavne Lease*      Med Ashdod Lease**(3) The Company                           0.4584                  0.3625  Affiliates  Isramco Negev 2, Limited              32.411                 19.1370 Partnership  I.O.C.                                 7.800                   7.800  I.N.O.C. Dead Sea                         --                  5.0525 Limited Partnership  Naphtha                               1.8033                      --  Naphtha Explorations                  2.2826                  1.8411 Limited Partnership JOEL                                  2.8807                      --  Equital                               2.1639                      --  Non-affiliated entities                 50.2                 65.8069  Total                                100.000                 100.000  Area (acres)                          13,100                  61,800  Expiration Date (2)                6/10/2030               6/15/2030  * The lease was granted in June 2000 and is scheduled to expire in June 2030.  ** The lease was granted in January 2002 and is scheduled to expire in June 2030.  (1) All of the oil and gas assets are subject to a 12.5% Overriding Royalty due to the Government of Israel under the Petroleum Law.  (2) The expiration dates are subject to the fulfillment of applicable provisions of the Israel Petroleum Law and Regulations, and the conditions and work obligations of each of the above leases.  (3) Under the Grant Agreement with the Government of Israel, the government may claim that the Company is contingently obligated to repay to the government the grant monies in the amount of $110,000 and to pay a 6.5 % Overriding Royalty on all production from the area.                                          3                       OVERRIDING ROYALTIES HELD BY THE COMPANY  The Company holds Overriding Royalties in certain oil and gas assets. Additionally, the Company is entitled to receive from certain participant in the Med Yavne and Med Ashdod leases overriding royalties equal to 2% of each such participant's rights to any oil/gas produced within those leases. The Company holds the following Overriding Royalties:                            TABLE OF OVERRIDING ROYALTIES  From the Limited Partnership, on the first 10% of the Limited Partnership's share of the following leases                                                 Before Payout    After Payout                                                -------------    ------------   Med Yavne Lease*                                    1%             13%   Med Ashdod Lease**                                  1%             13%   From JOEL                                        On 8% of JOEL's Interest                                                  Before Payout    After Payout                                                -------------    ------------   Med Ashdod Lease                                  2.5%           12.5%   From Delek Oil Exploration Ltd.     (DOEX) (1)(2)                               On 6% of DOEX's Interest                                                 Before Payout    After Payout                                                -------------    ------------  Med Ashdod Lease                                   2.5%           12.5%  From Naphtha, Naphtha Exploration LP, Joel, Equital, INOC Dead Sea L P on oil and/or gas produced on the Med Leases                                                   2%  To IOC On Certain petroleum rights held by Limited Partnership                                          5%  * A 30 year lease covering an area of approximately 53 square kilometers (including the area of the gas discovery) was granted in June 2000.  ** A 30-year lease covering an area of approximately 250 square kilometers (including the area of the gas discovery) was granted in January 2002.  (1) The Working Interests of Delek and DOEX have been assigned to Delek Drilling Limited Partnership.  (2) The prospectus of the Delek Limited Partnership dated January 26, 1994 states that the interest which Delek L.P, received from Delek and DOEX is free from any encumbrances except that the Company may argue that the interests are subject to an Overriding Royalty. The Company has no information available to it as to why this statement is in the Delek L.P. prospectus.                                          4   The Company has no direct financial obligation with regard to the Overriding Royalties, however, in the event the Limited Partnership, JOEL, DOEX or Delek, fails to fund its obligation with regard to the leases to which an Overriding Royalty exists, the Company could lose its interest in such Overriding Royalty . See also "Table of Working Interests" above.                       SUMMARY OF EXPLORATION EFFORTS IN ISRAEL  MED YAVNE LEASE  Based on the gas finds known as "Or 1" and "Or South" , a 30 years lease was granted in June 2000 (hereinafter: the "Med Yavne Lease"). The Med Yavne Lease covers 53 square kilometers (approximately 13,000 acres) offshore Israel. The operator of the Med Yavne Lease is BG International Limited, a member of the British Gas Group ("BG").  According to the operator's estimates, which are based on the results of the drillings in the "Or 1" and "Or South" wells, and a three-dimensional seismic survey performed in the area of the lease which also covered parts of nearby gas reserves (outside the area of the lease), the recoverable gas reserves in the Med Yanve Lease is estimated at 93 billion cubic feet, out of which it is estimated that approximately 51 billion cubic feet are in Or 1. In November 2002, the Company received an opinion from a consulting firm in the United States that performed a techno-economic examination for the development of the "Or 1" reserve. The opinion indicates that, under certain assumptions, development of the reserve by connection to a nearby platform (at a distance of seven Miles) and from there via an existing transportation pipeline to the coast, may be economically feasible. In respect to the balance of the reserves (42 billions cubic feet) the Company does not currently believe that development is feasible or likely.  The Company's participation interest of the Med Yavne Lease is 0.4585%.  MED ASHDOD LEASE  Following the results of "Nir 1" drilling, a 30 year lease was granted in January 2002. The Med Ashdod Lease covers approximately 250 square kilometers (approximately 62,000 acres) offshore Israel. The Company serves as the operator of the Med Ashdod Lease and holds a 0.3625% participation interest therein.  On February 28, 2005, the Company, on behalf of the Limited Partnership, a lease participant and an affiliate of the Company, issued a sole risk notice to the other participants in the lease to drill a gas well (the "Gad 1" well) to a total depth of 2,600 meter (8,350 feet) at a total budget of $13 million. As a result of the sole risk notice, the rights of lease' participants who did not respond to the notice were transferred to the Limited Partnership as a result of which the Limited Partnership's interests in the Gad 1 well increased to 85.103%.  In August and September 2005, the Limited Partnership transferred a 40% working interests in the Gad 1 well to third parties. On September 25, 2005 the Gad 1 well was spudded. On November 16, 2005, the lease participants decided to plug and abandon the well. The total cost of the well was approximately $16.4 million.                 SUMMARY OF EXPLORATION EFFORTS IN THE UNITED STATES  The Company, through its wholly-owned subsidiaries, Jay Petroleum LLC ("Jay Petroleum") and Jay Management LLC ("Jay Management"), is involved in oil and gas production in the United States. Jay Petroleum owns varying working interests in oil and gas wells in Louisiana, Texas, Oklahoma and Wyoming. Independent estimates of the reserves held by Jay Petroleum as of December 31, 2005 are approximately 106,368 net barrels of proved developed producing oil and 1,645 net MMCFs of proved developed producing natural gas. Jay Management acts as the operator of certain of the producing oil and gas interests owned or acquired by Jay Petroleum.                                          5   On November 1, 2005, Jay Petroleum purchased from Ness Energy International Inc., an oil and gas company based in Texas, a 15% working interests in certain Barnett Shale acreage in north central Texas (Parker County), for a purchase price of $2.1 million. The purchase was financed from cash generated by operations. In addition, under the purchase agreement Jay Petroleum has the right to participate for up to 40% working interest in any well drilled by Ness in shallower formations from the surface to the top of the Barnett Shale. App. 80 locations for new development wells in the Barnet Shale have been so far identified in this acreage based on a 3D seismic survey. To date three gas wells have been drilled and completed to production in this acreage.  NON-OIL AND GAS PROPERTIES                                MIRAGE 1 CRUISE LINER  OVERVIEW  In March 2004, the Company purchased a luxury cruise liner (the "Vessel") for aggregate consideration of $8,050,000. The Vessel, a Bahamas registered ship, contains 270 passenger cabins on nine decks. The Company leased the Vessel to tour operator for the period from April 4, 2005 through October 31, 2005 at a daily rate of $8,000. Under the lease all maintenance and operating costs associated with the vessel were borne by the operator.  Title to the Vessel is in Magic 1 Cruise Line Corp., a British Virgin Islands corporation and a wholly owned subsidiary of the Company ("Magic"). As of December 31, 2005, the Company has expended approximately $1.0 million in each of 2005 and 2004 in respect of the maintenance, repairs renovation, and upkeep of the vessel.  CRUISE LINE BUSINESS  Cruise lines compete for consumers' leisure time spending with other vacation alternatives such as land-based resort hotels and sightseeing destinations. Demand for such activities is influenced by, among other things, geo-political and general economic conditions. The Company believes that cruise passengers currently represent only a small share of the vacation market and that a significant portion of cruise passengers carried are first-time cruisers.  The Company's principal operating strategy is to lease the Vessel through time charter or bareboat charter. Under a bareboat charter the lessee operates the vessel and solely bears all expenses associated with the operation, maintenance and upkeep of the vessel. Under a time charter the owner of the Vessel is responsible for those expenses and provides a crew. Under a time charter, the lessee is responsible for marketing, itinerary and providing all cruise line services to passengers. Generally, revenue from time charter is higher than with respect to bareboat charters.  Cruising season in the Mediterranean is generally from April to October. So long as the Vessel is leased for use in the Mediterranean, the Company anticipates that revenues from the lease of the vessel will remain seasonal. In May 2004, Magic entered into a time charter with an Israeli based tour operator for the period from July 1, 2004 through October, 2004 at a daily rate of $21,500. The tour operator targeted the Israeli consumer market and promoted Vessel cruises to various destinations in the Mediterranean including Cyprus, Greek islands and Turkey.  In March 2005 Magic entered into a bareboat charter with a European based tour operator for the lease of the Vessel for the period from April 14, 2005 through October 31, 2005 at a daily rate of $8,000. Under the bareboat charter the tour operator operated the Vessel in and around the Mediterranean and solely bore all outlays associated with the operation, maintenance and upkeep of the Vessel.  The Vessel was delivered by the Company to the operator on April 21, 2005 (due to necessary repairs which delayed the Vessel's delivery). Accordingly, it was agreed between the Company and the operator that the lease period was to commence on April 21, 2005 and conclude on October 27, 2005.                                          6   Contemporaneous with its entry into the bareboat charter the tour operator entered into an agreement (the "Marketing Agreement") with a subsidiary of one of the leading transportation companies in Israel ("the "Marketing Party") pursuant to which the operator granted to the Marketing Party the exclusive marketing of the tours on the Vessel, and under which the operator is entitled to minimum payments from the Marketing Party.  In connection with the bareboat charter, on March 9, 2005, the Company furnished a limited guarantee (the "Guarantee") to and in favor of the Marketing Party, pursuant to which the Company undertook to indemnify the Marketing Party in an amount not exceeding $1 million in respect of any loss or damage incurred by the Marketing Party arising out of the breach by the Operator of its obligations under the Marketing Agreement. To induce the Company to issue the Guarantee, the operator granted to the Company a security interest on all amounts due to it under the Marketing Agreement and agreed to provide the Company with a bank guarantee in the amount of $600,000 (which will secure its obligations under the bareboat charter as well).  In February 2006, the Company entered into a bareboat charter with the same tour operator, pursuant to which the vessel is to be leased for three specific periods, with the first such period scheduled to commence on April 6, 2006 and terminate on November 5, 2006, the period thereafter to commence on March 29, 2007 and terminate on October 28, 2007 and the third period to commence on April 8, 2008 and terminating on November 7, 2008, at a daily rate of $8,000. The operator may cancel the second charter period and the third charter period, by giving a written notice to the Company no later than November 1, 2006 and it may cancel the third charter period by giving a written notice to the Company no later than November 1, 2007.  REGULATORY  The operation of the Vessel is subject to various international laws and regulations relating to environmental protection. Under such laws and regulations, the Company is prohibited from, among other things, discharging certain materials, such as petrochemicals and plastics, into the waterways. The Company has made, and will continue to make, capital and other expenditures to comply with environmental laws and regulations. From time to time, environmental and other regulators consider more stringent regulations which may affect operations and increase Company's compliance costs. The Company believes that the impact of cruise ships on the global environment will continue to be an area of focus by the relevant authorities throughout the world and, accordingly, this will likely subject to increasing compliance costs in the future.  The Company believes that The Company is in material compliance with all the regulations applicable to the Vessel and that have all licenses necessary to conduct our business. Health, safety, security and financial responsibility issues are, and believe will continue to be, an area of focus by the relevant government authorities. From time to time, various regulatory and legislative changes may be proposed that could impact our operations and would likely subject to increasing compliance costs in the future.  REAL ESTATE IN ISRAEL  In June 2002, the Company purchased non oil and gas producing real estate located in Israel at an aggregate cost of $1,887,000. As of December 1, 2004, the Company entered into an agreement with a related entity pursuant to which the property is leased to such entity for a 24 month period at a monthly rent of $7,000 through December 31, 2005. On January 1, 2006, the Company entered into a new agreement with a related entity pursuant to which a significantly smaller part of the property is leased to such entity for a 24-month period at a monthly rent of $550.  EMPLOYEES  As of December 31, 2005, the Company had ten employees at its branch office in Israel and three employees in its office in Houston, Texas.                                    RISK FACTORS  In addition to the other information contained in this Annual Report on Form 10-K, investors should consider carefully the following risks. If any of these risks occurs, the Company's business, financial condition or operating results could be adversely affected.                                          7                   RISKS RELATED THE COMPANY'S OIL AND GAS BUSINESS              OIL AND GAS DRILLING IS A SPECULATIVE ACTIVITY AND RISKY  The Company is engaged in the business of oil and natural gas exploration and the resulting development of productive oil and gas wells. The Company's growth will be materially dependent upon the success of its future drilling program. Drilling for oil and gas involves numerous risks, including the risk that no commercially productive oil or natural gas reservoirs will be encountered. The cost of drilling, completing and operating wells is substantial and uncertain, and drilling operations may be curtailed, delayed or cancelled as a result of a variety of factors beyond the Company's control, including unexpected drilling conditions, pressure or irregularities in formations, equipment failures or accidents, adverse weather conditions, compliance with governmental requirements and shortages or delays in the availability of drilling rigs or crews and the delivery of equipment. Although the Company believes that its use of 3-D seismic data and other advanced technology should increase the probability of success of its wells and should reduce average finding costs through elimination of prospects that might otherwise be drilled solely on the basis of 2-D seismic data and other traditional methods, drilling remains an inexact and speculative activity. In addition, the use of 3-D seismic data and such technologies requires greater pre-drilling expenditures than traditional drilling strategies and the Company could incur losses as a result of such expenditures. The Company's future drilling activities may not be successful and, if unsuccessful, such failure could have an adverse effect on the Company's future results of operations and financial condition. Although the Company may discuss drilling prospects that have been identified or budgeted for, the Company may ultimately not lease or drill these prospects within the expected time frame, or at all. The Company may identify prospects through a number of methods, some of which do not include interpretation of 3-D or other seismic data. The drilling and results for these prospects may be particularly uncertain. The final determination with respect to the drilling of any scheduled or budgeted wells will be dependent on a number of factors, including (i) the results of exploration efforts and the acquisition, review and analysis of the seismic data, (ii) the availability of sufficient capital resources to the Company and the other participants for the drilling of the prospects, (iii) the approval of the prospects by other participants after additional data has been compiled, (iv) economic and industry conditions at the time of drilling, including prevailing and anticipated prices for oil and natural gas and the availability of drilling rigs and crews, (v) the Company's financial resources and results (vi) the availability of leases and permits on reasonable terms for the prospects and (vii) the payment of royalties to lessors. There can be no assurance that these projects can be successfully developed or that the wells discussed will, if drilled, encounter reservoirs of commercially productive oil or natural gas. There are numerous uncertainties in estimating quantities of proved reserves, including many factors beyond the Company's control.          THE OIL AND NATURAL GAS RESERVE DATA INCLUDED IN THIS REPORT ARE ONLY ESTIMATES AND MAY PROVE TO BE INACCURATE.  There are numerous uncertainties inherent in estimating oil and natural gas reserves and their estimated values. The reserve data in this report represent only estimates that may prove to be inaccurate because of these uncertainties. Estimates of economically recoverable oil and natural gas reserves depend upon a number of variable factors, such as historical production from the area compared with production from other producing areas and assumptions concerning effects of regulations by governmental agencies, future oil and natural gas prices, future operating costs, severance and excise taxes, development costs and workover and remedial costs, some or all of these assumptions may in fact vary considerably from actual results. For these reasons, estimates of the economically recoverable quantities of oil and natural gas attributable to any particular group of properties, classifications of such reserves based on risk of recovery, and estimates of the future net cash flows expected therefrom prepared by different engineers or by the same engineers but at different times may vary substantially. Accordingly, reserve estimates may be subject to downward or upward adjustment. Actual production, revenue and expenditures with respect to the Company's reserves will likely vary from estimates, and such variances may be material.                                          8           THERE IS A POSSIBILITY THAT THE COMPANY WILL LOSE THE LEASES TO ITS OIL AND GAS PROPERTIES.  The Company's oil and gas revenues are generated through leases to the oil and gas properties or, in the case of Israeli based properties, licenses that, subject to certain conditions, may result in leases being granted. The leases are subject to certain obligations and are renewable at the discretion of various governmental authorities, as such, the Company may not be able to fulfill its obligations under the leases which may result in the modification or cancellation of such leases, or such leases may not be renewed or may be renewed on terms different from the current leases. The modification or cancellation of the Company's leases may have a material impact on the Company's revenues.          COMPETITION IN THE INDUSTRY MAY IMPAIR THE COMPANY'S ABILITY TO EXPLORE, DEVELOP AND COMMERCIALIZE ITS OIL AND GAS PROPERTIES.  The oil and natural gas industry is very competitive. Competition is particularly intense in the acquisition of prospective oil and natural gas properties and oil and gas reserves. The Company competes with a substantial number of other companies having larger technical staffs and greater financial and operational resources. Many such companies not only engage in the acquisition, exploration, development and production of oil and natural gas reserves, but also carry on refining operations, electricity generation and the marketing of refined products. The Company also competes with major and independent oil and gas companies in the marketing and sale of oil and natural gas, and the oil and natural gas industry in general competes with other industries supplying energy and fuel to industrial, commercial and individual consumers. The Company competes with other oil and natural gas companies in attempting to secure drilling rigs and other equipment necessary for drilling and completion of wells. Such equipment may be in short supply from time to time.          THE COMPANY'S BUSINESS MAY BE AFFECTED BY OIL AND GAS PRICE VOLATILITY.  Historically, natural gas and oil prices have been volatile. These prices rise and fall based on changes in market demand and changes in the political, regulatory and economic climate and other factors that affect commodities markets that are generally outside of the Company's control. Some of the Company's projections and estimates are based on assumptions as to the future prices of natural gas and crude oil. These price assumptions are used for planning purposes. The Company expects that its assumptions will change over time and that actual prices in the future may differ from its estimates. Any substantial or extended decline in the actual prices of natural gas and/or crude oil may have a material adverse effect on the Company's financial position and results of operations (including reduced cash flow and borrowing capacity), the quantities of natural gas and crude oil reserves that it can economically produce and the quantity of estimated proved reserves that may be attributed to its properties          THE COMPANY HAS NO MEANS TO MARKET ITS OIL AND GAS PRODUCTION WITHOUT THE ASSISTANCE OF THIRD PARTIES.  The marketability of the Company's production depends upon the proximity of its reserves to, and the capacity of, facilities and third party services, including oil and natural gas gathering systems, pipelines, trucking or terminal facilities, and processing facilities. The unavailability or lack of capacity of such services and facilities could impair or delay the production of new wells or the delay or discontinuance of development plans for properties. A shut-in or delay or discontinuance could adversely affect the Company's financial condition. In addition, regulation of oil and natural gas production transportation in the United States or in other countries may affect its ability to produce and market its oil and natural gas on a profitable basis.          THE COMPANY IS SUBJECT TO RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS.  The Company conducts business from its facilities in Israel and the United States. Its international operations and activities subject the Company to a number of risks, including the risk of political and economic instability, difficulty in managing foreign operations, potentially adverse taxes, higher expenses and difficulty in collection of accounts receivable. Although the Company Israeli subsidiary receives most of its operating funds in U.S. dollars, a portion of its payroll and other expenses and certain of its investments are fixed in the currency of Israel. Because the Company's financial results are reported in U.S. dollars, they are affected by changes in the value of the various foreign currencies that the Company uses to make payments in relation to the U.S. dollar.                                          9           THE COMPANY'S OPERATIONS MAY BE IMPACTED BY CERTAIN RISKS COMMON IN THE INDUSTRY.  The Company's exploration and drilling operations are subject to various risks common in the industry, including cratering, explosions, fires and uncontrollable flows of oil, gas or well fluids. The drilling operations are also subject to the risk that no commercially productive natural gas or oil reserves will be encountered. The cost of drilling, completing and operating wells is often uncertain, and drilling operations may be curtailed, delayed or canceled as a result of a variety of factors, including drilling conditions, pressure or irregularities in formations, equipment failures or accidents and adverse weather conditions.  In accordance with industry practice, the Company maintains insurance against some, but not all, of the risks described above. The Company cannot provide assurance that its insurance will be adequate to cover losses or liabilities. Also, it cannot predict the continued availability of insurance at premium levels that justify its purchase.          GOVERNMENT REGULATION AND LIABILITY FOR ENVIRONMENTAL MATTERS MAY ADVERSELY AFFECT THE COMPANY'S BUSINESS AND RESULTS OF OPERATIONS.  Oil and natural gas operations are subject to various federal, state and local government regulations, which may be changed from time to time. Matters subject to regulation include discharge permits for drilling operations, drilling bonds, reports concerning operations, the spacing of wells, unitization and pooling of properties and taxation. From time to time, regulatory agencies have imposed price controls and limitations on production by restricting the rate of flow of oil and natural gas wells below actual production capacity in order to conserve supplies of oil and natural gas. There are federal, state and local laws and regulations primarily relating to protection of human health and the environment applicable to the development, production, handling, storage, transportation and disposal of oil and natural gas, by-products thereof and other substances and materials produced or used in connection with oil and natural gas operations. In addition, the Company may be liable for environmental damages caused by previous owners of property it purchases or leases. As a result, the Company may incur substantial liabilities to third parties or governmental entities. The Company is also subject to changing and extensive tax laws, the effects of which cannot be predicted. The implementation of new, or the modification of existing, laws or regulations could have a material adverse effect on the Company's business.                             RISKS RELATED TO THE VESSEL  THE DESIGNATION OF THE VESSEL AS AN `ISRAELI VESSEL' COULD INCREASE THE COST OF OPERATING THE VESSEL AND MAY POTENTIALLY REDUCE THE INCOME FROM LEASING THE VESSEL.  In January 2005, Israeli authorities advised Naphtha Israel Petroleum Corp. that in their view the Vessel qualified as an Israeli vessel (notwithstanding its foreign registration and ownership) as Naphtha holds 49.8% of the issued and outstanding shares of the Company. Consequently, the authorities contend that certain Israeli maritime rules and regulations govern the Vessel and its operations. These rules impose certain requirements as to operation of the vessel and require among other things that the vessel be staffed by Israeli crew, satisfy certain security requirements and allow for the mobilization of the Vessel by the Israeli authorities during periods of war or hostilities.  In February 2005 Naphtha applied to the Israeli high court for a declaratory order that the Vessel is not an Israeli vessel. In the event that the Israeli court declines to grant Naphtha's application, the operating costs of the Vessel will increase and result in a reduction of potential charter (lease) opportunities for exploitation of the Vessel. In March 2005, Naphtha was advised that under a 'bareboat charter' the authorities will not deem the vessel to be an Israeli vessel.                                          10   As of the filing of the annual report on Form 10-K, the Company cannot determine the outcome of the matter.          A POTENTIAL LOSS OF BUSINESS DUE TO COMPETITORS THROUGHOUT THE VACATION MARKET.  The Company faces significant competition from other cruise lines, in terms of the types of ships and services. Additionally, oceanline cruises are only one of many alternatives for people choosing a vacation. Therefore risk losing potential lessors of the Vessel due to competition form other cruise lines and also due to other vacation operators that provide other travel and leisure options, including hotels, resorts and package holidays and tours. Any failure to lease the Vessel for a significant period of time may adversely affect Company's results of operations and financial condition.          THE POLITICAL AND ECONOMIC CLIMATE AND OTHER WORLD EVENTS AFFECTING SAFETY AND SECURITY COULD ADVERSELY AFFECT THE DEMAND FOR CRUISES AND COULD HARM THE FUTURE LEASING AND PROFITABILITY.  Demand for cruises and other vacation options has been, and is expected to continue to be, affected by the public's attitude towards the safety of travel, the international political climate and the political climate of destination countries. Events such as the terrorist attacks in the U.S. on September 11, 2001 and the instability in much of the Mediterranean region (the region in which our Vessel operates) and the threats of attacks in the Mediterranean and elsewhere, concerns of an outbreak of additional hostilities, national government travel advisories, the resulting political instability and concerns over safety and security aspects of traveling, have had a significant adverse impact on demand and pricing in the travel and vacation industry and may continue to do so in the future. Demand for cruises is also likely to be increasingly dependent on the underlying economic strength of the countries from which cruise companies source their passengers. Economic or political changes that reduce disposable income or consumer confidence in the countries may affect demand for vacations, including cruise vacations, which are a discretionary purchase. Decreases in demand could adversely affect our ability to lease the Vessel and negatively affect profitability.          ACCIDENTS AND OTHER INCIDENTS OR ADVERSE PUBLICITY CONCERNING THE CRUISE INDUSTRY AND COULD AFFECT COMPANY'S REPUTATION AND HARM FUTURE LEASING AND PROFITABILITY.  The operation of cruise ships involves the risk of accidents, passenger and crew illnesses, mechanical failures and other incidents at sea or while in port, which may bring into question passenger safety, health, security and vacation satisfaction and thereby adversely effect future industry performance, sales and profitability. It is possible that these factors could adversely affect our leasing ability or existing charter, which would have an adverse affect on profitability. In addition, adverse publicity concerning the vacation industry in general or the cruise industry or us in particular could affect our reputation and impact demand and, consequently, have an adverse affect on our profitability.          NEW REGULATIONS OF HEALTH, SAFETY, SECURITY, ENVIRONMENTAL AND OTHER REGULATORY ISSUES COULD INCREASE COMPANY'S OPERATING COSTS AND ADVERSELY AFFECT NET INCOME.  The Company is subject to various international, national, state and local health, safety and security laws, regulations and treaties. We believe that health, safety, security and other regulatory issues will continue to be areas of focus by relevant government authorities. Resulting legislation or regulations, or changes in existing legislation or regulations, could impact Company's operations and would likely subject to increasing compliance costs in the future.          PROBLEMS ENCOUNTERED AT PORTS COULD REDUCE COMPANY'S PROFITABILITY.  Industrial actions and insolvency or financial problems of the ports where the Vessel is docked could adversely affect Company's profitability.                                          11                         RISKS RELATED TO OPERATIONS GENERALLY          THE COMPANY IS SUBJECT TO RISKS ASSOCIATED WITH OPERATIONS IN ISRAEL.  The Company is involved in oil and gas exploration activities in Israel as operator of certain offshore licenses or otherwise. The Company also purchased significant non-oil and gas real-estate properties in Israel. The Company also maintains a significant presence within Israel. Accordingly, a significant portion of the Company's business is directly affected by prevailing economic, military and political conditions that affect Israel. Any major hostilities involving Israel might have a material adverse effect on the Company's business, financial condition or results of operations.          THE COMPANY'S STOCK PRICE IS VOLATILE AND COULD CONTINUE TO BE VOLATILE.  Investor interest in the Company's common stock may not lead to the development of an active or liquid trading market. The market price of the Company's common stock has fluctuated in the past and is likely to continue to be volatile and subject to wide fluctuations. In addition, the stock market has experienced extreme price and volume fluctuations. The stock prices and trading volumes for the Company's stock has fluctuated widely and may continue to so for reasons that may be unrelated to business or results of operations. General economic, market and political conditions could also materially and adversely affect the market price of the Company's common stock and investors may be unable to resell their shares of common stock at or above their purchase price.          PENNY STOCK REGULATIONS ARE APPLICABLE TO INVESTMENT IN SHARES OF THE COMPANY'S COMMON STOCK.  Broker-dealer practices in connection with transactions in "penny stocks" are regulated by certain penny stock rules adopted by the Securities and Exchange Commission. Penny stocks generally are equity securities with a price of less than $5.00 (other than securities registered on certain national securities exchanges or quoted on the Nasdaq system, provided that current prices and volume information with respect to transactions in such securities are provided by the exchange or system). The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document that provides information about penny stocks and the risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction, and monthly account statements showing the market value of each penny stock held in the customer's account. In addition, the penny stock rules generally require that prior to a transaction in a penny stock the broker-dealer make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser's written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for a stock that becomes subject to the penny stock rules. Many brokers will not deal with penny stocks; this restricts the market.
The Company maintains offices in Houston, Texas. The Company leases office space premises (approximately 2,015 square feet) at 11767 Katy Freeway, Houston, TX 77079 under a lease expiring in October 2006 at a monthly rental of $2,508. The Company anticipates that it will be able to extend the lease, or find replacement premises, on commercially reasonable terms.  The Company also leases office space in Israel from Naphtha at 8 Granit St., Petach Tikva, Israel. In 2005, the Company paid Naphtha an aggregate of $235,000 for rental space, office services, secretarial services and computer services. The Company believes that the payment for the above services are reasonable compared to other similar locations.                                          12
From time to time, the Company is involved in disputes and other legal actions arising in the ordinary course of business. In management's opinion, none of these other disputes and legal actions is expected to have a material impact on the Company's consolidated financial position or results of operations.  RECENT DEVELOPMENT  On January 20, 2006 the "Company entered into a settlement agreement and mutual release (the "California Settlement") with the defendant parties named therein (the "California Defendants") relating to the lawsuit initiated by the Company against the Defendants on February 10, 2004 in the Superior Court of California, County of Los Angeles, alleging breach of contract and tort claims in connection with an agreement between the Company and the California Defendants to jointly purchase and develop certain parcels of real estate outside Los Angeles (the "California Action"). The California Settlement provides for the settlement of the California Action with no finding or admission of fault on the part of any party and, pursuant thereto, certain of the California Defendant paid to the Company $2,500,000 as reimbursement for costs and expenses incurred by the Company in connection with its pursuit of the real estate investment opportunity that was the subject of the California Action. Under the California Settlement, the Company and the California Defendants mutually released one another from any claims or causes of actions arising out of or relating to the California Action, any claim that could have been asserted in the California Action, and any and all claims and/or allegations relating to the real estate (and the development thereof) that was the subject of the California Action.  On February 1, 2006 the Company entered into a settlement agreement and mutual release (the "Texas Settlement") with the defendant parties named therein (The "Texas Defendants") relating to the lawsuit initiated by the Company against the Texas Defendants on 2004 in the District court of Harris County, Texas, alleging a tort claim in connection with an agreement between the Company and a third Party pursuant to which the Company purchased all of the outstanding capital stock of a company that owns oil and gas assets in Illinois (the "Texas Action"). Under the Texas Settlement the Texas Defendants paid to the Company $550,000 and the Company filed a motion to dismiss the Texas Action. As a result of the payment received under the California and Texas Settlements, the Company anticipates recording a net gain of approximately $2,500,000 (after payment of legal fees and other expenses) during the first quarter of 2006.
During the fourth quarter of the fiscal year covered by this report, no matter was submitted to a vote of security holders of the Company.                                       PART II
The number of record holders of the Company's Common Stock on March 23, 2006 was approximately 456, not including an undetermined number of persons who hold their stock in street name.  Our common stock is listed on the Nasdaq Capital Market under the symbol "ISRL". The following table sets forth for the periods indicated, the reported high and low closing prices for our common stock.                                                  Common Stock         Quarter Ended                       High             Low         -------------                     --------         -------         2005         March 31                          $   8.99         $  8.72         June 30                           $  10.93         $  9.60         September 30                      $  15.09         $ 14.27         December 31                       $  15.27         $ 14.91          2004         March 31                          $   7.59         $  7.01         June 30                           $   6.50         $  6.40         September 30                      $   6.08         $  6.08         December 31                       $   5.28         $  5.24  The Company has not declared or paid any cash dividends on its Common Stock. The Company does not anticipate paying any cash dividends on its Common Stock in the foreseeable future. The Company intends to retain all earnings for use in its business operations and in expansion.                                          13
The data presented below with respect to the Company should be read in conjunction with the Consolidated Financial Statements and related Notes thereto of the Company included elsewhere in this Report and Item 7-- "Management's Discussion and Analysis of Financial Condition and Results of Operations." (in Thousands)                                                                  2005           2004           2003           2002           2001                                                           ------------   ------------   ------------   ------------   ------------       Operator's fees                                           $        977   $        137   $        753   $        249   $        234 Oil and Gas Sales                                         $      3,319   $      3,137   $      3,439   $      2,423   $      3,068 Revenue from vessel                                       $      1,520   $      2,034 Interest income                                           $        293   $        729   $        760   $        738   $        541 Office services to related parties and other              $        912   $        772   $        939   $        913   $        857 Equity in earnings (losses) of investees                  $        661   $      1,365   $      1,098   $       (440)  $       (177) Gain from sale of oil and gas properties and equipment                                            --             --   $          4 Capital Gain                                                        --             --   $        549             --             -- Gain (Loss) on marketable securities                      $        551   $        240   $        872   $       (189)  $       (199) Other                                                     $       (524)  $        492   $        475   $         49   $         -- Impairment of oil & gas properties                        $        759   $        268   $        617             --   $         -- Impairment of Investment                                  $        110             --             --             --   $         -- Exploration costs                                                   --             --   $        165   $      1,747   $        204 Lease operating expenses and severance Taxes                                                     $      1,458   $      1,149   $        872   $        844   $        905 Depreciation, depletion and Amortization                  $      2,139   $      1,334   $        621   $        642   $        564 Operator expense                                          $        767   $        807   $        795   $        791   $        696 General and administrative expenses                       $      2,314   $      1,717   $      2,012   $      1,422   $      2,048 Interest Expense                                          $        205   $        168   $         52   $        210   $         -- Accretion Expense                                         $         25   $          5   $         43             --             -- Income tax expense (benefit)                              $        (40)  $       (576)  $      1,188   $        114   $         50 Net Income (loss) before cumulative effect                $     (1,132)  $        993   $      2,520   $     (1,799)  $       (139) Cumulative effect of change in accounting principles                --             --   $       (264)  $      3,516             -- Basic and diluted earnings (loss) per share for: Net income (loss) before cumulative effect                $      (0.42)  $       0.38   $       0.95   $      (0.68)  $      (0.05) Cumulative effect of accounting change, net                                        --   $      (0.10)          1.33             -- Net income (loss)                                         $      (0.42)  $       0.38   $       0.85   $       0.65   $      (0.05)  Weighted average number of Common shares outstanding - basic                            2,709,355      2,639,853      2,639,853      2,639,853     2,639,853  Weighted average number of Common shares outstanding - diluted                          2,709,355      2,640,751      2,639,853      2,639,853     2,639,853                                                                                           December 31,                                                           ------------------------------------------------------------------------                                                               2005           2004           2003           2002           2001                                                           ------------   ------------   ------------   ------------   ------------  Balance Sheet Data  Total assets                                              $     38,615   $     41,358   $     32,614   $     28,667   $     26,615 Total liabilities                                         $     10,122   $     11,322   $      2,733   $      2,175   $      1,160 Shareholders' equity                                      $     28,493   $     30,036   $     29,881   $     26,492   $     25,455
THE FOLLOWING COMMENTARY SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES CONTAINED ELSEWHERE IN THIS FORM 10-K. THE DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THESE STATEMENTS RELATE TO  FUTURE EVENTS OR OUR FUTURE FINANCIAL PERFORMANCE. IN SOME CASES, YOU CAN IDENTIFY THESE FORWARD-LOOKING STATEMENTS BY TERMINOLOGY SUCH AS "MAY," "WILL," "SHOULD," "EXPECT," "PLAN," "ANTICIPATE," "BELIEVE," "ESTIMATE," "PREDICT," "POTENTIAL," "INTEND," OR "CONTINUE," AND SIMILAR EXPRESSIONS. THESE STATEMENTS ARE ONLY PREDICTIONS. OUR ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF A VARIETY OF FACTORS, INCLUDING, BUT NOT LIMITED TO, THOSE SET FORTH UNDER "RISK FACTORS" AND ELSEWHERE IN THIS FORM 10-K.                                          14   OVERVIEW  Isramco, Inc., a Delaware corporation, is active in the exploration of oil and gas in Israel and the United States. The Company acts as an operator of certain leases and licenses and also holds participation interests in certain other interests. The Company also holds certain non-oil and gas properties discussed below.  CRITICAL ACCOUNTING POLICIES  Estimation of oil and gas reserves is important to the effective management of the Company. They are integral to making investment decisions about oil and gas properties such as whether development should proceed or enhanced recovery methods should be undertaken. Oil and gas reserve quantities are also used as the basis of calculating the unit-of-production rates for depreciation and evaluating for impairment. Oil and gas reserves are divided between proved and unproved reserves. Proved reserves are the estimated quantities of crude oil, natural gas and natural gas liquids that geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions; i.e., prices and costs as of the date the estimate is made. Unproved reserves are those with less than reasonable certainty of recoverability and are classified as either probable or possible.  The estimation of proved reserves is an ongoing process based on rigorous technical evaluations and extrapolations of well information such as flow rates and reservoir pressure declines. Although the company is reasonably certain that proved reserves will be produced, the timing and amount recovered can be affected by a number of factors including completion of development projects, reservoir performance, regulatory approvals and significant changes in long-term oil and gas price levels.  The calculation of unit-of-production depreciation is a critical accounting estimate that measures the depreciation of upstream assets. It is the ratio of (1) actual volumes produced to (2) total proved developed reserves (those proved reserves recoverable through existing wells with existing equipment and operating methods) applied to the (3) asset cost. The volumes produced and asset costs are known and, while proved developed reserves have a high probability of recoverability, they are based on estimates that are subject to some variability.  Our cruise line operation is capital intensive. At December 31, 2005, we have approximately $8.5 million of net investment in the vessel recorded on our balance sheet. We depreciate our assets on a straight-line basis over their estimated useful lives. The estimates of the useful lives are based on the nature of the assets as well as our current operating strategy. Future events, such as property expansions, new competition and new regulations, could result in a change in the manner in which we are using certain assets requiring a change in the estimated useful lives of such assets. In assessing the recoverability of the carrying value of property and equipment, we must make assumptions regarding estimated future cash flows and other factors. If these estimates or the related assumptions change in the future, we may be required to record impairment charges for these assets.  The Company records an investment impairment charge when it believes an investment has experienced a decline in value that is other than is temporary. Future adverse changes in market conditions or poor operating results of underlying investments could result in losses or an inability to recover the carrying value of the investment that may not be reflected in an investment's current carrying value, thereby possibly requiring an impairment charge in the future.  The Company records a valuation allowance to reduce its deferred tax assets to the amount that is more likely than not to be realized. While the Company has considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event that the Company were to determine that it would be able to realize its deferred tax assets in the future in excess of its net recorded amount, an adjustment to the deferred tax asset would increase net income in the period such determination was made.                                          15   The Company does not participate in, nor has it created, any off-balance sheet special purpose entities or other off-balance sheet financing. In addition, the Company does not enter into any derivative financial instruments.  The Company records a liability for asset retirement obligation at fair value in the period in which it is incurred and a corresponding increase in the carrying amount of the related long live assets.  LIQUIDITY AND CAPITAL RESOURCES  The Company finances its operations primarily from cash generated by operations. The Company's operating activities provided net cash of $1,545,000 and $1,573,000 for the years ended December 31, 2005 and 2004, respectively. The availability of cash generated by operations could be affected by other business risks discussed in the "Risk Factors" section of this annual report.  Working capital (current assets minus current liabilities) was $4,441,000 and $6,590,000 at December 31, 2005 and 2004, respectively. The decrease in working capital is primarily attributable to the purchase of oil and gas assets, participation in drilling of two wells in United States and investments in repairs and renovation of the cruise line vessel Net cash used in investing activities in fiscal 2005 was $741,000 compared to $8,195,000 in fiscal 2004. The decrease in net cash used in investing activities is primarily attributable to the purchase in March 2004 and maintenance, repairs and renovation of the Vessel ($9,028,000) and the outlays associated with the drilling of wells in Texas and Oklahoma ($1,096,000), offset by the increase in the value of marketable securities. The cash used in investing activities in 2005 was primarily attributable to purchase of oil and gas properties.  Capital expenditures for property and equipment were $4,703,000 and $10,126,000 in fiscal 2005 and 2004, respectively. Capital expenditures in 2005 were primarily attributable to purchase of oil and gas properties in the United States. Capital expenditures in 2004 were primarily attributable to purchase of the cruise line Vessel.  RESULTS OF OPERATIONS  YEAR ENDED DECEMBER 31, 2005 COMPARED TO YEAR ENDED DECEMBER 31, 2004.  The Company reported net loss before cumulative effect of $1,132,000 (loss of $0.42 per share) in 2005 compared to a net profit of $993,000 (loss of $0.38 per share) in 2004. The decrease in the net income in 2005 compared to 2004 is primarily attributable to: (i) an increase in losses associated with the operation of the vessel, (ii) an increase in the impairment of oil and gas assets, (iii) an increase in lease operation expenses of the wells in the United States and (iv) an increase in the general and administration expenses.  Set forth below is a break-down of these results.                                    UNITED STATES                   OIL AND GAS VOLUME AND REVENUES (IN THOUSANDS)                                                   2005          2004                                             ------------  ------------          Oil Volume Sold (Bbl)                      16            18          Gas Volume Sold (MCF)                     355           470          Oil Sales ($)                             806           678          Gas Sales ($)                           2,525         2,524          Average Unit Price          Oil ($/Bbl) *                           51.25         38.12         Gas ($/MCF) **                           7.11          5.38  * Bbl - Barrel Equivalent to 42 U.S. Gallons  ** MCF - 1,000 CUBIC FEET                                          16   OIL AND GAS EXPLORATION COSTS  In 2005 the Company incurred $110,000 in exploration costs. These costs were incurred mainly for a well drilled in Israel that was plugged and abandoned.  OPERATOR'S FEES  In 2005 the Company earned $977,000 in operator fees compared to $137,000 in 2004. The increase is due to the drilling of the Gad 1 well.  OIL AND GAS REVENUES  In 2005 and 2004 the Company had oil and gas revenues of $3,319,000 and $3,174,000, respectively. The increase is due to the increase in oil and gas prices in 2005 partially offset by the decline in oil and gas production.  LEASE OPERATING EXPENSES AND SEVERANCE TAXES  Lease operating expenses and severance taxes were incurred primarily in connection with oil and gas fields in the United States. Oil and gas lease operating expenses and severance taxes were $1,458,000 and $1,149,000 for 2005 and 2004, respectively. The increase in lease operating expenses and severance taxes is primarily attributable to workovers performed on two wells.  INTEREST AND DIVIDEND INCOME  Interest income during the year ended December 31, 2005 was $293,000 compared to $729,000 for the year ended December 31, 2004. The decrease in interest income is primarily attributable to interest receivable on marketable securities (Debentures).  GAIN ON MARKETABLE SECURITIES  In 2005, the Company recognized net realized and unrealized gain on marketable securities of $551,000 compared to net realized and unrealized gain on marketable securities of $240,000 in 2004.  Increases or decreases in the gains and losses from marketable securities are dependent on the market prices in general and the composition of the portfolio of the Company.  OPERATOR EXPENSES  In 2005, the Company expended $767,000 for operator expenses compared to $807,000 in 2004.  GENERAL AND ADMINISTRATIVE EXPENSES  In 2005, the Company incurred $2,313,000 in general and administrative expenses compared to $1,717,000 in 2004. The relatively higher amount in 2005 is primarily attributable to bonus payments totaling $245,000 to the president, vice president and secretary, fees associated with lawsuits initiated by the Company and consultants' fees.  EQUITY IN NET INCOME OF INVESTEE  The Company's equity in the net income of investees for 2005 was $661,000 compared to its equity in net income of investees of $1,365,600 for 2004. The decrease is primarily attributable to the decrease in the gain of marketable securities held by the Limited Partnerships Isramco Negev 2 and I.O.C Dead Sea LP, affiliates of the Company.                                          17   CRUISE LINE VESSEL INCOME  Income from the leasing of the cruise line vessel for 2005 was $1,520,000, compare to a net income of $2,034,000 in 2004. The decrease is due to the fact that during 2004 the Vessel was leased under a time charter while in the year 2005 the Vessel was leased under a bareboat charter.  CRUISE LINE VESSEL EXPENSES  Expenses of the Vessel for 2005 were $1,051,000 compared to expenses of $1,926,000 in 2004. The decrease in the expenses is due to the fact that during the year 2004 the Vessel was leased under a time charter while in the year 2005 the Vessel was leased under a bareboat charter.  DEPRECIATION, DEPLETION AMORTIZATION AND IMPAIRMENT  Depreciation depletion and amortization expenses are connected to the producing wells in the United States and to the Cruise line vessel.  During 2005, the Company recorded $2,139,000 compared to $1,334,000 in 2004. The increase is attributable to an increase in depreciation of the Vessel from $438,000 in 2004 to $1,128,000 in 2005 resulting from a full year of depreciation in 2005 and only a partial year of depreciation in 2004.  During 2005 and 2004, the Company recorded impairment charges of $759,000 and $268,000, respectively, relating to oil and gas assets in the United States.  OTHER INCOME  Other Income in 2005 was $(524,000) compared to $492,000 in 2004. Other Income in 2005 is primarily attributable to monthly income of $7,000 related to lease of the real estate in Israel, $195,000 received from the European tour operator of the cruise line vessel for office services provided by the Company and ($671,000) related to net expense for the mark-to-market of swap contracts on oil and gas prices.  CONTRACTUAL OBLIGATIONS  The Company leases office facilities in Texas and in Israel and certain equipment pursuant to non-cancelable operating lease agreements. Future minimum lease payments pursuant to these leases as of December 31, 2005 were as follows (in thousands).                           TOTAL       2006      2007      2008      Thereafter                          -----       ----      ----      ----      ---------- Operating Leases:          Texas:         26,000     26,000        --        --            --                             --         --        --        --            --  YEAR ENDED DECEMBER 31, 2004 COMPARED TO YEAR ENDED DECEMBER 31, 2003.  The company reported net income of $993,000 ($0.38 per share) in 2004 compared to a net income of $2,256,000 ($0.85 per share) in 2003. The decrease in the net income in 2004 compared to 2003 is primarily attributable to: (i) a decrease in operators' fee collected during 2004 (ii) decrease in oil and gas sales due to decline in gas production, (iii) decrease in the gain on marketable securities.  Set forth below is a break-down of these results.                                    UNITED STATES                   OIL AND GAS VOLUME AND REVENUES (IN THOUSANDS)                                                    2004            2003                                              ------------    ------------         Oil Volume Sold (Bbl)                        18              19         Gas Volume Sold (MCF)                       470             600         Oil Sales ($)                               678             542         Gas Sales ($)                             2,524           2,897          Average Unit Price         Oil ($/Bbl) *                             38.12           28.09         Gas ($/MCF) **                             5.38            4.82  * Bbl - Barrel Equivalent to 42 U.S. Gallons ** MCF - 1,000 Cubic Feet                                          18   THE OFFSHORE LICENSES (ISRAEL)  The Company did not expend any amount in respect of the offshore licenses compared to $88,243 in 2003.  OIL AND GAS EXPLORATION COSTS  During 2004 the Company did not expand any amounts in respect of oil and gas exploration, as compared to $165,000 in 2003.  OPERATOR'S FEES  In 2004 the Company earned $137,000 in operator fees compared to $753,000 in 2003.  The decrease in operator fees is due to the decrease in oil and gas exploration activity in 2004 compared to 2003 in which the Company drilled the Nir 2 well offshore Israel.  OIL AND GAS REVENUES  In 2004 and 2003 the Company had oil and gas revenues of $3,174,000 and $3,439,000, respectively. The decrease is due mainly to the decline of gas production in 2004.  LEASE OPERATING EXPENSES AND SEVERANCE TAXES  Lease operating expenses and severance taxes were incurred primarily in connection with oil and gas fields in the United States. Oil and gas lease operating expenses and severance taxes were $1,149,000 and $872,000 for 2004 and 2003, respectively. The relatively higher amounts in 2004 in lease operating expenses and severance taxes is primarily due to the workovers performed in connection with producing wells in 2004.  INTEREST AND DIVIDEND INCOME  Interest income during the year ended December 31, 2004 was $729,000 compared to $760,000 for the year ended December 31, 2003. The income is primarily attributable to interest receivable on marketable securities (Debentures).  GAIN ON MARKETABLE SECURITIES  In 2004, the Company recognized net realized and unrealized gains on marketable securities of $240,000 compared to net realized and unrealized gains on marketable securities of $872,000 in 2003.  Increases or decreases in the gains and losses from marketable securities are dependent on the market prices in general and the composition of the portfolio of the Company.  OPERATOR EXPENSES  In 2004 the Company expended $807,000 in respect of operator expenses compared to $795,000 in 2003.  GENERAL AND ADMINISTRATIVE EXPENSES  In 2004, the Company incurred $1,705,000 as general and administrative expenses compared to $2,012,000 incurred in 2003. The relatively higher amount in 2003 is primarily attributable to bonuses awarded to senior officers and increase in legal and other professional fees paid by the Company.                                          19   EQUITY IN NET INCOME OF INVESTEE  The Company's equity in the net income of Investee for 2004 was $1,365,000 compared to its equity in net income of $1,098,000 for 2003. The increase is primarily attributable to the increase in the marketable value of the marketable securities hold by Isramco Negev 2 and I.O.C Dead Sea LP, affiliates of the Company.  CRUISE LINE VESSEL INCOME AND EXPENSES  Income from the leasing of the cruise line vessel for 2004 (July through October 2004) were $2,034,000. The associated expenses in 2004 were $1,926,000 and are primarily attributable to insurance, maintenance, repair upkeep and payroll.  Additionally, depreciation expense of $438,000 for the vessel was recorded in 2004.  DEPRECITION, DEPLETION AND AMORTIZATION  Depreciation depletion and amortization expenses are connected to the producing wells in the United States and to the Cruise line vessel.  During 2004, the Company recorded $1,334,000 compared to $621,000 in 2003. The increase in 2004 compared to 2003 is attributable to depreciation of the Vessel ($438,000) and increase of $315,000 in the depreciation of the wells it the United Stated due to the decline in production of the gas wells.  During 2004 and 2003, the Company recorded impairment charges of $268,000 and $617,000 respectively relating to oil and gas assets.  OTHER INCOME  Other Income in 2004 was $492,000 compared to $475,000 in 2003. Other Income is primarily attributable to monthly income of $7,000 related to lease of the real estate in Israel and $369,000 related to a change of estimate for asset retirement obligations. Other Income in the year 2003 included the sum of $350,000 which represents the settlement of a liability recorded in connection which a well drilled in Marine 9 permit offshore Congo, and was recorded during 2002 as exploration costs.  RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS  In December 2004, the FASB issued SFAS No. 123R, "Accounting for Stock-Based Compensation." SFAS No. 123R establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. This Statement focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. SFAS No. 123R requires that the fair value of such equity instruments be recognized as expense in the historical financial statements as services are performed. Prior to SFAS No. 123R, only certain pro forma disclosures of fair value were required. SFAS No. 123R shall be effective for small business issuers as of the beginning of the first interim or annual reporting period that begins after December 15, 2005. The adoption of this new accounting pronouncement is not expected to have a material impact on the financial statements of the Company during the calendar year 2006.
The Company is exposed to market risk, including adverse changes in commodity prices.  The Company produces and sells natural gas and crude oil. As a result, the Company's financial results can be significantly affected if these commodity prices fluctuate widely in response to changing market forces.
The information called for by this Item 8 is included following the "Index to Financial Statements" contained in this Annual Report on Form 10-K.                                          20
On January 13, 2005, the audit committee of the board of directors (the "Audit Committee") of the Company accepted the resignation of UHY - Mann Frankfort Stein & Lipp CPAS, LLP ("UHY LLP") (formerly - Mann Frankfort Stein & Lipp CPAS, L.L.P.) as the Company's independent accountants. Concurrent with UHY LLP's resignation, the Audit Committee appointed Malone & Bailey, PC (the "New Accountants") as the independent accounting firm to audit the financial statements of the Company for the year ended December 31, 2004.  The reports by UHY LLP with respect to the Company's financial statements for the year ended December 31, 2003 did not contain any adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles. During the fiscal year ended December 31 2003 and during the subsequent interim period, there were no disagreements between the Company and UHY LLP on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which, if not resolved to the satisfaction of UHY LLP, would have caused it to make reference to the subject matter of thereof in connection with its reports.  During the fiscal year ended December 31 2003, and through the date of their resignation, UHY LLP did not advise the Company with respect to any matters described in paragraphs (a)(1)(v)(A) through (D) of Item 304 of Regulation S-K.  During the fiscal year ended December 31, 2003, and through the date of their engagement, the Company did not consult with the New Accountants regarding either (i) the application of accounting principles to a specified transaction, either completed or proposed; (ii) the type of audit opinion that might be rendered on the Company's financial statements; (iii) any matter that was either the subject of disagreement (as defined in Item 304(a)(1)(iv) of Regulation S-K) or a reportable event (as defined in Item 304(a)(1)(v) of Regulation S-K).
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company's Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure based closely on the definition of "disclosure controls and procedures" in Rule 13a-14(c).  As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with participation of management, including our Chief Executive Officer (and our Principal Financial Officer), of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our Chief Executive Officer (and Principal Financial Officer) concluded that our disclosure controls and procedures were effective.  CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING. During the quarter ended December 31, 2005, there have been no changes in our internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, these controls.
None.                                          21                                       PART III  The information called for by items 10, 11, 12 13 and 14 will be contained in the Company's definitive proxy statement which the Company intends to file within 120 days after the end of the Company's fiscal year ended December 31, 2005 and such information is incorporated herein by reference.  GLOSSARY  "Grant Agreement" shall mean the agreement between the Company and the Government of Israel pursuant to which the Government of Israel has provided assistance to the Company in connection with its investment in the Negev 2 Venture by providing a grant of 44.34(cent) for each U.S. dollar ($1.00) invested and expended by the Company in oil and gas activities in Israel within the framework of the Negev 2 Venture. The Government financing provided for under the Grant is repayable only from funds emanating from commercial production in any payout area and then, only to the extent of 30% of the recipient's share of the net revenue from said payout area, as and when received. The Grant Agreement entitles the Government of Israel, to receive a 12.5% royalty on oil sales, as well as an overriding royalty of 6.5% of the Company's share in the petroleum produced and saved after payout. If there is no commercial discovery of oil, the Company will not be required to repay the grant monies. A grant agreement was also entered into between the Government of Israel and HEI, Donesco, L.P.S. and Mazal Oil.  "Joint Operating Agreement" shall mean the Joint Operating Agreement of the Negev 2 Venture which was signed as of the 30th day of June, 1988, between the participants in the Negev 2 Venture, as amended or as shall be amended from time to time.  "Joint Venture Agreement" shall mean the Joint Venture Agreement of the Negev 2 Venture which was signed as of the 30th of June, 1988 between the participants in the Negev 2 Venture, as amended from time to time.  "Limited Partnership" shall mean Isramco-Negev 2 Limited Partnership, a Limited Partnership founded pursuant to a Limited Partnership Agreement made on the 2nd and 3rd days of March, 1989 (as amended on September 7, 1989, July 28, 1991, March 5, 1992 and June 11, 1992) between the Trustee on part as Limited Partner and Isramco Oil and Gas Ltd., as General Partner on the other part.  "Limited Partnership Agreement" shall mean the Limited Partnership Agreement made the 2nd and 3rd days of March, 1989 (as amended September 7, 1989, July 28, 1991, March 5, 1992 and June 11, 1992), between Isramco Oil and Gas Ltd., as General Partner, and Isramco Management (1988) Ltd. as the Limited Partner.  "Negev 2 Venture Agreements" shall mean the Joint Venture Agreement, the Joint Operating Agreement, the Voting Agreement and every agreement into which the parties to said agreements have entered, in connection with the Negev 2 Venture.  "Overriding Royalty" shall mean a percentage interest over and above the base royalty and is free of all costs of exploration and production, which costs are borne by the Grantor of the Overriding Royalty Interest and which is related to a particular Petroleum License.  "Payout" shall mean the defined point at which one party has recovered its prior costs.  "Petroleum" shall mean any petroleum fluid, whether liquid or gaseous, and includes oil, natural gas, natural gasoline, condensates and related fluid hydrocarbons, and also asphalt and other solid petroleum hydrocarbons when dissolved in and producible with fluid petroleum.  "Petroleum Exploration" shall mean test drilling; any other operation or search for petroleum, including geological, geophysical, geochemical and similar investigations and tests; and, drilling solely for obtaining geological information.  "Petroleum Production" shall mean the production of petroleum from a petroleum field and all operations incidental thereto, including handling and treatment thereof and conveyance thereof to tankers, a pipe line or a refinery in or in the vicinity of the field.  "Preliminary Permit", "Preferential Right to Obtain a License", "License" shall have the meaning(s) set forth in the Petroleum Law of Israel.                                          22   "Trust Agreement" shall mean the Trust Agreement made on the 3rd day of March, 1989 (as amended September 7, 1989, July 28, 1991, March 5, 1992 and June 11, 1992) for the Trust Company of Kesselman and Kesselman. "Working Interest" shall mean an interest in a Petroleum Asset granting the holder thereof the right to participate pro rata in exploiting the Petroleum Asset for petroleum exploration, development and petroleum production, subject to its pro rata participation in the expenses involved therein after acquiring the Working Interest.  "Israel Petroleum Law"  The Company's business in Israel is subject to regulation by the State of Israel pursuant to the Petroleum Law, 1952. The administration and implementation of the Petroleum Law is vested in the Minister of National Infrastructure (the "Minister") and an Advisory Council.  The following includes brief statements of certain provisions of the Petroleum Law in effect at the date of this Prospectus. Reference is made to the copy of the Petroleum Law filed as an exhibit to the Registration Statement referred to under "Additional Information" and the description which follows is qualified in its entirety by such reference.  The holder of a preliminary permit is entitled to carry out petroleum exploration, but not test drilling or petroleum production, within the permit areas. The Commissioner determines the term of a preliminary permit and it may not exceed eighteen (18) months. The Minister may grant the holder a priority right to receive licenses in the permit areas, and for the duration of such priority right no other party will be granted a license or lease in such areas.  Drilling for petroleum is permitted pursuant to a license issued by the Commissioner. The term of a license is for three (3) years, subject to extension under certain circumstances for an additional period up to four (4) years. A license holder is required to commence test drilling within two (2) years from the grant of a license (or earlier if required by the terms of the license) and not to interrupt operations between test drillings for more than four (4) months. If any well drilled by the Company is determined to be a commercial discovery prior to expiration of the license, the Company will be entitled to receive a Petroleum Lease granting it the exclusive right to explore for and produce petroleum in the lease area. The term of a lease is for thirty (30) years, subject to renewal for an additional term of twenty (20) years.  The Company, as a lessee, will be required to pay the State of Israel the royalty prescribed by the Petroleum Law which is presently, and at all times since 1952 has been, 12.5% of the petroleum produced from the leased area and saved, excluding the quantity of petroleum used in operating the leased area.  The Minister may require a lessee to supply at the market price such quantity of petroleum as, in the Minister's opinion, is required for domestic consumption, subject to certain limitations.  As a lessee, the Company will also be required to commence drilling of a development well within six (6) months from the date on which the lease is granted and, thereafter, with due diligence to define the petroleum field, develop the leased area, produce petroleum therefore and seek markets for and market such petroleum.                                          23
ITEM 11.   EXECUTIVE COMPENSATION.......................................... 22
ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................. 22
ITEM 15.   EXHIBITS........................................................ 24                                FORWARD LOOKING STATEMENTS  CERTAIN STATEMENTS MADE IN THIS ANNUAL REPORT ON FORM 10-K ARE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. FORWARD-LOOKING STATEMENTS CAN BE IDENTIFIED BY TERMINOLOGY SUCH AS "MAY", "WILL", "SHOULD", "EXPECTS", "INTENDS", "ANTICIPATES", "BELIEVES", "ESTIMATES", "PREDICTS", OR "CONTINUE" OR THE NEGATIVE OF THESE TERMS OR OTHER COMPARABLE TERMINOLOGY AND INCLUDE, WITHOUT LIMITATION, STATEMENTS BELOW REGARDING EXPLORATION AND DRILLING PLANS, FUTURE GENERAL AND ADMINISTRATIVE EXPENSES, FUTURE GROWTH, FUTURE EXPLORATION, FUTURE GEOPHYSICAL AND GEOLOGICAL DATA, GENERATION OF ADDITIONAL PROPERTIES, RESERVES, NEW PROSPECTS AND DRILLING LOCATIONS, FUTURE CAPITAL EXPENDITURES, SUFFICIENCY OF WORKING CAPITAL, ABILITY TO RAISE ADDITIONAL CAPITAL, PROJECTED CASH FLOWS FROM OPERATIONS, OUTCOME OF ANY LEGAL PROCEEDINGS, DRILLING PLANS, THE NUMBER, TIMING OR RESULTS OF ANY WELLS, INTERPRETATION AND RESULTS OF SEISMIC SURVEYS OR SEISMIC DATA, FUTURE PRODUCTION OR RESERVES, LEASE OPTIONS OR RIGHTS, PARTICIPATION OF OPERATING PARTNERS, CONTINUED RECEIPT OF ROYALTIES, AND ANY OTHER STATEMENTS REGARDING FUTURE OPERATIONS, FINANCIAL RESULTS, OPPORTUNITIES, GROWTH, BUSINESS PLANS AND STRATEGY. BECAUSE FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES, THERE ARE IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED OR IMPLIED BY THESE FORWARD-LOOKING STATEMENTS. ALTHOUGH THE COMPANY BELIEVES THAT EXPECTATIONS REFLECTED IN THE FORWARD-LOOKING STATEMENTS ARE REASONABLE, IT CANNOT GUARANTEE FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS. MOREOVER, NEITHER THE COMPANY NOR ANY OTHER PERSON ASSUMES RESPONSIBILITY FOR THE ACCURACY AND COMPLETENESS OF THESE FORWARD-LOOKING STATEMENTS. THE COMPANY IS UNDER NO DUTY TO UPDATE ANY FORWARD-LOOKING STATEMENTS AFTER THE DATE OF THIS REPORT TO CONFORM SUCH STATEMENTS TO ACTUAL RESULTS.                                         PART I
(a)     Exhibits          3.1     Articles of Incorporation of Registrant with all amendments                 filed as an Exhibit to the S-l Registration Statement, File No.                 2-83574.         3.2     Amendment to Certificate of Incorporation filed March 17, 1993,                 filed as an Exhibit with the S-l Registration Statement, File                 No. 33-57482.         3.3     By-laws of Registrant with all amendments, filed as an Exhibit                 to the S-l Registration Statement, File No. 2-83570.         10.1    Oil Marketing Agreement, filed as Exhibit with the S-l                 Registration Statement, File No. 2-83574.         10.2    Joint Venture Agreement and Joint Operating Agreement dated June                 30, 1988 by and among HEI Oil and Gas Limited Partnership, JOEL                 - Jerusalem Oil Exploration Ltd., Delek Oil Exploration Ltd.,                 Delek, The Israel Fuel Corporation Ltd., the Company, Southern                 Shipping and Energy (U.K.), Naphtha, Israel Petroleum Company                 Ltd., Oil Exploration of Pat Ltd., LPS Israel Oil Inc., Donesco                 Venture Fund One, a Limited Partnership and Mazaloil Inc. filed                 as an Exhibit to Form 8-K for the month of September 1988.         10.3    Grant Agreement with the Government of Israel, undated, between                 the Company and the Government of Israel on behalf of the State                 of Israel, filed as an Exhibit to Form 10-Q for the Company for                 the period ending September 30, 1988 and incorporated herein by                 reference.         10.4    Translated from Hebrew, Indemnity Agreement between the Company                 and Isramco Management (1988) Ltd. dated March _, 1989, filed as                 an Exhibit to Form 8-K for the month of March 1989 and                 incorporated herein by reference.         10.5    Amendment Agreement to Grant Agreement between the Company and                 the Government of Israel, filed as an Exhibit to this                 Post-effective Amendment No. 8 to Form S-l Registration                 Statement. File No. 2- 83574.         10.6    Translated from Hebrew, Limited Partnership Agreement between                 Isramco Oil and Gas Ltd. and Isramco Management (1988) Ltd.                 dated March 2, 1989, filed as an Exhibit to Form 8-K for the                 month of March 1989 and incorporated herein by reference.         10.7    Translated from Hebrew, Trust Agreement between Isramco                 Management (1988) Ltd. and Kesselman and Kesselman dated March                 3, 1989, filed as an Exhibit to Form 8-K for the month of March                 1989 and incorporated herein by reference.         10.8    Translated from Hebrew, Indemnity Agreement between the Company                 and Isramco Management (1988) Ltd. dated March _, 1989, filed as                 an Exhibit to Form 8-K for the month of March 1989 and                 incorporated herein by reference.         10.9    Equalization of Rights Agreement between Isramco-Negev 2 Limited                 Partnership and Delek Oil Exploration Ltd. and Delek - The                 Israel Fuel Corporation Ltd, filed as an Exhibit to Form 8-K for                 the month of January 1993 dated January 21, 1993 and                 incorporated herein by reference.         10.10   Option Agreement between Isramco Resources Inc. and Delek Oil                 Exploration Ltd. and Delek - The Israel Fuel Corporation Ltd.                 filed as an Exhibit to Form 8-K for the month of January 1993                 dated January 21, 1993 and incorporated herein by reference.         10.11   Agreement by and among Naphtha Congo Ltd., Equital Ltd. and the                 Company dated September 4, 1997, filed as an Exhibit to Form 8-K                 for the month of September, 1997 and incorporated herein by                 reference.         10.12   Amendment to Consulting Agreement between Goodrich Global L.T.D.                 B.V.I. and the Company dated December _, 1997, filed as an                 Exhibit to Form 8-K for the month of December, 1997 and                 incorporated herein by reference.                                          24           10.13   Consulting Agreement between Romulas Investment Ltd. and the                 Company dated August _, 1997, filed as an Exhibit to Form 8-K                 for the month of September, 1997 and incorporated herein by                 reference, assigned by Romulas Investment Ltd. on December 31,                 1997 to Remarkable Holdings Ltd.         10.14   Inventory Services Management Agreement dated December 1997                 between the Company and Equital Ltd. filed herewith as Exhibit                 10.70.         10.15   Consulting Agreement dated as of November 1, 1999 between the                 Company and Worldtech, Inc.         10.16   Agreement dated June 12, 2002 between the Company and Mati                 Properties and Construction Ltd. and Boaz Avrahami, filed as an                 Exhibit to the Form 10-Q for the quarter ended June 30, 2002.         14.1    Code of Ethics, filed as an Exhibit to Form 10-K for the year                 ended December 31, 2003.         31      Certification of Chief Executive and Principal Financial Officer                 pursuant to Section 302 of Sarbanes-Oxley Act *         32      Certification of Chief Executive and Principal Financial Officer                 pursuant to 18 U.S.C. Section 1350, as adopted pursuant to                 Section 906 of the Sarbanes-Oxley act of 2002. *         99.1    Financial Statements of Isramco Negev 2 Limited Partnership as                 of December 31, 2004 *   * Attached hereto as an exhibit                                          25                                      SIGNATURES  In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.                                           /s/ HAIM TSUFF                                         --------------                                         HAIM TSUFF,                                         CHAIRMAN OF THE BOARD, CHIEF EXECUTIVE                                         OFFICER (AND PRINCIPAL FINANCIAL AND                                         ACCOUNTING OFFICER)          DATE: MARCH 24, 2006   In accordance with the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the capacities and on the dates indicated.           SIGNATURE                   TITLE                     DATE         ---------                   -----                     ----          /S/ JACKOB MAIMON           PRESIDENT, DIRECTOR       MARCH 24, 2006         -----------------         JACKOB MAIMON           /S/ AMIR ESKANDARI          DIRECTOR                  MARCH 24, 2006         ------------------         AMIR ESKANDARI           /S/ MAX PRIDGEON            DIRECTOR                  MARCH 24, 2006         ----------------         MAX PRIDGEON           /S/  DONALD D. LOVELL       DIRECTOR                  MARCH 24, 2006         ---------------------                                          26    INDEX TO FINANCIAL STATEMENTS                                                                             Page                                                                            ----  Reports of Independent Registered Public Accounting Firms                  F-1,2  Consolidated Balance Sheets at December 31, 2005 and 2004                  F-3  Consolidated Statements of Operations for the years ended December 31, 2005, 2004 and 2003                                                        F-4  Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 2005, 2004 and 2003                       F-5  Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2004 and 2003                                                        F-6  Notes to Consolidated Financial Statements                                 F-7                 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM  To the Board of Directors Isramco, Inc. and Subsidiaries Houston, Texas  We have audited the accompanying consolidated balance sheet of Isramco, Inc. and subsidiaries as of December 31, 2005 and 2004, and the related consolidated statements of operations, shareholders' equity, and cash flows for the years then ended. These financial statements are the responsibility of Isramco, Inc's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.  We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.  In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Isramco, Inc., as of December 31, 2005, and the results of its operations and its cash flows for the periods described above in conformity with accounting principles generally accepted in the United States of America.  As described in Note S, the financial statements for 2004 have been restated.  MALONE & BAILEY, PC www.malone-bailey.com Houston, Texas  March 20, 2006                                         F-1   REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM  To the Shareholders and Board of Directors of Isramco, Inc. and Subsidiaries  We have audited the accompanying consolidated statements of operations, changes in shareholders' equity, and cash flows of Isramco, Inc. and subsidiaries (the "Company") for the year ended December 31, 2003. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We did not audit the financial statements of Isramco Oil and Gas, Ltd.; Isramco B.V., Cruquius; or Isramco, Inc. - Israel Branch, which are wholly - owned subsidiaries whose combined statements reflect total revenues of $3,422,000 for the year ended December 31, 2003. Those statements were audited by other auditors whose reports have been furnished to us, and our opinion, insofar as it relates to the amounts included for these subsidiaries, is based solely on the reports of the other auditors.  We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit and the reports of the other auditors provide a reasonable basis for our opinion.  In our opinion, based on our audit and the reports of other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated results of the operations and the cash flows for the year ended December 31, 2003, in conformity with accounting principles generally accepted in the United States.  As discussed in Note A, the Company adopted the provisions of Statement of Financial Accounting Standards No. 143 "Accounting for Asset Retirement Obligations" as of January 1, 2003.                             /S/ UHY MANN FRANKFORT STEIN & LIPP CPAS, LLP                         (FORMERLY MANN FRANKFORT STEIN & LIPP CPAS, L.L.P)                         HOUSTON, TEXAS                         MARCH 5, 2004                                         F-2                                           ISRAMCO INC. AND SUBSIDIARIES                                        CONSOLIDATED BALANCE SHEETS                                (in thousands except for share information)                                                                                          DECEMBER 31                                                                                 ------------------------                                                                                    2005          2004                                                                                 ----------    ----------                                                                                               (RESTATED)                            ASSETS  CURRENT ASSETS          Cash and cash equivalents                                              $   1,249     $   2,087          Marketable securities, at market                                           5,570         6,203          Accounts receivable - Trade                                                  605           776          Prepaid expenses and other current assets                                     98           194                                                                                 ----------    ----------           TOTAL CURRENT ASSETS                                                       7,522         9,260  Property and equipment, net (successful efforts method for oil and gas properties)                                                  5,110         3,190 Real estate                                                                         1,887         1,887 Marketable securities, at market                                                    3,619         6,225 Investment in affiliates                                                           11,836        12,044 Investment in Vessel                                                                8,479         8,590 Other                                                                                 162           162                                                                                 ----------    ----------  TOTAL ASSETS                                                                    $  38,615     $  41,358                                                                                 ==========    ==========                    LIABILITIES AND SHAREHOLDERS' EQUITY  CURRENT LIABILITIES          Accounts payable and accrued expenses                                  $   2,243     $   1,261          Credit from banks                                                            370           676          Current portion of bank loan                                               1,010           733                                                                                 ----------    ----------           TOTAL CURRENT LIABILITIES                                                  3,623         2,670                                                                                 ----------    ----------  LONG-TERM LIABILITIES          Asset retirement obligations                                                 343           314          Deferred tax obligation                                                    2,899         3,469          Long-term bank loan                                                        3,257         4,869                                                                                 ----------    ----------           TOTAL LONG-TERM LIABILITIES                                                6,499         8,652                                                                                 ----------    ----------           TOTAL LIABILITIES                                                         10,122        11,322                                                                                 ----------    ----------  SHAREHOLDERS' EQUITY          Common stock $0.0l par value; authorized 7,500,000 shares;                    27            27          issued 2,746,958 in 2005 and 2,669,120 shares in 2004; outstanding          2,717,691 shares in 2005 and 2,639,853 shares in 2004          Additional paid-in capital                                                26,240        26,240          Retained earnings                                                          1,557         2,689          Accumulated other comprehensive income                                       833         1,244          Treasury stock, 29,267 shares at cost                                       (164)         (164)                                                                                 ----------    ----------           Total shareholders' equity                                                28,493        30,036                                                                                 ----------    ----------  Total liabilities and shareholders' equity                                      $  38,615     $  41,358                                                                                 ==========    ==========   See notes to the consolidated financial statements.                                                     F-3                                               ISRAMCO INC. AND SUBSIDIARIES                                      CONSOLIDATED STATEMENTS OF OPERATIONS                                   (in thousands except for share information)                                                                              YEAR ENDED DECEMBER 31,                                                               ------------------------------------------------                                                                   2005              2004              2003                                                               ------------      ------------      ------------                                                                                  (RESTATED)     Revenues and other income : Operator fees from related party                              $       977       $       137       $       753 Oil and gas sales                                                   3,319             3,174             3,439 Revenue from Vessel                                                 1,520             2,034                -- Interest income                                                       293               729               760 Office services          To related parties                                           476               592               635          To others                                                    462               180               304 Capital gain                                                           --                --               549 Gain on marketable securities                                         551               240               872 Equity in net income of investees                                     661             1,365             1,098 Other                                                                (524)              492               475                                                               ------------      ------------      ------------                   Total revenues and other income                    7,735             8,943             8,885                                                               ------------      ------------      ------------ Expenses : Interest expense                                                      205               168                52 Cost of revenue from vessel                                         1,051             1,926                -- Accretion expense                                                      25                 5                43 Depreciation, depletion and amortization                            2,139             1,334               621 Lease operation expense and severance taxes                         1,458             1,149               872 Exploration costs                                                     110                --               165 Operator expense                                                      767               807               795 General and administrative             To related parties                                        503               358               317             To others                                               1,810             1,359             1,695 Impairment of oil and gas assets                                      759               268               617                                                                ------------      ------------      ------------                Total expenses                                       8,827             7,374             5,177                                                               ------------      ------------      ------------   Income (loss) before income taxes                                  (1,092)            1,569             3,708 Income (taxes) benefit                                                (40)             (576)           (1,188)                                                               ------------      ------------      ------------  Net income (loss) before cumulative effect                         (1,132)              993             2,520 Cumulative effect of change in accounting principle, net               --                --              (264)                                                               ------------      ------------      ------------  Net income (loss)                                             $    (1,132)      $       993       $     2,256                                                               ============      ============      ============  Earnings (loss) per share Basic and diluted earnings (loss) per share for:    Net income (loss) before cumulative effect                 $     (0.42)      $      0.38       $      0.95    Cumulative effect of accounting change, net                         --                --             (0.10)                                                               ------------      ------------      ------------ Net income (loss)                                             $     (0.42)      $      0.38       $      0.85                                                               ============      ============      ============ Weighted average number of shares    outstanding-basic                                            2,709,355         2,639,853         2,639,853                                                               ============      ============      ============ Weighted average number of shares outstanding -diluted          2,709,355         2,640,751         2,639,853                                                               ============      ============      ============   See notes to the consolidated financial statements.                                                                    F-4                                                          ISRAMCO INC. AND SUBSIDIARIES                                      CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY                              FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 (RESTATED) AND 2003 (RESTATED)                                               COMMON STOCK                                         ---------------------                 ACCUMULATED      RETAINED                                                                 ADDITIONAL       OTHER         EARNINGS                    TOTAL                                           NUMBER                 PAID-IN     COMPREHENSIVE   (ACCUMULATED   TREASURY   SHAREHOLDERS'                                          OF SHARES    AMOUNT     CAPITAL     INCOME (LOSS)      DEFICIT)      STOCK        EQUITY                                         -----------  --------   ----------   -------------   ------------   ---------  -------------                                                                   $ IN THOUSANDS, EXCEPT SHARE AMOUNTS         Balances at December 31, 2002            2,669,120   $     27   $   26,240   $        (544)  $       (560)  $   (164)  $     24,999 Comprehensive income:  Net Income                                                                                          2,256                     2,256 Net unrealized gain on available   for sale marketable   securities, net of taxes                      --         --           --             524             --         --            524 Net gain (loss) on foreign   exchange rate, net of taxes                                                          609                                      609                                                                                                                        -------------                                                                                                                               3,389                                         -----------  --------   ----------   -------------   ------------   ---------  ------------- Balances at December 31, 2003            2,669,120         27       26,240             589          1,696       (164)        28,388   Net Loss                                                                                              993                       993 Net unrealized gain on available   for sale marketable   securities, net of taxes                      --         --                          504                        --            504 Net realized gain (loss) on foreign   exchange rate, net of taxes                                                          151                                      151                                                                                                                        ------------- Total Comprehensive income                                                                                                    1,558                                         -----------  --------   ----------   -------------   ------------   ---------  ------------- Balances at December 31, 2004            2,669,120         27       26,240           1,244          2,689       (164)        30,036 Shares issued for exercise of options       77,838         --           --                                                        - Net Loss                                                                                           (1,132)                   (1,132) Net unrealized gain on available   for sale marketable securities,   net of taxes                                                                         113                                      113 Net gain (loss) on foreign exchange   rate, net of taxes                                                                  (524)                                    (524)                                                                                                                        ------------- Total Comprehensive income (loss)                                                                                            (1,543)                                         -----------  --------   ----------   -------------   ------------   ---------  ------------- Balances at December 31, 2005            2,746,958   $     27   $   26,240   $         833   $      1,557   $   (164)  $     28,493                                         ===========  ========   ==========   =============   ============   =========  =============   See notes to the consolidated financial statements.                                                                   F-5                                               ISRAMCO INC. AND SUBSIDIARIES                                      CONSOLIDATED STATEMENTS OF CASH FLOWS                                                  (in thousands)                                                                                      YEAR ENDED DECEMBER 31,                                                                       ------------------------------------------------                                                                           2005              2004              2003                                                                       ------------      ------------      ------------                                                                                          (RESTATED)     CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)                                                     $    (1,132)      $       993       $     2,256  Adjustments to reconcile net income (loss) to cash provided  by operating activities:  Depreciation, depletion, amortization and provision for impairment          2,898             1,140             1,238 Accretion of asset retirement obligation                                       25                 5                43 Dry hole costs                                                                 --                --                99 Loss (gain) on marketable securities                                         (550)             (336)             (872) Gain from sale of securities                                                   --                --              (549) Equity in net loss (income) of investees                                     (661)           (1,366)           (1,098) Cumulative effect of an accounting change                                      --                --               264 Deferred taxes                                                               (355)              790             1,532 Changes in assets and liabilities: Accounts receivables                                                          172              (272)               53 Prepaid expenses and other current assets                                     169               160              (163) Accounts payable and accrued expenses                                         980               462            (1,377) Marketable securities trading                                                  --                --              (138)                                                                       ------------      ------------      ------------ Net cash provided by operating activities                                   1,545             1,576             1,288                                                                       ------------      ------------      ------------  CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment                                         (4,703)           (1,098)             (676) Investment in vessel                                                                         (9,028)               -- Proceeds from sale of oil and gas properties and equipment                                       14                -- Purchase of real estate                                                                          --                -- Purchase of marketable securities                                          (3,353)           (4,807)           (3,070) Proceeds from sale of marketable securities                                 7,315             6,115             3,270 Proceeds from sale of other investment                                         --               609                --                                                                       ------------      ------------      ------------ Net cash used in investing activities                                        (741)           (8,195)             (476)                                                                       ------------      ------------      ------------  CASH FLOWS FROM FINANCING ACTIVITIES:  Receipt of loans from banks                                                    --             9,800                -- Payments on short-term debt                                                (1,336)           (4,800)               -- Change in short-term credit from banks                                       (306)            1,277                --                                                                       ------------      ------------      ------------ Net cash provided by financing activities                                  (1,642)            6,277                --                                                                       ------------      ------------      ------------  NET INCREASE (DECREASE)  IN CASH AND CASH EQUIVALENTS                        (838)             (342)              812  CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                              2,087             2,429             1,617                                                                       ------------      ------------      ------------  CASH AND CASH EQUIVALENTS AT END OF YEAR                              $     1,249       $     2,087       $     2,429                                                                       ============      ============      ============  SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:  CASH PAID DURING THE PERIOD FOR INTEREST                              $       205       $       168       $        52                                                                       ============      ============      ============ CASH PAID DURING THE PERIOD FOR TAXES                                 $        65       $        82       $        50                                                                       ============      ============      ============   See notes to the consolidated financial statements.                                                        F-6                             ISRAMCO INC. AND SUBSIDIARIES                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (NOTE A) -- General and Summary of Significant Accounting Policies:  [1] The Company  Isramco Inc. (the "Company") is primarily engaged in the acquisition, exploration, operation and development of oil and gas properties. As of December 31, 2005, the Company had oil and gas interests in Texas, Louisiana, Oklahoma, Wyoming, New Mexico, and working interests in various properties located in Israel.  In addition, the Company owns real estate in Israel and a luxury cruise liner.  [2] Consolidation  The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries: Jay Petroleum, L.L.C., a Texas limited liability company (Jay); Jay Management L.L.C., a Texas limited liability company (Jay Management); IsramTec Inc., a Delaware corporation (IsramTec); Isramco Oil and Gas Ltd., an Israeli company; and Magic 1 Cruise Line, Corp., a British Virgin Island corporation. Inter-company balances and transactions have been eliminated in consolidation.  [3] Method of Accounting for Oil and Gas Operations  The Company follows the "successful efforts" method of accounting for its oil and gas producing activities. Costs to acquire mineral interests in oil and gas properties, to drill and equip exploratory wells that find proved reserves, and to drill and equip development wells are capitalized. Costs to drill exploratory wells that do not find proved reserves, geological and geophysical costs, and costs of carrying and retaining unproved properties are expensed. Costs incurred for exploratory wells that find reserves that cannot yet be classified as proved are capitalized on the Company's balance sheet if (a) the well has found a sufficient quantity of reserves to justify its completion as a producing well and (b) the Company is making sufficient progress assessing the reserves and the economic and operating viability of the project. Otherwise, well costs are expensed if a determination as to whether proved reserves were found cannot be made within one year following the completion of drilling and these criteria are not met.  Management estimates that the salvage value of lease and well equipment will approximately offset the future liability for plugging and abandonment of the related wells. Accordingly, no accrual for such costs has been recorded.  [4] Marketable Securities  Statement of Financial Accounting Standard No. 115 (SFAS No. 115), Accounting for Certain Investments in Debt and Equity Securities, requires the Company to classify its debt and equity securities in one of three categories: trading, available-for-sale and held-to-maturity. Trading securities are bought and held principally for the purposes of selling them in the near term. Held-to-maturity securities are those securities in which the Company has both the ability and intent to hold the security until maturity. All other securities not included in trading or held-to-maturity are classified as available-for-sale.  Trading and available-for-sale securities are recorded at fair market value. The Company holds no held-to-maturity securities. Unrealized holding gains and losses on trading securities are included in earnings. Unrealized holding gains or losses, net of the related tax effects, on available-for-sale securities are excluded from earnings and are reported net of applicable taxes as accumulated other comprehensive income, a separate component of shareholders' equity, until realized.  [5] Investment in Affiliates  The Company uses the equity method to account for its investments in affiliate entities over which it has the ability to exercise significant influence over operating and financial policies.                                         F-7   [6] Equipment  Equipment, consisting of motor vehicles, office furniture and equipment, is carried at cost less accumulated depreciation, computed on the straight-line method over the estimated useful lives of the assets.  [7] Translation of Foreign Currencies  Foreign currency is translated in accordance with Statement of Financial Accounting Standards No. 52, which provides the criteria for determining the functional currency for entities operating in foreign countries. The Company has determined its functional currency is the United States (U.S.) dollar since all of its contracts are in U.S. dollars. The financial statements of Oil and Gas and the Israel branch the Company's Israeli subsidiaries have been translated into U.S. dollars as follows: at rates prevailing during the year for revenue and expense items (except depreciation); at year-end rates for assets and liabilities except for fixed assets and prepaid expenses which are translated at the rate in effect at the time of their acquisition. Depreciation is translated based on the historical dollar cost of the underlying assets. The net effects of currency translations were not material in any period.  [8] Earnings Per Share (EPS)  The Company follows SFAS No. 128, Earnings per Share, for computing and presenting earnings per share, which requires, among other things, dual presentation of basic and diluted loss per share on the face of the statement of operations. Basic EPS is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common shares were exercised or converted into common shares or resulted in the issuance of common shares that then shared in the earnings of the entity. For the year ended December 31, 2005, the Company's stock options were anti-dilutive.  [9] Cash Equivalents  Cash equivalents include short-term investments with original maturities of ninety days or less and are not limited in their use.  [10] Non-compete Agreements  Non-compete agreements are amortized over the terms of the agreements, which are generally from three to five years.  [11] Use of Estimates  The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and related notes. Actual results could differ from those estimates.  Oil and gas reserve quantities are the basis for the calculation of depreciation, depletion and impairment of oil and gas properties. An independent petroleum engineering firm estimates the Company's reserves. However, management emphasizes that reserve estimates are inherently imprecise and that estimates of more recent discoveries and non-producing reserves are more imprecise than those for properties with long production histories. At December 31, the Company's oil and gas reserves were attributable to non-producing reserves. Accordingly, the estimates of the Company's reserves are expected to change as additional information becomes available.  As mandated under SFAS No. 144, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets" (SFAS No. 144), the Company is required under certain circumstances to evaluate the possible impairment of the carrying value of its long-lived assets. For proved oil and gas properties, this involves a comparison to the estimated future undiscounted cash flows, as described in the paragraph below. In addition to the uncertainties inherent in the reserve estimation process, these amounts are affected by management's estimates for projected prices for oil and natural gas, which have typically been volatile. It is reasonably possible that the Company's oil and gas reserve estimates may materially change in the forthcoming year.                                         F-8   [12] Impairment of Long-Lived Assets  The Company adopted SFAS No. 144, effective as of January 1, 2002. This Statement requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to undiscounted future cash flows expected to be generated by the asset or used in its disposal. If the carrying amount of an asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized equal to the amount by which the carrying amount exceeds the fair market value of the asset. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.  During 2005 and 2004, the Company reported impairment charges of $759,000 and $50,000 respectively, relating to its proved properties. During 2003, the Company recorded impairment charges of $248,000 relating to its proved properties and $81,000 related to the retirement obligation assets.  Unproved oil and gas properties that are individually significant are periodically assessed for impairment value, and a loss is recognized to the extent, if any, that the cost of the property has been impaired. During 2005, 2004 and 2003, the Company recorded impairments of $0, $218,000 and $288,000, respectively, relating to its unproved properties.  [13] Income Taxes  The Company accounts for income taxes using the asset and liability method as prescribed by SFAS No. 109, Accounting for Income Taxes. Deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities, and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The measurement of deferred tax assets is reduced, if necessary, by a valuation allowance for any tax benefits that are not expected to be realized. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that such tax rate changes are enacted.  [14] Oil and Gas Revenues  The Company follows the entitlement method of accounting for recording oil and gas revenues under that method, any revenues received in excess of the Company's share is treated as a liability. If revenues received are less than the Company's share, the deficiency is recorded as an asset. The Company's imbalance position was not significant in terms of volumes or values at December 31, 2005 and 2004.  [15] Environmental  The Company is subject to extensive federal, state, local and foreign environmental laws and regulations. These laws, which are constantly changing, regulate the discharge of materials into the environment and may require the Company to remove or mitigate the environmental effects of the disposal or release of petroleum or chemical substances at various sites. Liabilities for expenditures of no capital nature are recorded when environmental assessment and/or remediation is probable, and the costs can be reasonably estimated. No significant amounts for environmental liabilities were recorded at December 31, 2005 and 2004.  [16] Stock-Based Compensation  SFAS No. 123, "Accounting for Stock-Based Compensation," encourages, but does not require, companies to record compensation cost for stock-based employee compensation plans at fair value. In December 2002, the FASB issued SFAS No. 148, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. The statement also amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based compensation and the effect of the method used on reported results.  The Company has chosen to continue to account for stock-based compensation issued to employees using the intrinsic value method prescribed in Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. Accordingly, compensation cost for stock options is                                         F-9   measured as the excess, if any, of the quoted market price of the Company's stock at the date of the grant over the amount an employee must pay to acquire the stock.  The fair value of options is calculated using the Black-Scholes option-pricing model. Had the Company adopted the fair value method of accounting for stock based compensation, compensation expense would have been higher, and net loss and net loss attributable to common shareholders would have increased for the periods presented. No change in cash flows would occur. The effects of applying SFAS No. 123 in this pro forma disclosure are not indicative of future amounts.                                                                         Year Ended December 31,                                                                         (in thousands)                                                              ------------------------------------                                                                 2005         2004         2003                                                              ----------   ----------   ----------     Net income (loss) reported.................................. $  (1,132)   $     993    $   2,256   Deduct:     Total stock based employee compensation expense       determined under fair value based method for all       awards, net of related income tax..................                        --           -- Pro forma net (loss)........................................    (1,132)         993        2,256 Net Loss Per Share..........................................   Basic-as reported......................................... $   (0.42)   $    0.38    $    0.85   Basic-pro forma...........................................     (0.42)        0.38         0.85   Diluted-as reported.......................................     (0.42)        0.38         0.85   Diluted-pro forma.........................................     (0.42)        0.38         0.85   [17] Accounting Changes  Effective January 1, 2003, the Company adopted SFAS No. 143 "Accounting for Asset Retirement Obligations" and recognized a loss of $264,000 that is included as a cumulative effect of change in accounting principle. Effective January 1, 2002, the Company applied the provisions of Statement SFAS No.142 "Goodwill and Other Intangible Assets". In 2002, the Company performed the transitional impairment evaluation as provided in the said standard. Accordingly, the Company recognized for the year ended December 31, 2003 a gain in the amount of $3,516,000 from a negative goodwill that is included as a cumulative effect of a change in accounting principle.  [18] Reclassifications  Certain amounts in prior financial statements have been reclassified to conform to the 2005 financial statements presentation.  [19] New Pronouncements need to update  In April 2003, the Financial Accounting Standards Board issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." The statement amends and clarifies accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts, and hedging activities. This statement is designed to improve financial reporting such that contracts with comparable characteristics are accounted for similarly. The statement, which is generally effective for contracts entered into or modified after June 30, 2003, has been considered for the Company's derivative instruments.  In December 2004, the FASB issued SFAS No. 123R, "Accounting for Stock-Based Compensation." SFAS No. 123R establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. This Statement focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. SFAS No. 123R requires that the fair value of such equity instruments be recognized as expense in the historical financial statements as services are performed. Prior to SFAS No. 123R, only certain pro forma disclosures of fair value were required. SFAS No. 123R shall be effective for small business issuers as of the beginning of the first interim or annual reporting period that begins after December 15, 2005. The adoption of this new accounting pronouncement is not expected to have a material impact on the financial statements of the Company during the calendar year 2006.                                         F-10   (NOTE B) - Transactions with Affiliates and Related Parties  The Company acts as operator for joint venture with related parties in Israel engaged in the exploration of oil and gas for which it receives operating fees equal to the larger of 6% of the actual direct costs or minimum monthly fees of $6,000.  Operator fees earned and related operator expenses are as follows:                                         YEAR ENDED DECEMBER 31,                                        -----------------------                                2005               2004               2003                          $ IN THOUSANDS     $ IN THOUSANDS     $ IN THOUSANDS                         ----------------   ----------------   ----------------  Operator fees: Nir 2                   $            --    $            --    $           559 Gad 1                               905                 --                 -- Med Ashdod Lease                     72                 --                 56 GAL C                                --                 72                 -- Marine North                         --                 --                 -- Marine Center                                           --                 66 Marine South                         --                 65                 72                         ----------------   ----------------   ----------------  Operator Income         $           977    $           137    $           753                         ================   ================   ================  Operator expenses       $           767    $           807    $           795                         ================   ================   ================  In December 2003, the Company entered into a consulting agreement with Doron Avraham, the Vice President of the Company. Pursuant to this agreement, the Company agreed to pay the consultant the sum of $15,000 per month plus expenses in consideration of the services that he provides to the Company. The term of the consulting agreement expires in November 2007.  The Company paid Naphtha Israel Petroleum Corp., Ltd. ("Naphtha") $235,000, $228,000 and $197,000 for the years ended December 31, 2005, 2004 and2003, respectively, for rent and office, secretarial and computer services. Naphtha is the sole shareholder of Naphtha Holdings, Ltd., which is the record holder of 48.39% of the Company's outstanding common stock and which may be deemed to be controlled by Haim Tsuff, the Chairman of the Board of Directors and Chief Executive Officer of the Company.  The Company paid Equital Ltd. $148,375 consulting fee for Isramco's projects in US and in Israel .Equital is company controlled by Haim Tsuff, the chairman of the Board and Chief Executive Officer of the Company.  Isramco Oil and Gas Ltd. ("IOG"), a wholly-owned subsidiary of the Company, is the general partner of Isramco-Negev 2 Limited Partnership, from which the Company received management fees and expense reimbursements of $480,000 for each of the years ended December 31, 2005, 2004 and 2003.  In May 1996, the Company entered into a consulting agreement with Goodrich Global L.T.D. B.V.I., a company owned and controlled by Haim Tsuff, the Chairman of the Board of Directors and Chief Executive Officer of the Company. Pursuant to this consulting agreement, the Company pays the consultant $144,000 per annum in installments of $12,000 per month plus expenses in consideration of the services that Mr. Tsuff provides to the Company. In April 1997, the consulting fees payable under the agreement was increased to $240,000 per annum in installments of $20,000 per month. The term of the consulting agreement expires in May 2006. In the event that the Company terminates the agreement, the consultant will be entitled to receive a lump sum severance payment equal to the balance of the unpaid consulting fees due for the remaining term of the agreement.                                         F-11   In November 1999, the Company entered into a consulting agreement with Worldtech Inc., a Mauritus company of which Jackob Maimon, the President of the Company, is a director. Pursuant to this consulting agreement, the Company pays the consultant $240,000 per annum in installments of $20,000 per month plus expenses in consideration of the services that he provides to the Company. The term of the agreement expires in May 2006. In the event that the Company terminates the agreement, , the consultant shall be entitled to receive a lump sum severance payment equal to the balance of the unpaid consulting fees due for the remaining term of the agreement.  In December 2003, the Company awarded bonuses of $125,000 to its Chief Executive Officer and Chairman of the Board of Directors and $125,000 to its President.  In December 2004, the Company awarded a bonus of $150,000 to its Chief Executive Officer and Chairman of the Board of Directors.  In December 2005, the Company awarded bonuses of $150,000 to its Chief Executive Officer and Chairman of the Boards of Directors, $150,000 to its President and $75,000 to its Vice President.  In December 2004, the Company leased real estate to I.O.C. Israel Oil Company LTD pursuant to a two-year lease at a monthly rental of $7,000.  On January 1, 2001 the Company retained the services of I.O.C. Israel Oil Company LTD in connection with the operation of Jay Petroleum and Jay Management. The Company paid I.O.C. $120,000 for each of the years 2005, 2004 and 2003. I.O.C is a company fully owned by Naphtha Israel Petroleum Corporation, a company controlled by Haim Tsuff.  (NOTE C) - Investments in Affiliate  Isramco Oil and Gas Ltd. ("IOG"), a wholly-owned subsidiary of the Company, is the general partner of the Isramco Negev 2 Limited Partnership (the "Limited Partnership"). The daily management of the Limited Partnership is under the control of the general partner; however, matters involving the rights of the Limited Partnership unit holders are subject to supervision of a supervisor, appointed to supervise the Limited Partnership activities, and in some instances the approval of the Limited Partnership unit holders. Through IOG, the Company owns a 0.05% interest in the Limited Partnership, which is accounted for by the equity method of accounting due to the Company's ability to exercise significant influence over the Limited Partnership.  At December 31, 2005 and 2004, the Company owned 282,817,359 units (6.65% of the issued Limited Partnership units) of the Limited Partnership, with a cost of valued at $4,050,000 and market value of $6,768,000 and $6,498,000, respectively. This investment is also accounted for under the equity method of accounting.                                         F-12   Summarized financial information of the Limited Partnership is as follows (amounts in thousands) (unaudited):                                          AS OF DECEMBER 31,                                   ------------------------------ Balance Sheet                          2005            2004                                   --------------  --------------  Current Assets                    $     127,661   $     128,016 Other Assets                              1,653           2,908                                   --------------  -------------- Total Assets                            129,314         130,924                                   ==============  ==============  Current Liabilities                         109             129 Equity                            $     129,205   $     130,795                                   --------------  -------------- Total Liabilities and equity      $     129,314   $     130,924                                   ==============  ==============                                                 Year Ended December 31,                                   ---------------------------------------------- Statement of Operations                2005            2004            2003                                   --------------  --------------  --------------  Income                            $      15,509   $      13,080   $      19,700 Expenses                                 (7,267)           (807)         (8,500)                                   --------------  --------------  -------------- Net income                        $       8,242   $      12,273   $      11,200                                   ==============  ==============  ==============  At December 31, 2005 and 2004 the Company also owned 7,877,248 of units (24.97% of the issued Partnership units) of the I.N.O.C Dead Sea Limited Partnership with a cost of $1,270,000 and value at $2,530,000 and $2,452,000, respectively. This investment is also accounted for under the equity method of accounting.                                         F-13   Summarized financial information of I.N.O.C. Dead Sea Limited Partnership is as follows (amounts in thousands - unaudited):                                          AS OF DECEMBER 31,                                   ------------------------------ Balance Sheet                          2005            2004                                   --------------  --------------  Current Assets                    $      13,277   $      13,752 Other Assets                                 --              --                                   --------------  -------------- Total Assets                      $      13,277          13,752                                   ==============  ==============  Current Liabilities                          65              71 Equity                            $      13,212   $      13,681                                   --------------  -------------- Total Liabilities and Equity      $      13,277   $      13,752                                   ==============  ==============                                                 Year Ended December 31,                                   ---------------------------------------------- Statement of Operations                2005            2004            2003                                   --------------  --------------  --------------  Income                            $       1,495   $       2,488   $       2,070 Expenses                                   (262)           (300)         (1,400)                                   --------------  --------------  -------------- Net income                        $       1,233   $       2,188   $         670                                   ==============  ==============  ==============  (NOTE D) - Marketable Securities  At December 31, 2005 and 2004, the Company had net unrealized gains on marketable securities (trading and available for sale) of $1,538,000 and $1,717,000 respectively. Sales of marketable securities resulted in realized gains of $550,000, $240,000 and $872,000 for the years ended December 31, 2005, 2004 and 2003, respectively.  Trading securities, which are primarily traded on the Tel-Aviv Stock Exchange, consists of the following:                                                        DECEMBER 31, 2005              DECEMBER 31, 2004                                               ----------------------------    ----------------------------                                                   COST        MARKET VALUE       COST         MARKET VALUE                                               ------------    ------------    ------------    ------------      Debentures and Convertible Debentures         $  3,852,000    $  3,981,000    $  2,222,000    $  3,164,000 Equity securities                                1,476,000       1,432,000       2,433,000       1,931,000 Investment Trust Funds                             145,000         157,000       1,091,000       1,108,000                                               ------------    ------------    ------------    ------------                                               $  5,473,000    $  5,570,000    $  5,746,000    $  6,203,000                                               ============    ============    ============    ============                                          F-14   Available-for-sale securities, which are primarily traded on the Tel-Aviv Stock Exchange and on the OTC Bulletin Board, consist of the following:              DECEMBER 31, 2005              DECEMBER 31, 2004       ----------------------------    ----------------------------           COST        MARKET VALUE       COST         MARKET VALUE       ------------    ------------    ------------    ------------        $  2,178,000    $  3,619,000    $  4,955,000    $  6,225,000       ------------    ------------    ------------    ------------  (NOTE E) - Other assets - Investment in a high-tech company.  The Company sold 203,000 shares of high tech Company, Eyeblaster for $609,000 recognizing a gain of $549,000 in December 2003.  (NOTE F) - Oil and Gas Properties and Equipment  Annual rates of depreciation are as follows:  Office equipment and furniture                                       7%--20% Motor vehicles                                                      15%--30%                                                                2005                  2004                                                        -------------         -------------    Transportation equipment                                     167,000               142,000 Office equipment                                             100,000               100,000                                                        -------------         -------------                                                              267,000               242,000                                                        -------------         ------------- Less accumulated depletion,                                (174,000)             (170,000) Equipment, net                                                93,000                72,000                                                        -------------         -------------  A summary of property and equipment is as follows:                                                             2005                  2004                                                        -------------         ------------- Unproved properties                                    $      37,000                37,000 Proved Oil and gas properties                             10,552,000             7,305,000 Retirement obligation assets                                 230,000               108,000 Equipment                                                    271,000               242,000                                                        -------------         -------------                                                           11,090,000             7,692,000 Less accumulated depletion, depreciation, amortization and provision for impairment                (5,970,000)           (4,502,000)                                                        -------------         -------------                                                            5,110,000             3,190,000                                                        =============         =============   (NOTE G) Derivative Instruments  The Company enters into derivative contracts to provide a measure of stability in the cash flows associated with the Company's oil and gas production and to manage exposure to commodity price. The Company's objective is to lock in a range of oil and gas prices.  Derivative contracts not designated as hedges are "marked to market" at each period end and the increases or decreases in fair values recorded as other revenue in the statement of operations. No derivative instruments have been designated as cash flow hedges. During 2005, 2004 and 2003, the Company had recorded losses of $671,000, $0 and $0, respectively, related to its derivative instruments.  The Company is exposed to credit risk in the event of nonperformance by the counter party to these contracts, Bank of Oklahoma. However, the Company periodically assesses their credit worthiness to mitigate this credit risk.                                         F-15   (NOTE H) Debt    The Company's debt consists of the following as of:                   DECEMBER 31, 2005         DECEMBER 31, 2004                                                                       -----------------         -----------------    Bank loan, repayable in 19 equal quarterly installments (of principal and interest) over the period beginning June 20, 2005, interest rate of LIBOR + 1% per annum, due December 20, 2009                                                     $      4,267,000          $      5,002,000 Bank loan, due on March 29, 2005, interest of 3.35%                                 --                   600,000                                                                       -----------------         ----------------- Total debt                                                                   4,267,000                 5,602,000 Less: current portion                                                       (1,010,000)                 (733,000)                                                                       -----------------         ----------------- Long term debt                                                        $      3,257,000          $      4,869,000                                                                       =================         =================   For purpose of securing its liability, the Company agreed to the placement of a lien on the cruise line vessel.  (NOTE I) EPS Computation  SFAS No. 128, "Earnings Per Share", requires a reconciliation of the numerator (income) and denominator (shares) of the basic EPS computation to the numerator and denominator of the diluted EPS computation. The company's reconciliation is as follows:                                                               FOR THE YEAR ENDED DECEMBER 31,                                   ----------------------------------------------------------------------------------                                              2005                        2004                        2003                                   -------------------------    -------------------------   -------------------------                                      INCOME        SHARES         INCOME        SHARES        INCOME        SHARES                                   ------------   ----------    ------------   ----------   ------------   ----------        Earnings (loss) - basic           $(1,132,000)    2,709,355    $    993,000    2,639,853   $  2,256,000    2,639,853 Effect of dilutive securities: Stock options                              --            --              --          898             --           -- Earnings (loss) - diluted         $(1,132,000)    2,709,355    $    993,000    2,640,751   $  2,256,000    2,639,853   (NOTE J) Stock Options  The 1993 stock option plan (the 1993 Plan) was approved at the annual meeting of shareholders held in August 1993. At December 31, 2005, 50,000 shares of common stock were reserved for issuance under the 1993 Plan. Options granted under the 1993 Plan may be either incentive stock options under the Internal Revenue Code or options which do not qualify as incentive stock options. Options granted under the 1993 Plan may be exercised for a period of up to ten years from the grant date. The exercise price for an incentive stock option may not be less than 100% of the fair market value of the Company's common stock on the date of grant. All the options granted under the 1993 Plan to date were fully vested on the date of grant. The administrator of the 1993 Plan may set the exercise price for a nonqualified stock option at less than 100% of the fair market value of the Company's common stock on the date of grant.                                         F-16   A summary of the stock options outstanding under the 1993 Plan is presented below:                                                  WEIGHTED-AVERAGE  1993 Plan:                                  OPTIONS          EXERCISE PRICE                                         ----------------    ---------------- Outstanding at December 31, 2002                 29,750     $          21.00 Granted                                              --                   -- Expired                                         (24,250)               23.39                                         ----------------    ---------------- Outstanding at December 31, 2003                  5,500     $          10.45 Granted                                              --                   -- Expired                                          (2,500)               16.92                                         ----------------    ---------------- Outstanding at December 31, 2004                  3,000     $           5.06 Expired                                          (3,000)                5.06                                         ----------------    ---------------- Outstanding at December 31, 2005                     --     $             --                                         ================    ================  No stock options were granted during 2005, 2004 and 2003. Shares of common stock reserved for future issuance under the 1993 plane are 20,050 shares.  (NOTE K) -- Income Taxes  Income (loss) before income taxes from U.S. and foreign results of operations is as follows:                                                YEAR ENDED DECEMBER 31,                                   ----------------------------------------------                                        2005            2004            2003                                   --------------  --------------  -------------- U.S.                              $    (600,000)  $   1,107,000   $   1,022,000 Foreign                                (492,000)        462,000       2,426,000                                   --------------  --------------  -------------- Total                             $  (1,092,000)  $   1,569,000   $   3,448,000                                   ==============  ==============  ==============  Total income tax expense (benefit) for each of the years ended December 31, 2005, 2004 and 2003 were allocated as follows:                                                Year Ended December 31,                                   ----------------------------------------------                                        2005            2004            2003                                   --------------  --------------  --------------                                                     (RESTATED) Income taxes (benefit)            $      40,000   $     576,000   $   1,188,000 Shareholders' equity for   unrealized holding gains   (losses) on marketable   securities                            212,000         260,000          80,000                                   --------------  --------------  -------------- Total                             $     252,000   $     836,000   $   1,268,000                                   ==============  ==============  ==============  Income tax expense (benefit) attributable to income from continuing operations consist of:                                                YEAR ENDED DECEMBER 31,                                   ----------------------------------------------                                        2005            2004            2003                                   --------------  --------------  -------------- Current:        State                      $      25,000   $      24,000   $      17,000        Federal                               --              --       1,171,000        Foreign                          370,000              --              -- Deferred federal                       (355,000)        552,000              --                                   --------------  --------------  -------------- Total                             $      40,000   $     576,000   $   1,188,000                                   ==============  ==============  ==============                                         F-17   The deferred tax assets (liabilities) as of December 31, 2005 and 2004 are as follows:                                                                   2005              2004                                                            -------------     -------------                                                                                   (RESTATED) Net unrealized depreciation (appreciation) of marketable   $   (523,000)     $   (589,000) securities Investments in partnerships                                  (2,510,000)       (2,780,000) Basis differences in property and equipment                    (708,000)         (254,000) Losses carry-forward                                            456,000           154,000 Foreign tax credit carry-forward                                370,000                -- Other timing differences                                         16,000                --                                                            -------------     ------------- Total                                                      $ (2,899,000)     $ (3,469,000)                                                            =============     =============   Reconciliation between the actual income tax expense (benefit) and income taxes computed by applying the U.S. Federal income tax rate to income before income taxes is as follows:                                                YEAR ENDED DECEMBER 31,                                   ----------------------------------------------                                        2005            2004            2003                                   --------------  --------------  --------------                                                     (RESTATED)  Computed at U.S. statutory rates         (35.0)%           35.0%          35.0% State income taxes, net of   federal benefit                          2.3%             1.1%           0.5% Foreign income taxes                      33.9%              --             -- Other                                     2.5%              0.6%         (1.05)%                                           3.7%             36.7%         34.45%  (NOTE L) -- Concentrations of Credit Risk  Financial instruments, which potentially expose the Company to concentrations of credit risk, consist primarily of trade accounts receivable. The Company's customer base includes several of the major United States oil and gas operating and production companies. Although the Company is directly affected by the well-being of the oil and gas production industry, management does not believe a significant credit risk existed at December 31, 2005.  The Company maintains deposits in banks, which may exceed the amount of federal deposit insurance available. Management periodically assesses the financial condition of the institutions and believes that any possible deposit loss is minimal.  A significant portion of the Company's cash and cash equivalents is invested in marketable securities. Substantially all marketable securities owned by the Company are held by banks in Israel and Switzerland.  (NOTE M) -- Luxury Cruise Liner  In March 2004, the Company purchased a luxury cruise liner for aggregate consideration of $8,050,000.  In March 2004, the Company borrowed approximately $7.5 million from commercial banks to finance the purchase of the vessel. The loans are secured by a lien on the vessel, marketable securities and a Company guarantee. As of December 31, 2005, approximately $4.3 million in principal of the loans remain outstanding. Interest on the loan accrues at the per annum rate of LIBOR+1% per annum.  Title to the vessel is held by Magic 1 Cruise Line Corp., a wholly owned subsidiary of the Company ("Magic").  The Company leased the vessel to a European-based tour operator for the period from April 21, 2005 through October 27, 2005 at a daily rate of $8,000.                                         F-18   (NOTE N) -- Commitments and Contingencies  COMMITMENTS:  The Company leases corporate office facilities under a three-year operating lease expiring in October 2006 at a monthly rental of $2,400 with escalation to $2,500 on November 2005. The Company is also responsible for its pro rate share of the operating expenses that exceed a certain threshold.  At December 31, 2005, future minimum lease payments under non-cancelable operating leases were approximately $26,000. Future annual minimum lease payments are follows:                                                   Year Ending                                                 December 31,                                                 ------------                  2006                            $     26,000                                                 ------------                                                 $     26,000                                                 ============  CONTINGENCIES:  The Company is involved in various other legal proceedings arising in the normal course of business. In the opinion of management, the Company's ultimate liability, if any, in these pending actions would not have a material adverse effect on the financial position, operating results or liquidity of the Company.  (NOTE O) - Geographical Segment Information  The Company's operations for 2005 involve two industry segments - the exploration, development production and transportation of oil and natural gas and holding and leasing its cruise line vessel. Prior to 2004, the Company operated in a single operating segment - oil and gas activities. Its current oil and gas activities are concentrated in the United States and Israel. Operating outside the United States subjects the Company to inherent risks such as a loss of revenues, property and equipment from such hazards as exploration, nationalization, war, terrorism and other political risks, risks of increased taxes and governmental royalties, renegotiation of contracts with government entities and change in laws and policies governing operations of foreign-based companies.  The Company's oil and gas business is subject to operating risks associated with the exploration, and production of oil and gas, including blowouts, pollution and acts of nature that could result in damage to oil and gas wells, production facilities of formations. In additions, oil and gas prices have fluctuated substantially in recent years as a result of events, which were outside of the Company's control. The Company does not directly operate the cruise line vessel. The Company leases the vessel to third party cruise line operators. This segment of the Company's business is subject to many risks all of which cannot be presently anticipated, including losses resulting from unexpected repairs and maintenance and competition.                                         F-19                                                           GEOGRAPHIC SEGMENTS                                                       -------------------                                                         (IN THOUSANDS)                                                         --------------                                                                                       TOTAL                                                                                  OIL AND GAS                    CONSOLIDATED                                                  UNITED STATES      ISRAEL        AND OTHER        VESSEL           TOTAL                                                  -------------    ----------    -------------    ----------    --------------                2005 Sales and other operating revenue                $       3,319    $    1,915    $       5,234    $    1,520    $        6,754 Costs and operating expenses                            (3,233)         (897)          (4,130)       (2,179)           (6,309)                                                  -------------    ----------    -------------    ----------    -------------- Operating profit (loss)                                     86         1,018            1,104          (659)              445  Interest income                                                                                                           293 Interest expense                                                                                                         (205) Gain on marketable securities and net gain   in investee                                                                                                           1,212 General corporate expenses                                                                                             (2,313) Other income                                                                                                             (524) Income taxes                                                                                                              (40) Net loss                                                                                                               (1,132) Identifiable assets at December 31, 2005         $       5,236    $       68    $       5,304    $    8,479    $       13,783 Cash and corporate assets                                                                                              25,049 Total assets at December 31, 2005                                                                                      38,615           2004 Sales and other operating revenue                $       3,174    $      909    $       4,083    $    2,034    $        6,117 Costs and operating expenses                            (2,309)         (816)          (3,125)       (2,364)           (5,489)                                                  -------------    ----------    -------------    ----------    -------------- Operating profit (loss)                                    865            93              958          (330)              628 Interest income                                                                                                           729 Interest expense                                                                                                         (168) General corporate expenses                                                                                             (1,717) Gain on marketable securities and   net income in investee                                                                                                1,605 Other income                                                                                                              492 Income taxes                                                                                                             (576) Net loss                                                                                                                  993 Identifiable assets at December 31, 2004         $       3,135    $       59    $       3,194    $    8,590    $       11,784 Cash and corporate assets                                                                                              29,574 Total assets at December 31, 2004                                                                                      41,358           2003 Sales and other operating revenue                $       3,582    $    1,549    $       5,131    $       --    $        5,131 Costs and operating expenses                             1,960          (820)          (2,780)         (150)           (2,930)                                                  -------------    ----------    -------------    ----------    -------------- Operating profit (loss)                          $       1,622    $      729    $       2,351    $     (150)   $        2,201  Interest income and other corporate revenues                                                                              760 Net gain in investee and gain on marketable   securities                                                                                                            1,098 General corporate expenses                                                                                             (2,012) Internet expense                                                                                                          (52) Capital gain                                                                                                              549 Other income                                                                                                              475 Accretion expenses                                                                                                        (43) Income taxes                                                                                                           (1,188) Net income before cumulative effect                                                                                     2,256 Identifiable assets at December 31, 2003         $       2,987    $       81    $       3,068    $       --    $        3,068 Net  property and equipment Cash and corporate assets                                                                                              29,627 Total assets at December 31, 2003                                                                                      32,614                                                                 F-20   (NOTE P) -- Asset Retirement Obligations  The Company recognizes the fair value of a liability for an asset retirement obligation in the period in which it is incurred. The associated asset retirement costs are capitalized as part of the carrying amount of the asset. The fair value of a liability for an asset retirement obligation is the amount for which that liability could be settled in a current transaction between willing parties. The Company uses the expected cash flow approach for calculating asset retirement obligations. The liability is discounted using the credit-adjusted risk-free interest rate in effect when the liability is initially recognized. The changes in the liability for an asset retirement obligation due to the passage of time are measured by applying an interest method of allocation to the amount of the liability at the beginning of the period. This amount is recognized as an increase in the carrying amount of the liability and as accretion expense classified as an operating item in the statement of operations.  Effective January 1, 2003, the Company adopted SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 requires entities to record a liability for asset retirement obligations at fair value in the period in which it is incurred and a corresponding increase in the carrying amount of the related long-lived asset. As of January 1, 2003, the Company recorded asset retirement costs of $458,581 and asset retirement obligations of $650,240.  The cumulative effect of the change in accounting principles as of January 1, 2003 was $263,955, after taxes of $39,158.  The reconciliation of the beginning and ending asset retirement obligations for the years ended December 31, 2005 and 2004 is as follows (in thousands):                                                                    2005          2004                                                              ----------    ----------     Asset retirement obligations, as of beginning of the year    $      314    $      766  Liabilities incurred                                                  7             8  Liabilities settled                                                  --            --  Accretion expense                                                    19            18  Revisions in estimated cash flows                                     3          (478)                                                              ----------    ----------  Asset retirement obligations, as of end of year              $      343    $      314                                                              ==========    ==========   (NOTE Q) -- Common Stock  In March 2005, the Company issued 38,919 shares of its common stock to each of Haim Tsuff, Chairman of the Board of Directors and Chief Executive Officer of the Company, and Jackob Maimon, President of the Company. The shares were issued upon the exercise of options to purchase 69,995 shares common stock at an exercise price of $4.28 per share granted to each of Mr. Tsuff and Mr. Maimon on March 25, 2000. The options were exercised pursuant to "cashless" exercise provisions under which the number of shares of common stock issued upon exercise was reduced by the number of shares, valued at the closing price of the common stock on the Nasdaq Small Cap Market on the trading day immediately prior to exercise, equal to the aggregate exercise price of the option.  (NOTE R) -- Subsequent Events  (i) In January 2006, the Company entered into a settlement agreement and mutual release with the defendant parties named therein relating to the lawsuit initiated by the Company against the defendants in February 2004 in the Superior Court of California, County of Los Angeles, alleging breach of contract and tort claims in connection with an agreement between the Company and the defendants to jointly purchase and develop certain parcels of real estate outside Los Angeles. The agreement provides for the settlement of the action with no finding or admission of fault on the part of any party and, pursuant thereto, certain of the defendants paid to the Company $2,500,000 as reimbursement for costs and expenses incurred by the Company in connection with its                                         F-21   pursuit of the real estate investment opportunity that was the subject of the action. Under the agreement, the Company and the defendants mutually released one another from any claims or causes of actions arising out of or relating to the action, any claim that could have been asserted in the action, and any and all claims and/or allegations relating to the real estate (and the development thereof) that was the subject of the action.  (ii) In February 2006, the Company entered into a settlement agreement and mutual release with the defendant parties named therein relating to the lawsuit initiated by the Company against the defendants in 2004 in the District Court of Harris County, Texas, alleging a tort claim in connection with an agreement between the Company and a third party pursuant to which the Company purchased all of the outstanding capital stock of a company that owns oil and gas assets in Illinois. Under the agreement the defendants paid the Company $550,000 and the Company filed a motion to dismiss its claims against the defendants with prejudice.  As a result of the payment received under the settlements agreement, the Company anticipates recorded a net gain of approximately $2,500,000 (after payment of legal fees and other expenses) during 2006.  (NOTE S) -- Restatement  The Company has restated its 2004 financial statements from the amounts previously reported. The restatements include adjustments to the calculation of the deferred tax in 2004 related to temporary differences that originated prior to 2003. Following is a summary of the restatement adjustments:                                                   AS REPORTED      ADJUSTMENTS      AS RESTATED 2004 SUMMARY BALANCE SHEET     Total assets                                   $    41,358               --      $    41,358 Current Liabilities                                  2,670               --            2,670 Assets retirement obligation                           314               --              314 Deferred tax obligation                              2,989              480            3,469 Current portion of long-term bank loan               4,869               --            4,869 Total Long term Liabilities                          8,172              480            8,652 Total Liabilities                                   10,842              480           11,322 Total Shareholder's Equity                          30,516             (480)          30,036                                                 AS REPORTED      ADJUSTMENTS      AS RESTATED 2004 SUMMARY STATEMENT OF OPERATIONS  Total Revenues                                 $     8,943      $        --      $     8,943 Total Expenses                                       7,374               --            7,374 Income before taxes                                  1,569               --            1,569 Income taxes                                        (1,589)           1,013             (576) Net Income                                     $       (20)     $     1,013      $       993 Earning Per Share                              $        --      $      0.38      $      0.38   (NOTE T) -- Supplementary Oil and Gas Information (Unaudited)  The following supplemental information regarding the oil and gas activities of the Company for 2005, 2004 and 2003 is presented pursuant to the disclosure requirements promulgated by the Securities and Exchange Commission and SFAS No. 69, "Disclosures About Oil and Gas Producing Activities." Capitalized costs relating to oil and gas activities and costs incurred in oil and gas property acquisition, exploration and development activities for each year are shown below.                                         F-22   CAPITALIZED COST OF OIL AND GAS PRODUCING ACTIVITIES (IN THOUSANDS)                                                   2005       2004            2003                                              --------   --------   -------------------                                               UNITED     UNITED     UNITED     CONGO                                               STATES     STATES     STATES                                              --------   --------   --------   --------      Unproved properties not being amortized      $     --   $     --   $     --   $    150 Proved property being amortized                10,566      7,427      6,352         -- Accumulated depreciation, depletion amortization and impairment                    (5,347)    (4,316)    (3,338)      (150)                                              --------   --------   --------   -------- Net capitalized costs                        $  5,219   $  3,111   $  3,014   $     --                                              ========   ========   ========   ========   COSTS INCURRED IN OIL AND GAS PROPERTY ACQUISITION, EXPLORATION, AND DEVELOPMENT ACTIVITIES (IN THOUSANDS)                                                   2005       2004            2003                                              --------   --------   -------------------                                               UNITED     UNITED     UNITED     CONGO                                               STATES     STATES     STATES                                              --------   --------   --------   --------      Property acquisition costs--proved and unproved properties Exploration costs                            $  2,557   $     --   $    260   $     -- Development costs                                 110         --         22         54                                                   582      1,098        393         -- (Israel exploration costs in 2005-$110, 2004-$0 and 2003-$88)       RESULTS OF OPERATIONS FOR OIL AND GAS PRODUCING ACTIVITIES (IN THOUSANDS)                                                        2005       2004            2003                                                   --------   --------   -------------------                                                    UNITED     UNITED     UNITED     CONGO                                                    STATES     STATES     STATES                                                   --------   --------   --------   --------      Oil and gas sales                                 $  3,319   $  3,174   $  3,439   $     -- Lease operating expense and severance taxes         (1,457)    (1,149)      (872)        -- Depreciation, depletion, amortization and provision for impairment                         1,397     (1,181)    (1,088)      (150) Exploration costs                                     (160)        --        (22)       (54) Income (Loss) before tax provision                --------   --------   --------   -------- Provision for income taxes                             305        843      1,457       (204)                                                         --         --         --         71 Results of operations                             --------   --------   --------   --------                                                   $    305   $    843   $  1,457   $   (133)                                                   ========   ========   ========   ========                                          F-23   OIL AND GAS RESERVES  Oil and gas proved reserves cannot be measured exactly. The engineers interpreting the available data, as well as price and other economic factor base reserve estimates on many factors related to reservoir performance, which require evaluation. The reliability of these estimates at any point in time depends on both the quality and quantity of the technical and economic data, the production performance of the reservoirs as well as extensive engineering judgment. Consequently, reserve estimates are subject to revision, as additional data become available during the producing life of a reservoir. When a commercial reservoir is discovered, proven reserves are initially determined based on limited data from the first well or wells. Subsequent data may better define theextent of the reservoir and additional production performance, well tests and engineering studies will likely improve the reliability of the reserve estimate. The evolution of technology may also result in the application of improved recovery techniques such as supplemental or enhanced recovery projects, or both, which have the potential to increase reserves beyond those envisioned during the early years of a reservoir's producing life.  The following table represents the Company's net interest in estimated quantities of proved developed and undeveloped reserves of crude oil, condensate, natural gas liquids and natural gas and changes in such quantities at December 31, 2005, 2004 and 2003, and for the years then ended. Net proved reserves are the estimated quantities of crude oil and natural gas which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Proved developed reserves are proved reserve volumes that can be expected to be recovered through existing wells with existing equipment and operating methods. Proved undeveloped reserves are proved reserve volumes that are expected to be recovered from new wells on undrilled acreage or from existing wells where a significant expenditure is required for recompilation. All of the Company's proved reserves are in the United States. The Company's oil and gas reserves are priced at $58.80 per barrel and $9.30 per Mcf, respectively, at December 31, 2005.                                                 OIL BBLS         GAS MCF                                               ----------       ---------- December 31, 2002                                161,933        3,919,474  Revisions of previous estimates                   55,261         (317,234) Acquisition of minerals in place                      --               -- Sales of minerals in place                            --               -- Production                                       (19,294)        (599,000)  December 31, 2003                                197,900        3,003,240                                               ==========       ========== Revisions of previous estimates                  (40,031)        (522,242) Acquisition of minerals in place Sales of minerals in place                            --               -- Production                                       (17,789)        (469,558) December 31, 2004                                140,080        2,011,440                                               ==========       ==========  Revisions of previous estimates                  (20,269)        (118,402) Acquisition of minerals in place                   1,280          106,670 Sales of minerals in place                            --               -- Production                                       (15,723)        (355,008) December 31, 2005                                105,368        1,644,700                                               ==========       ==========  The Company's proved developed reserves are as follows:                                          DEVELOPED                     UNDEVELOPED                             ----------------------------   ----------------------------                              OIL BBLS           GAS MCF     OIL BBLS           GAS MCF                             ----------        ----------   ----------        ----------      December 31, 2005             105,368          1,644,700     20,652            484,101 December 31, 2004             140,080          2,011,440     32,880            334,100 December 31, 2003             197,900          3,003,240         --            516,440 December 31, 2002             161,933          3,919,474         --            138,050                                          F-24   Interest in proved reserves of unconsolidated affiliates                               OIL BBLS           GAS MCF                             ----------        ---------- December 31, 2005                              1,979,000 December 31, 2004                  --          1,979,000 December 31, 2003                  --          1,979,000  STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOW  The standardized measure of discounted future net cash flows relating to the Company's proved oil and gas reserves is calculated and presented in accordance with Statement of Financial Accounting Standards No. 69. Accordingly, future cash inflows were determined by applying year-end oil and gas prices to the Company's estimated share of the future production from proved oil and gas reserves.  Future production and development costs were computed by applying year-end costs to future years. Applying year-end statutory tax rates to the estimated net future cash flows derived future income taxes. A prescribed 10% discount factor was applied to the future net cash flows.  In the Company's opinion, this standardized measure is not a representative measure of fair market value. The standardized measure is intended only to assist financial statement users in making comparisons among companies.                                                                      2005            2004             2003                                                              --------------   --------------   --------------     Future cash inflows                                          $   20,859,000   $   16,308,760   $   21,705,930 Future development costs                                           (158,000)         (73,800)        (160,780) Future production costs                                          (4,547,000)      (6,691,180)      (7,453,960)                                                              --------------   --------------   -------------- Future net cash flows                                            16,154,000        9,548,750       14,091,190 Future income tax expenses                                       (1,965,000)      (3,426,575)      (4,791,004) Annual 10% discount rate                                         (5,666,000)        (300,190)      (4,650,009)                                                              --------------   --------------   -------------- Standardized measure discounted future net cash flows        $    8,523,000   $    6,001,810   $    4,650,177                                                              ==============   ==============   ==============   CHANGES IN STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS  The principal sources of change in the standardized measure of discounted future net cash flows for the years ended December 31, 2005, 2004 and 2003 were as follows:                                                                                 2005             2004             2003                                                                         --------------   --------------   --------------     Beginning of the year                                                   $    6,001,810   $    4,650,177   $    5,875,253 Sales and transfers of oil and gas produced, net of production costs        (1,862,000)      (2,025,000)      (2,567,000) Net changes in prices and production costs                                  12,533,000        2,475,000               -- Net changes in income taxes                                                  1,461,575        1,364,429          113,710 Changes in estimated future development costs, net of current   development costs                                                            (84,200)          86,980           29,097 Acquisition of minerals in place                                             3,656,740        1,074,485               -- Revision of previous estimates and other                                    (7,818,115)      (5,974,080)         631,911 Changes in discount                                                         (5,365,810)       4,349,819          567,206                                                                         --------------   --------------   -------------- End of year                                                             $    8,523,000   $    6,001,810        4,650,177                                                                         ==============   ==============   ==============                                          F-25   (NOTE U) -- SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)                                                                            QUARTER ENDED                                                                         ------------- (amounts in thousands, except per share data)                                                    MARCH 31     JUNE 30   SEPTEMBER 30   DECEMBER 31     TOTAL                                                      2005         2005        2005           2005         2005                                                      ----         ----        ----           ----         ----       Total Revenues                                     $  2,201     $  1,621    $  3,301       $    612     $  7,735 Net Income (loss) before taxes                     $    460     $   (752)   $  1,342       $ (2,142)    $ (1,092) Cumulative effect of an accounting change          $     --     $     --    $     --       $     --     $     -- Net Income (loss)                                  $    304     $   (596)   $    992       $ (1,832)    $ (1,132)  Earnings (loss) per Common Share - -Basic and Diluted                                 $   0.11     $  (0.22)   $   0.36       $  (0.67)    $  (0.42)                                                                            QUARTER ENDED                                                                         -------------                                                     MARCH 31     JUNE 30   SEPTEMBER 30   DECEMBER 31     TOTAL                                                      2004         2004        2004           2004         2004                                                      ----         ----        ----           ----         ----       Total Revenues                                     $  1,893     $  1,526    $  3,122       $  2,402     $  8,943 Net Income (loss) before taxes                     $    915     $    273    $    588       $   (207)    $  1,569 Cumulative effect of an accounting change          $     --     $     --    $     --       $     --     $     -- Net Income (loss)                                  $    845     $     --    $   (595)      $    743     $    993  Earnings (loss) per Common Share - -Basic and Diluted                                 $   0.32     $   0.00    $  (0.23)      $   0.29     $   0.38                                                                            QUARTER ENDED                                                                         -------------                                                     MARCH 31     JUNE 30   SEPTEMBER 30   DECEMBER 31     TOTAL                                                      2003         2003        2003           2003         2003                                                      ----         ----        ----           ----         ----       Total Revenues                                     $  1,974     $  2,942    $  1,928       $  2,041     $  8,885 Net Income (loss) before taxes                     $    852     $  1,906    $    826       $    124     $  3,708 Cumulative effect of an accounting change          $  (264)     $     --    $     --       $     --     $   (264) Net Income                                         $    588     $  1,906    $    808       $ (1,046)    $  2,256  Earnings (loss) per Common Share - -Basic and Diluted                                 $   0.22     $   0.72    $   0.31       $  (0.40)    $   0.85                                          F-26    EX-31 2 tex31-9492.txt EX-31                                       EXHIBIT 31                     RULE 13A-14(A) / 15D-14(A) CERTIFICATIONS  I, Haim Tsuff, Chief Executive (and Principal Financial and Accounting Officer) of Isramco, Inc., certify that:  1. I have reviewed this annual report on Form 10-K of Isramco, Inc. for the year ended December 31, 2005;  2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;  3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;  4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and I have:  a) Designed such disclosure controls and procedures, or caused such controls and procedures to be designed under my supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to me by others within those entities, particularly during the period in which this annual report is being prepared;  b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report my conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this annual report based on such evaluation; and  c) Disclosed in this annual report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and  5. I have disclosed, based on my most recent evaluation of the internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons fulfilling the equivalent function):  a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and  b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.   DATE: MARCH 24, 2006                     /S/ HAIM TSUFF                                          ---------------------------------                                          HAIM TSUFF                                          CHIEF EXECUTIVE OFFICER                                          (AND PRINCIPAL FINANCIAL AND ACCOUNTING                                          OFFICER)     EX-32 3 tex32-9492.txt EX-32                                       EXHIBIT 32                      CERTIFICATION BY CHIEF EXECUTIVE OFFICER                        PURSUANT TO 18 U.S.C. SECTION 1350,       AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002  In connection with the Annual Report of Isramco, Inc. (the "Company") on Form 10-K for the year ended December 31, 2005 (the "Report") filed with the Securities and Exchange Commission, I, Haim Tsuff, Chief Executive and Principal Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:  (1) The Company's Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and  (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.   MARCH 24, 2006                           /S/ HAIM TSUFF                                          ---------------------------------                                          HAIM TSUFF                                          CHIEF EXECUTIVE OFFICER                                          (AND PRINCIPAL FINANCIAL AND ACCOUNTING                                          OFFICER)   A SIGNED ORIGINAL OF THIS STATEMENT REQUIRED BY SECTION 906 HAS BEEN PROVIDED TO ISRAMCO, INC. AND WILL BE RETAINED BY ISRAMCO, INC. AND FURNISHED TO THE SECURITIES AND EXCHANGE COMMISSION OR ITS STAFF UPON REQUEST.    EX-99.1 4 tex99_1-9492.txt EX-99.1                                      EXHIBIT 99.1                                 "ISRAMCO NEGEV 2"                               LIMITED PARTNERSHIP                                FINANCIAL STATEMENTS                              AS OF DECEMBER 31,2005                                           "ISRAMCO NEGEV 2"                                LIMITED PARTNERSHIP                                FINANCIAL STATEMENTS                              AS AT DECEMBER 31, 2005                                                    "Isramco - Negev 2" Limited Partnership  FINANCIAL STATEMENTS AS AT DECEMBER 31, 2005 - --------------------------------------------------------------------------------   CONTENTS                                                                             PAGE   Auditors' Report                                                            2   Balance Sheets                                                              4   Statements of Earnings                                                      5   Statements of Changes in Limited Partnership's Capital                      6   Statements of Cash Flows                                                    7   Notes to the Financial Statements                                           9    [LOGO] KPMG            SOMEKH CHAIKIN            MAIL ADDRESS       OFFICE ADDRESS            TELEPHONE  972 3 684 8000           PO Box 609         KPMG Millennium Tower     Fax 972 3 684 8444           Tel Aviv 61006     17 Ha'arba'a Street            Israel            Tel Aviv 61070                              Israel   REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM TO THE PARTNERS OF "ISRAMCO - NEGEV 2" LIMITED PARTNERSHIP  AUDITORS' REPORT TO THE PARTNERS OF "ISRAMCO - NEGEV 2" LIMITED PARTNERSHIP  We have audited the accompanying balance sheets of "Isramco - Negev 2" Limited Partnership (hereinafter - "the Limited Partnership") as of December 31, 2005 and 2004, and the related statements of earnings, changes in Limited Partnership's capital and cash flows, for each of the years in the three-year period ended December 31, 2005. These financial statements are the responsibility of the Board of Directors and the Management of the General Partner of the Limited Partnership. Our responsibility is to express an opinion on these financial statements based on our audits.  We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the Board of Directors and Management of the General Partner, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.  In our opinion, based on our audits, the financial statements referred to above present fairly, in all material respects, the financial position of Isramco-Negev 2 Limited Partnership as at December 31, 2005 and 2004, and the results of its operations, the changes in the Limited Partnership's capital and its cash flows for each of the years in the three-year period ended December 31, 2005, in conformity with generally accepted accounting principles (GAAP) in Israel. In addition, the aforementioned financial statements were prepared in accordance with the Securities Regulation (Preparation of Annual Financial Statements), 1993.  Accounting principles generally accepted in Israel differ in certain significant respects from accounting principles generally accepted in the United States. Application of accounting principles generally accepted in the United States would have affected the financial position of the Limited Partnership as at December 31, 2005 and 2004 and the results of its operations, the changes in the Limited Partnership's capital and its cash flows for the three-year period ended December 31, 2005, to the extent summarized in Note 13 to the financial statements.  SomekhEChaikin, a partnership registered under the Israeli Partnership Ordinance, is a member of KPMG International, a Swiss cooperative.    As discussed in Note 3B, the financial statements as at dates and for periods ended after December 31, 2003 are stated in reported amounts, in accordance with Accounting Standards published by the Israeli Accounting Standards Board. The financial statements as at dates and for periods ended up to and including December 31, 2003, are stated in values adjusted for the changes in the general purchasing power of the Israeli currency, in accordance with Opinions of the Institute of Certified Public Accountants in Israel.   Somekh Chaikin Certified Public Accountants (Isr.) Member Firm of KPMG International  January 23, 2006, except for Note 13, as to which the date is March 22, 2006.                                                                            "Isramco - Negev 2" Limited Partnership  BALANCE SHEETS AS AT DECEMBER 31 - --------------------------------------------------------------------------------------------------------------  REPORTED AMOUNTS*                                                                                        2005              2004                                                                              ---------------   ---------------                                                                      NOTE     NIS THOUSANDS     NIS THOUSANDS                                                            ---------------   ---------------   ---------------     CURRENT ASSETS  Cash and cash equivalents                                                             2,720            14,279 Marketable securities                                                   4           583,569           539,042 Joint ventures for oil and gas exploration                              5             1,328             1,307 Sundry receivables                                                      6                 9                 9                                                                              ---------------   ---------------                                                                                     587,626           554,637                                                                              ---------------   --------------- INVESTMENTS  Investment in oil and gas properties                                    7             7,609             7,609                                                                              ---------------   ---------------                                                                                      595,235           562,246   CURRENT LIABILITIES  Sundry payables                                                         8               501               458 Joint ventures for oil and gas exploration                              5               183                99                                                                              ---------------   ---------------                                                                                         684               557                                                                              ---------------   ---------------  CONTINGENT LIABILITIES AND COMMITMENTS                                  9  LIMITED PARTNERSHIP'S CAPITAL                                          10           594,551           561,689                                                                              ---------------   ---------------                                                                                      595,235           562,246                                                                              ===============   ===============    - ------------------------------------  -----------------------------------  -----------------------------------       Pinkstone Ltd. - Director                 Yossi Levy - CEO                  Eli Fish - Controller       Isramco Oil and Gas Ltd. -            Isramco Oil and Gas Ltd. -           Isramco Oil and Gas Ltd. -            General Partner                       General Partner                     General Partner     Represented by Ya'akov Meimon  March 22, 2006  *  Regarding discontinuance of the adjustment for inflation -see Note 3B.  The notes are an integral part of the financial statements.                                          4                                                                                       "Isramco - Negev 2" Limited Partnership  STATEMENTS OF EARNINGS FOR THE YEAR ENDED DECEMBER 31 - ------------------------------------------------------------------------------------------------------------------------                                                                                  2005              2004              2003                                                                     ----------------   ---------------   ---------------                                                                                                         AMOUNTS ADJUSTED                                                                                                            TO THE EFFECT                                                                                                          OF INFLATION IN                                                                            REPORTED           REPORTED   TERMS OF NIS OF                                                                            AMOUNTS*           AMOUNTS*     DECEMBER 2003                                                                     ----------------   ---------------   ---------------                                                            NOTES      NIS THOUSANDS      NIS THOUSANDS     NIS THOUSANDS                                                   ---------------   ----------------   ---------------   ---------------      INCOME Financing income, net                                        11A             71,388            58,623            89,694                                                                     ----------------   ---------------   ---------------  EXPENSES Participation in oil and gas exploration, net                11B             30,802               925            35,769 General and administrative expenses                          11C              2,650             2,693             2,667                                                                     ----------------   ---------------   ---------------                                                                               33,452             3,618            38,436   NET INCOME                                                                   37,936            55,005            51,258                                                                     ================   ===============   ===============   INCOME PER PARTICIPATION UNIT:                                                                                 NIS               NIS               NIS                                                                     ================   ===============   ===============  Basic income per participation unit                          11D             0.0089            0.0129            0.0120                                                                     ================   ===============   ===============     *   Regarding discontinuance of the adjustment for inflation - see Note 3B.   The notes are an integral part of the financial statements.                                          5                                                                             "Isramco - Negev 2" Limited Partnership  STATEMENTS OF CHANGES IN LIMITED PARTNERSHIP'S CAPITAL - ---------------------------------------------------------------------------------------------------------------                                                                PARTNERSHIP'S       ACCUMULATED                                                                    CAPITAL              LOSS             TOTAL                                                            ----------------   ---------------   ---------------                                                                 AMOUNTS ADJUSTED TO THE EFFECT OF INFLATION                                                                        IN TERMS OF DECEMBER 2003                                                            ----------------------------------------------------                                                              NIS THOUSANDS     NIS THOUSANDS     NIS THOUSANDS                                                            ----------------   ---------------   ---------------     BALANCE AS AT JANUARY 1, 2003                                      856,391          (397,346)          459,045  Net income for the year                                                  -            51,258            51,258                                                            ----------------   ---------------   ---------------  BALANCE AS AT DECEMBER 31, 2003                                    856,391          (346,088)          510,303                                                                 PARTNERSHIP'S       ACCUMULATED                                                                    CAPITAL              LOSS             TOTAL                                                            ----------------   ---------------   ---------------                                                                              REPORTED AMOUNTS*                                                            ----------------------------------------------------                                                              NIS THOUSANDS     NIS THOUSANDS     NIS THOUSANDS                                                            ----------------   ---------------   ---------------     BALANCE AS AT JANUARY 1, 2004                                      856,391          (346,088)          510,303  Net income for the year                                                  -            55,005            55,005  Tax deposits paid on behalf of holders of  the participation certificates**                                        -            (3,619)           (3,619)                                                            ----------------   ---------------   ---------------  BALANCE AS AT DECEMBER 31, 2004                                    856,391          (294,702)          561,689                                                            ================   ===============   ===============                                                                 PARTNERSHIP'S       ACCUMULATED                                                                    CAPITAL              LOSS             TOTAL                                                            ----------------   ---------------   ---------------                                                                              REPORTED AMOUNTS*                                                            ----------------------------------------------------                                                              NIS THOUSANDS     NIS THOUSANDS     NIS THOUSANDS                                                            ----------------   ---------------   ---------------     BALANCE AS AT JANUARY 1, 2005                                      856,391          (294,702)          561,689  Net income for the year                                                  -            37,936            37,936  Tax deposits paid on behalf of holders of  the participation certificates**                                        -            (5,074)           (5,074)                                                            ----------------   ---------------   ---------------  BALANCE AS AT DECEMBER 31, 2005                                    856,391          (261,840)          594,551                                                            ================   ===============   ===============   *       Regarding discontinuance of the adjustment for inflation - see Note 3B. **      Regarding the tax deposits paid on behalf of holders of the         participation certificates - see Note 10E.  The notes are an integral part of the financial statements.                                          6                                                                                             "Isramco - Negev 2" Limited Partnership  STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31 - -------------------------------------------------------------------------------------------------------------------------------                                                                                   2005                 2004                 2003                                                                   -------------------   ------------------   ------------------                                                                                                               AMOUNTS ADJUSTED                                                                                                               TO THE EFFECT OF                                                                                                                   INFLATION IN                                                                             REPORTED             REPORTED      TERMS OF NIS OF                                                                             AMOUNTS*             AMOUNTS*        DECEMBER 2003                                                                   -------------------   ------------------   ------------------                                                                        NIS THOUSANDS        NIS THOUSANDS        NIS THOUSANDS                                                                   -------------------   ------------------   ------------------     CASH FLOWS GENERATED BY OPERATING ACTIVITIES Net income                                                                    37,936               55,005               51,258 Adjustment to reconcile net income to net  cash flows generated by operating activities (A)                            (20,003)             (32,666)             (35,324)                                                                   -------------------   ------------------   ------------------  NET CASH INFLOW GENERATED BY OPERATING ACTIVITIES                             17,933               22,339               15,934                                                                   -------------------   ------------------   ------------------  CASH FLOWS GENERATED BY INVESTING ACTIVITIES: Investment in oil and gas properties                                         (30,370)                   -              (24,668) Investment in marketable securities                                         (487,366)            (204,464)            (187,069) Proceeds from sale of marketable securities                                  493,318              174,086              188,889                                                                   -------------------   ------------------   ------------------  NET CASH OUTFLOW GENERATED BY INVESTING ACTIVITIES                           (24,418)             (30,378)             (22,848)                                                                   -------------------   ------------------   ------------------  CASH FLOWS GENERATED BY FINANCING ACTIVITIES Tax deposits paid on behalf of holders of the  participation certificates                                                   (5,074)              (3,619)                   -                                                                   -------------------   ------------------   ------------------  NET CASH OUTFLOW GENERATED BY FINANCING ACTIVITIES                            (5,074)              (3,619)                   -                                                                   -------------------   ------------------   ------------------  DECREASE IN CASH AND CASH EQUIVALENTS                                        (11,559)             (11,658)              (6,914)  BALANCE OF CASH AND CASH EQUIVALENTS AT BEGINNING OF  THE YEAR                                                                     14,279               25,937               32,851                                                                   -------------------   ------------------   ------------------  BALANCE OF CASH AND CASH EQUIVALENTS AT END OF  THE YEAR                                                                      2,720               14,279               25,937                                                                   ===================   ==================   ==================   *       Regarding discontinuance of the adjustment for inflation - see Note 3B.  The notes are an integral part of the financial statements.                                          7                                                                                             "Isramco - Negev 2" Limited Partnership  STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31 (CONT'D) - -------------------------------------------------------------------------------------------------------------------------------                                                                                   2005                 2004                 2003                                                                   -------------------   ------------------   ------------------                                                                                                               AMOUNTS ADJUSTED                                                                                                               TO THE EFFECT OF                                                                                                                   INFLATION IN                                                                             REPORTED             REPORTED      TERMS OF NIS OF                                                                             AMOUNTS*             AMOUNTS*        DECEMBER 2003                                                                   -------------------   ------------------   ------------------                                                                        NIS THOUSANDS        NIS THOUSANDS        NIS THOUSANDS                                                                   -------------------   ------------------   ------------------     A.  ADJUSTMENTS TO RECONCILE NET INCOME TO NET     CASH FLOWS GENERATED BY OPERATING ACTIVITIES  Income and Expenses Not Involving Cash Flows: - --------------------------------------------  Gain from marketable securities, net                                         (50,479)             (36,006)              (67,183) Amortization of investment in oil and gas properties                          30,370                    -                35,617   Changes in Asset and Liability Items: - ------------------------------------  Decrease (increase) in sundry receivables                                          -                  309                 (105) Increase (decrease) in sundry payables                                            43                   46                  (31) Change in joint ventures for oil and gas exploration, net                         63                2,985               (3,622)                                                                   -------------------   ------------------   ------------------                                                                               (20,003)             (32,666)             (35,324)                                                                   ===================   ==================   ==================      *   Regarding discontinuance of the adjustment for inflation - see Note 3B.   The notes are an integral part of the financial statements.                                            8                                            "Isramco - Negev 2" Limited Partnership  NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2005 - --------------------------------------------------------------------------------  NOTE 1 - GENERAL          A.      Isramco - Negev 2, Limited Partnership (hereinafter - "the                 Limited Partnership" or "the Partnership") was established                 according to a limited partnership agreement that was signed on                 March 2 and 3, 1989 (and amended from time to time), between the                 general partner - Isramco Oil and Gas Ltd. (hereinafter - "the                 General Partner") and the limited partner - Isramco Management                 (1988) Ltd. (hereinafter - "the Limited Partner" or "the                 Trustee"). The Limited Partnership was registered on March 3,                 1989, under the Partnerships Ordinance (New Version), 1975.                 According to Section 61(a) of the Partnerships Ordinance, the                 limited partnership agreement constitutes the Articles of                 Association of the Limited Partnership.          B.      Under the Limited Partnership agreement, as amended from time to                 time, the General Partner and the Limited Partner will bear the                 expenses and losses of the Limited Partnership and will be                 entitled to income in accordance with their proportionate share                 of the capital they invested in the Limited Partnership's                 capital.          C.      The day-to-day management of the Limited Partnership is carried                 out by the General Partner, under the supervision of the                 Supervisor, Yigal Brightman & Co., Certified Public Accountants,                 and Mr. David Valiano, CPA (Isr.). Under the Limited Partnership                 agreement, the Supervisor was granted certain supervisory                 powers.          D.      The Limited Partner - Isramco Management (1988) Ltd., has                 various rights in the Limited Partnership. Under the trust                 agreement, the Limited Partner acts as trustee on behalf of the                 owners of the participation units.          E.      The Limited Partnership was approved by the Income Tax                 Commissioner for purposes of the Income Tax Regulations (Rules                 for Calculating Tax for Holding and Sale of Participation Units                 in an Oil Exploration Partnership), 1988. In December 2005, the                 effectiveness of these Regulations was extended up to December                 31, 2006.          F.      On June 7, 2000, the Petroleum Commissioner, in accordance with                 his authority under the Petroleum Law, announced the closure for                 purposes of oil exploration and production of all the offshore                 areas up to the point where the depth of water above them                 permits utilization of the natural resources and which are not                 subject to a petroleum right or a preliminary permit with a                 valid priority right.                                          9    NOTE 2 - THE OBJECTIVE OF THE LIMITED PARTNERSHIP          A.      The objective of the Limited Partnership is to participate in                 oil and gas exploration and production. For this purpose the                 Limited Partnership signed operating agreements (J.O.A.) with                 its partners in joint ventures.          B.      As at the approval date of the financial statements, the Limited                 Partnership's rights in oil and/or gas properties are as                 follows:                                                                                                   DATE OF                                                                     PRINCIPAL RATE       EXPIRATION OF                                                                                  %              RIGHTS                                                                  ------------------  ------------------            "Med Yavne" lease                                                  32.4111       June 10, 2030         "Med Ashdod" lease                                                 19.1370       June 15, 2030         Michal license                                                     30.3950    December 2, 2006         Matan license                                                      30.3950    December 2, 2006         Shikma Carveout (depth of 1,500 meters and under)                  10.0000       April 1, 2009           For additional details in connection with the Partnership's rights in         oil and/or gas properties - see Note 5, below.  NOTE 3 - REPORTING PRINCIPLES AND ACCOUNTING POLICIES          A.      GENERAL          The items in the financial reports are presented in accordance with the         principles provided in the Securities Regulations (Preparation of Annual         Financial Statements), 1993, except for items presented in the format         dictated by the nature of the Limited Partnership's business.          B.      DEFINITIONS          1.      RELATED PARTY - as defined in Opinion No. 29 of the Institute of                 Certified Public Accountants in Israel (hereinafter - the                 ICPAI).          2.      INTERESTED PARTY - as defined in Paragraph 1 of the definition                 of an "interested party" in a company in Section 1 of the                 Securities Law.          3.      CPI - the Consumer Price Index published by the Central Bureau                 of Statistics.          4.      DOLLAR - the U.S. dollar.          5.      ADJUSTED AMOUNT - the nominal historical amount adjusted in                 accordance with the provisions of Opinions 23, 34, 36 and 37 of                 the Institute of Certified Public Accountants in Israel.          6.      REPORTED AMOUNT - the adjusted amount as at the transition date                 (December 31, 2004), with the addition of amounts in nominal                 values that were added after the transition date and less                 amounts eliminated after the transition date.          7.      ADJUSTED FINANCIAL REPORT - the financial report based on the                 provisions of Opinions 23, 34, 36, 37 and 50 of the Institute of                 Certified Public Accountants in Israel.          8.      NOMINAL FINANCIAL REPORT - the financial report based on                 reported amounts.                                         10    NOTE 3 - REPORTING PRINCIPLES AND ACCOUNTING POLICIES (CONT'D)          C.      FINANCIAL STATEMENTS IN REPORTED AMOUNTS          (1)     In October 2001, the Israeli Accounting Standards Board                 published Accounting Standard No. 12, "Discontinuance of                 Adjustment of Financial Statements". Pursuant to this Standard                 and in accordance with Accounting Standard No. 17 that was                 published in December 2003, the adjustment of financial                 statements will be discontinued as of January 1, 2004. Up to                 December 31, 2004, the Partnership continued to prepare adjusted                 financial statements in accordance with Opinion No. 36 of the                 Institute of Certified Public Accountants in Israel. The                 adjusted amounts included in the financial statements as at                 December 31, 2004 constitute the starting point for the Nominal                 Financial Report as of January 1, 2004. The Partnership has                 implemented the provisions of the Standard and has accordingly                 discontinued the adjustment as of January 1, 2004.          (2)     In the past, the Partnership prepared its financial statements                 on the basis of historical cost adjusted for the changes in the                 Consumer Price Index. The Adjusted Amounts, as stated, included                 in the financial statements as at December 31, 2004 constituted                 the starting point for the Nominal Financial Report as of                 January 1, 2004. Additions made during the period are included                 according to their nominal values.          (3)     Amounts of the non-monetary assets do not necessarily reflect                 their realizable value or updated economic value but, rather,                 only the Reported Amounts of such assets.          (4)     The term "cost" in these financial statements means the Reported                 Amount of cost.          (5)     All the comparative data for prior periods is stated adjusted to                 the index of December 2004.          D.      REPORTING PRINCIPLES          (1)     Balance sheet:                  a.      Non-monetary items (investments in oil and gas                         properties and partnership capital) are stated at                         Reported Amounts.                  b.      Monetary items are stated in the balance sheet at their                         nominal historical values as at the balance sheet date.          (2)     Statement of earnings:                  a.      Income and expenses deriving from non-monetary items or                         from provisions included in the balance sheet are                         calculated as the difference between the Reported Amount                         of the opening balance and the Reported Amount of the                         closing balance.                  b.      All other items included in the statement of earnings                         are stated at their nominal value.          E.      CASH EQUIVALENTS          Cash equivalents include bank deposits having an original maturity, as         at the date of the investment therein, not in excess of three months.                                          11   NOTE 3 - REPORTING PRINCIPLES AND ACCOUNTING POLICIES (CONT'D)          F.      MARKETABLE SECURITIES          Marketable securities are stated at their market value as at the balance         sheet date. Changes in the value of such securities are recorded in the         statement of earnings as incurred.          G.      INVESTMENTS IN OIL AND GAS EXPLORATION          The Limited Partnership uses the "successful efforts" method with         respect to the accounting treatment of the recording of oil and gas         exploration expenses, as follows:          (1)     The Limited Partnership's expenses in executing geological and                 seismic tests and surveys are expensed immediately in the                 statement of earnings as incurred.          (2)     Investments in oil and gas wells, which are in the drilling                 stages, and regarding which it has not yet been proven whether                 they will produce oil or gas, or which have not yet been                 determined to be non-commercial, are stated in the balance sheet                 at cost.          (3)     Investments in oil and gas wells which were proven to be dry and                 were abandoned, or were determined to be non-commercial, or for                 which no development plans were prepared for the near future,                 are written off in full to the statement of earnings.          H.      DECLINE IN VALUE OF ASSETS          The Limited Partnership applies Accounting Standard No. 15 - "Decline in         the Value of Assets" (hereinafter - "the Standard"). The Standard         provides procedures which an entity must apply in order to assure that         its assets in the balance sheet (in respect of which the Standard         applies) are not presented at an amount greater than their recoverable         value, which is the higher of the net selling price and the realization         value (the present value of the estimated future cash flows expected to         derive from the use of the asset and its realization).          The Standard applies to all assets in the balance sheet, except for tax         assets and financial assets (except for financial assets which are         investments in investee companies which are not subsidiaries). In         addition, the Standard provides presentation and disclosure rules         regarding assets whose value has decreased. Where the value of an asset         in the balance sheet is greater than its recoverable value, the Limited         Partnership recognizes a loss from decline in value in an amount equal         to the difference between the book value of the asset and its         recoverable value. The loss recognized, as stated, will be eliminated         only if there have been changes in the estimates used in determining the         asset's recoverable value from the date on which the last loss from         decline in value was recognized.          I.      INCOME PER PARTICIPATION UNIT          The income per participation unit was computed in accordance with         Opinion No. 55 of the ICPAI, on the basis of the weighted-average number         of the outstanding participation units.                                          12   NOTE 3 - REPORTING PRINCIPLES AND ACCOUNTING POLICIES (CONT'D)          J.      USE OF ESTIMATES          The preparation of financial statements in conformity with generally         accepted accounting principles requires management to make estimates and         assumptions that affect the reported amounts of assets and liabilities         and disclosure of contingent assets and liabilities as at the date of         the financial statements and the reported amounts of revenues and         expenses during the reporting period. Actual results may differ from         such estimates.          K.      DISCLOSURE OF EFFECT OF NEW ACCOUNTING STANDARDS IN THE PERIOD                 PRIOR TO THEIR IMPLEMENTATION          In August 2005 the Israel Accounting Standards Board published         Accounting Standard No. 22, "Financial Instruments: Disclosure and         Presentation" (hereinafter - "the Standard"). The Standard provides         rules for presenting financial instruments in the financial statements         and specifies the proper disclosure required with respect thereto.         Furthermore, the Standard provides the method for classifying financial         instruments as financial liabilities and as shareholders' equity, for         classifying the interest, dividends, losses and gains related to them         and the circumstances for offsetting financial assets and financial         liabilities. The new Standard will apply to financial statements for         periods beginning on January 1, 2006 or thereafter. The Standard         provides that it is to be adopted on a prospective basis. The         comparative data presented in the financial statements for periods         beginning on the date the Standard comes into effect will not be         restated. First-time application of the Standard is not expected to have         an effect on the Limited Partnership's financial statements.          L.      RATES OF EXCHANGE AND LINKAGE BASIS          Assets and liabilities denominated in or linked to foreign currency are         stated in the balance sheet according to the representative exchange         rates published by Bank of Israel as at balance sheet date.          Assets and liabilities linked to the CPI are stated in accordance with         the specific linkage terms relating to each asset or liability.          Below are the figures for the Consumer Price Index and the rates of         exchange:                                                    DECEMBER 31                                     % CHANGE                                 ----------------------------  -------------------------------------------                                         2005           2004           2005           2004           2003                                 -------------  -------------  -------------  -------------  -------------                Index - in points             103.0          100.6           2.39           1.20          (1.89)          Exchange rate of           the dollar in NIS            4.603          4.308           6.85          (1.62)         (7.56)                                          13    NOTE 4 - MARKETABLE SECURITIES                                                                         DECEMBER 31       DECEMBER 31                                                                             2005              2004                                                                  ----------------  ----------------                                                                    NIS THOUSANDS     NIS THOUSANDS                                                                  ----------------  ----------------            Shares and options (1)                                            82,396           103,924         Government debentures (2)                                         33,094           133,156         Convertible debentures                                            86,370           107,396         Corporate debentures (3)                                         364,940           170,432         Participation certificates in mutual funds                        10,871            19,566         Participation units (1)                                            5,898             4,568                                                                  ----------------  ----------------                                                                          583,569           539,042                                                                  ================  ================          (1) INCLUDING MARKETABLE SECURITIES OF RELATED PARTIES             8,638             6,531                                                                  ================  ================           As at December 31, 2005, the Limited Partnership holds 4.43% of the         total participation units in the I.N.O.C Dead Sea Limited Partnership         (rate of holdings as at December 31, 2004 - same), where the market         value as at the balance sheet date equals NIS 1,784 thousand and 13.52%         of the total participation units in Naphtha Exploration (rate of         holdings as at December 31, 2004 - same), where the market value as at         the balance sheet date equals NIS 4,114 thousand. In addition, the         Limited Partnership holds 0.9% of the issued share capital of J.O.E.L         Jerusalem Oil Exploration Ltd. (rate of holdings as at December 31, 2004         - same), where the market value as at the balance sheet date equals NIS         2,740 thousand.          The income from investment in the marketable securities of the related         parties in the year 2005 amounts to NIS 2,107 thousand (2004 - income         NIS 2,524 thousand).                                                                         DECEMBER 31       DECEMBER 31                                                                             2005              2004                                                                  ----------------  ----------------                                                                    NIS THOUSANDS     NIS THOUSANDS                                                                  ----------------  ----------------            (2) GOVERNMENT DEBENTURES - LINKAGE BASES            Unlinked                                                       33,094           133,156                                                                  ================  ================          (3) CORPORATE DEBENTURES - LINKAGE BASES            CPI linked                                                    292,475           107,573            Linked to dollar                                               62,574            48,611            Unlinked                                                        9,891            14,248                                                                  ----------------  ----------------                                                                           364,940           170,432                                                                  ================  ================                                          14   NOTE 5 - JOINT VENTURE FOR OIL AND GAS EXPLORATION          COMPOSITION                                                                        DECEMBER 31       DECEMBER 31                                                                             2005              2004                                                                  ----------------  ----------------                                                                    NIS THOUSANDS     NIS THOUSANDS                                                                  ----------------  ----------------            DEBIT BALANCES         "Med Yavne" Joint Venture                                          1,120             1,120         "Nir 2" Joint Venture                                                208               187                                                                  ----------------  ----------------                                                                             1,328             1,307                                                                  ================  ================         CREDIT BALANCES         "Med Ashdod" Lease Joint Venture                                      63                57         "Nordon 1" Joint Venture                                              42                42         "Gad 1" Joint Venture                                                 78                 -                                                                  ----------------  ----------------                                                                               183                99                                                                  ================  ================           ADDITIONAL INFORMATION:          GENERAL          The balances shown in the balance sheet and relating to the joint         ventures constitute the amount of the actual investment of the Limited         Partnership in each joint venture less its share in the losses of that         venture (or its share in the venture's losses less the amounts invested         therein).          A.      "MED YAVNE" LEASE          1.      GENERAL                  In June 2000, the Petroleum Commissioner (hereinafter - "the                 Commissioner") granted the partners to the Offshore License                 239/"Med Yavne" (hereinafter - "Med Yavne License"), in which                 the Limited Partnership had oil rights, a lease for a period of                 30 years for an area of 250 sq. km. out of the area of the                 aforesaid license, following the results of the "Or 1" and                 nearby drillings executed in the license area.                  The conditions provide, among other things, that the leaseholder                 shall act diligently to develop the lease and to produce gas                 from the lease, and at the end of 5 years from the date the                 lease was granted the leaseholder shall submit a plan for                 continued activity in the lease area.                  The lease is limited in the entire area thereof, to the                 subterranean space as far as the roof of messenian ophorites or                 to the base of the Pliocene in absence of the ophorites. In                 2001, the Commissioner approved the return of an area of 105                 square kilometers of the northern area of the lease in which no                 drilling prospects were located. In 2002, an additional area of                 92 square kilometers out of the northern portion of the lease                 was returned in light of the operator's recommendation not to                 carry out any drilling in accordance with the conditions of the                 lease since, based on the existing data, the prospects currently                 indicated are at a level of high risk. The remaining lease area                 after return of the said portions is 53 square kilometers.                  Regarding the lease period - see Note 9G., below.                  Regarding the Partnership's liability for payment of royalties -                 see Note 9A., below.                                         15   NOTE 5 - JOINT VENTURE FOR OIL AND GAS EXPLORATION (CONT'D)          A.      "MED YAVNE" LEASE (CONT'D)          2.      THE "OR 1" WELL IN THE"MED YAVNE" LICENSE                  In October 1999, the "Or 1 " well was conducted in the "Med                 Yavne" License. The results of the production test performed at                 the well indicated that the rate of production in the area                 examined was 21 million cubic feet per day. Nonetheless, in the                 operator's estimation, the well is capable of producing gas at a                 higher rate, once the well is completed for regular production,                 with appropriate equipment and by opening up additional areas in                 the target layer.                  The Partnership's participation percentage in the "Or 1"                 drilling is 32.4111%. The cost of the well amounted to $5.2                 million. The Partnership's share in the drilling costs, recorded                 in the category "investments in oil and gas assets", amounted to                 NIS 7.6 million.          3.      THE GAS RESERVES AT THE "MED-YAVNE" LEASE                  According to the operator's estimations, which are based on the                 results of the "Or 1" well and nearby wells, and a                 three-dimensional seismic survey performed in the area of the                 lease, and which also covered parts of nearby gas reserves                 (outside the area of the lease), the recoverable gas reserves in                 the Med Yavne Lease amount to 93 billion cubic feet, out of                 which 51 billion cubic feet in the "Or 1" reserve, and based on                 the seismic information in the possession of the partners in the                 lease, the balance of the reserves (about 42 billion cubic feet)                 are in the "Noa" and "Noa 1" gas fields (which are owned by the                 "Yam Tatis" Joint Venture) that reach into the area of the "Med                 Yavne" lease (hereinafter - "the Balance of the Reserves").                  In November 2002, the Partnership received an opinion from a                 consulting firm in the United States, the object of which was to                 perform a techno-economic examination for the development of the                 "Or 1" reserve (wherein the reserves are estimated at 51 billion                 cubic feet). The said opinion indicates that, under certain                 assumptions, development of the reserve, by connecting it to the                 nearby production platform in the adjacent "Meri" gas field (at                 a distance of 12 km) and from there via a transportation pipe to                 Ashdod, is economically feasible.                  At a meeting of the partners held in January 2005, it was agreed                 that the operator of the lease will request from Noble, the                 operator of the "Yam Tatis" joint venture (hereinafter -                 "Noble"), the holder of the rights in the "Noa", "Noa South" and                 "Meri" gas fields, to receive an estimate of the expenses                 required in order to connect the "Or 1" gas field to the gas                 pipeline Noble plans to install between the "Noa" gas field and                 the production platforms in the "Meri" gas field. This pipeline                 is supposed to run close to the "Or 1" gas field and the                 possibility is being examined of connecting to the aforesaid gas                 pipeline in order to pipe the gas produced therefrom to the                 production platforms in the "Meri" gas field, and from there to                 Ashdod. In addition, the operator of the lease will request                 Noble's estimate of the charges for handling the gas on the                 production platforms and piping from there to Ashdod, as stated.                  In April 2005, the operator of the lease notified the partners                 that Noble is ready to discuss a corporation with respect to                 development of the "Or 1" gas field together with the "Noa" gas                 field, the development of which is planned for 2009-2010. It was                 decided that the discussions with Noble will continue regarding                 the charges for piping and handling the gas produced from the                 "Or 1" gas field.                                         16   NOTE 5 - JOINT VENTURE FOR OIL AND GAS EXPLORATION (CONT'D)          A.      "MED YAVNE" LEASE (CONT'D)          3.      THE GAS RESERVES AT THE "MED-YAVNE" LEASE (cont'd)                  In the estimation of the General Partner, based on the opinion                 received, as stated, and based on the price of the gas and the                 development costs, the fair value of the "Or 1" gas field is not                 less than its value as recorded in the books.                  At a meeting of the partners in January 2005, the possibility                 was also discussed of utilizing the balance of the gas reserves                 in the lease (approximately 42 billion cubit feet), the                 utilization of which will be possible only by means of their                 joint production with the gas reserves in the "Noa", and "Noa                 South" gas fields along with joint cooperation with the "Yam                 Tatis" group, while determining a mechanism for allocation of                 the investments in and income from the joint production                 (unification of the reserves). It was agreed that the operator                 will contact Noble with respect to the matter of unification of                 the reserves, as stated.                  In April 2005, the operator of the lease notified the partners                 that Noble object to joining the reserves.                  On December 13, 2005, the operator presented the partners the                 findings of an additional evaluation performed, pursuant to                 which development of the "Noa", and "Noa South" gas fields will                 utilize only a small, immaterial part of the Balance of the gas                 fields. In light of the results of the test, the partners                 decided not to continue the efforts toward enforcing unification                 of the reserves, as stated.                  In light of that stated above, there is only a small probability                 that it will be possible to utilize the Balance of the Reserves.                  In June 2005, the operator requested a change in the terms of                 the lease from the Petroleum Commissioner (hereinafter - "the                 Commissioner") such that the work plan for development of the                 lease will be submitted to the Commissioner at the time                 development of the "Noa" gas field is begun (instead of at the                 end of 5 years from the date the lease was granted, that is June                 2005). The commissioner agreed to the operator's request.          B.      THE "MED ASHDOD" LEASE          1.      GENERAL                  In January 2002, the Commissioner granted the partners in the                 Offshore License 242/"Med Ashdod", a lease (hereinafter - "the                 Lease") in an area of 250 square kilometers out of the "Med                 Ashdod" License area for a period of 30 years (as from June                 2000), this being based on the findings of the "Nir 1" well,                 which was executed in the license area. The Partnership's share                 in the Lease is 19.1370%.                  Regarding the lease period - see Note 9G., below.                  Regarding obligations of the Partnership to pay royalties - see                 Note 9A., below.                                         17   NOTE 5 - JOINT VENTURE FOR OIL AND GAS EXPLORATION (CONT'D)          B.      THE "MED ASHDOD" LEASE (CONT'D)          1.      GENERAL (cont'd)                  The work plan in the Lease, as determined by the Commissioner,                 for the first three years, is as follows:                  A.      Drilling for Tertiary age prospects or Mesozoic age                         prospects within two years from the grant date of the                         Lease (in 2003, "Nir 2" well for Tertiary age prospects                         was executed).                  B.      If drilling takes place, for the purpose of the Tertiary                         age only, within two years of the grant date of the                         lease, then an extension of one more year shall be given                         for drilling for the purposes of the Jurassic age. If no                         further discovery is made beneath the Pliocene base,                         then the Lease shall be restricted to the Pliocene base.                         In December 2005, an extension was granted for                         presentation of a drilling agreement for the purpose of                         the Jurassic age up to May 1, 2006 and execution of a                         drilling within 12 months from the signing date of the                         drilling agreement.                  In February 2004, Isramco Inc., the operator of the lease                 (hereinafter - "the Operator") presented to the Partners, among                 other things, the "Yam 3" prospect - well for oil prospects                 (hereinafter - "the Drilling") in the Jurassic layer at a depth                 of 5,900 meters, and with an estimated budget of $40 million.                  Absent a unanimous decision of all the partners regarding                 execution of the drilling, on July 25, 2004, a "sole risk"                 notification was issued (hereinafter - "the Notification") in                 the name of the Partnership to the other partners in the Lease,                 the meaning of which is that every partner in the Lease is given                 a period of 30 days from the date the Notification was received,                 to notify the Operator if it wishes to participate in the                 Drilling and at what rate of rights. Up to the last date fixed                 for responding to the Notification, partners holding 42% of the                 rights (including the Partnership) gave notice of their wish to                 join the Drilling. Pursuant to the joint operating agreement                 applying to the Lease, execution of the Drilling must begin with                 180 days of the last date fixed for responding to the                 Notification. Since the Drilling was not commenced by February                 25, 2005, the validity of the Notification expired.                  Execution of the Drilling is subject to approval of the Ministry                 of Defense and signing of an agreement with an owner of the                 drilling equipment (Semi or Jack Up).                  At the meetings held in 2004 and 2005, the Operator and the                 Ministry of Defense discussed the conditions for execution of                 the Drilling. In August 2005, upon submission of the summation                 with the Ministry of Defense, the Operator contacted drilling                 companies for purposes of receiving its proposal for execution                 of the Drilling (timetable and price). If and subject to                 acceptance of the proposals and an agreement in-principle with                 the drilling contractor (who will comply with the limitations of                 the Ministry of Defense), the Operator will update the budget                 for the Drilling and will bring its execution for the approval                 of the partners in the lease as well as the approval of the                 Ministry of Defense.                  At this stage, and as long as proposals have not been received                 from drilling companies and approvals have not been received                 from the Ministry of Defense and the partners in the lease, as                 stated, it is not possible to estimate if and when the Drilling                 of "Yam 3" well will be executed.                                         18    NOTE 5 - JOINT VENTURE FOR OIL AND GAS EXPLORATION (CONT'D)          B.      THE "MED ASHDOD" LEASE          2.      "GAD 1" WELL                  In February 2005 the operator recommended to the partners in the                 Lease to execute a drilling for gas purposes - the "Gad 1" Well                 (hereinafter - "the Well"). In the absence of an unanimous                 decision of all the partners with respect to execution of the                 Well, On February 28. 2005, the operator issued a "Sole Risk"                 notification in the name of the Partnership to the other                 partners in the Well. The meaning of the "Sole Risk"                 notification is that every partner in the Lease is given a                 period of 30 days from the date of receipt of the "Sole Risk"                 notification to notify the operator of his interest in                 participating in the Well, at the full rate of this rights of in                 part thereof or not to participate in the Well at all.                  In response to the "Sole Risk" notification, in addition to the                 Partnership, other partners holding approximately 14.9% of the                 rights in the Lease gave notice of their interest in                 participating in the Well. Accordingly, the rights of those                 partners not responding to the "Sole Risk" notification were                 transferred to the Partnership.                  Pursuant to the decision made on August 25, 2005 by the General                 Meeting of the holders of the Participation Units in the                 Partnership:                  1.      On August 29, 2005, the Partnership entered into an                         agreement with the U.S. company, Palace Petroleum Crop.                         (hereinafter - "Palace"),.pursuant to which the                         Partnership will transfer to Palace participation rights                         in the Well at the rate of 30% in exchange for Palace                         investing in the Well 34.2% of the drilling costs and                         30% of the productions tests (if any). In addition, the                         Partnership will grant Palace on option to acquire                         participation rights at the rate of 30% of every                         additional drilling, if executed in the future in the                         Med Ashdod Lease site, this being only in a case where                         the Partnership receives additional participation rights                         (in addition to the present rate of its rights in the                         Lease) as part of the "Sole Risk" process, and at a rate                         that will not be less than the rights to be transferred                         to Palace as part of the option as stated above.                  2.      On August 28, 2005, the Partnership transferred                         participation rights in the Well at the rate of 1% to                         Petroleum Fields Exploration (1992) Limited Partnership,                         in exchange for it bearing its relative share of the                         drilling costs.                  3.      On September 13, 2005 and September 26, 2005, the                         Partnership transferred participation rights in the Well                         at the rate of 4% and 5%, respectively, to Delek                         Drilling Limited Partnership, in exchange for it bearing                         its relative share of the drilling costs.                  After transfer of the rights as stated, the Partnership remains                 with 45.103% of the rights in the Well.                  On September 25, 2005, execution of the Well was commenced by                 the offshore drilling rig, Atwood Southern Cross. The Well was                 planned for a depth of approximately 2,600 meters and has a                 budget (after updates) of $ 16.4 million (not including                 production tests). When the Well reached its final depth,                 electrical examinations were made which indicated that the                 target layers are saturated with water. Therefore, on November                 16, 2005, the Partners have decided to abandon the Well. The                 Well costs amounted to roughly $ 16.4 million.                  The Partnership share in the drilling costs amounted to NIS                 30,370 thousand, which was recorded on the statement of                 operations in the fourth quarter of 2005.                                          19   NOTE 5 - JOINT VENTURE FOR OIL AND GAS EXPLORATION (CONT'D)          B.      THE "MED ASHDOD" LEASE          3.      "NIR 1" AND "NIR 2" WELLS                  A.      In 2000, "Nir 1" well was executed in the "Yam Ashdod                         Carveout" for gas purposes. The rate of the                         Partnership's participation in the "Nir 1" well is                         19.1370%. The cost of the well amounted to $13.3                         million. The Partnership's share in the drilling costs,                         which were recorded in the category "investments in oil                         and gas assets", amounted to NIS 10.9 million.                          In 2002, Isramco Inc., the Operator of the Lease,                         obtained from three different overseas firms, opinions                         designed to provide an assessment of the potential gas                         that can be produced in the "Nir" reservoir and the                         economic feasibility of its production. These opinions                         offer different assessments of the existence of the gas                         producing potential in the reservoir. The opinions                         indicate that in order to verify whether an economic gas                         reserve exists, at least one confirmation drilling must                         be made.                          At a meeting of the partners held on April 30, 2003, the                         Operator recommended execution of the "Nir 2"                         confirmation well.                  B.      Due to a "Sole Risk" notification issued by the                         Partnership in April 2003 for execution of the "Nir 2"                         confirmation drilling and transfer of a portion of the                         rights to third parties, the Partnership remained with                         rights at the rate of 56.18%.                          On September 1, 2003, execution of the "Nir 2" well was                         begun. On November 19, 2003, the Operator presented the                         partners with an analysis of the results of the                         production test executed at the "Nir 2" well, which                         indicated that it is not economically feasible to                         produce gas from the "Nir 2" well. The total cost of the                         "Nir 2" well amounted to NIS 44 million. On February 15,                         2004, the Operator notified the partners that based on                         the data analyzed, production of gas from the "Nir 1"                         well is not economically feasible.                  C.      In light of that stated above, in 2003, the Partnership                         wrote off the full amount of its investment in the "Nir                         1" well (in the amount of approximately NIS 10.9                         million) and its investment in the "Nir 2" well (in the                         amount of approximately NIS 24.7 million).          C.      "MARINE SOUTH" LICENSE          In 2002, the Commissioner granted 316/"Marine South" License in an area         of 142 square kilometers for a period of three years. The holders of the         rights in the License are the limited partnerships: the Partnership         (59%), Naphtha Exploration (15%), INOC Dead Sea (15%), Modi'in Energy         (10%), and Isramco Inc., which serves as operator of the License (1%).         In October 2003, the Commissioner's approval was received for deferral         of execution of the three-dimensional seismic survey up to February 15,         2004. In addition, the Commissioner provided that the last date for         preparing the prospect for drilling is June 15, 2004, and execution of         drilling shall begin no later than December 15, 2004.          In January 2004, the operator requested from the Commissioner to         increase the area of the "Marine South" in order to permit a         three-dimensional seismic survey on the enlarged area. The operator also         requested from the Commissioner to defer the date of execution of the         said seismic survey up to January 1, 2005, and that if the said survey         is executed to approve extension of the License for two more years. As a         result of rejection of the said request, in November 2004, the operator         recommended to the partners to return the license. The partners accepted         the operator's recommendation and the license was returned.                                          20   NOTE 5 - JOINT VENTURE FOR OIL AND GAS EXPLORATION (CONT'D)          D.      THE "GAL" LICENSES          GENERAL          In 2001, the Partnership acquired rights at the rate of 5% in six         offshore licenses: Michal, Matan, Tommy, Orli, Shira and Aya         (hereinafter - "the Gal Licenses").          In June 2002, the Orli, Aya and Tommy licenses were returned due to the         absence of appropriate drilling prospects and, in July 2003, the Shira         license expired due to a failure to comply with the license's work plan.          MICHAL AND MATAN LICENSES          In 2001, the operator presented the partners with the results of the         three-dimensional seismic survey that had been conducted in the areas of         the Michal and Matan Licenses and according to which two prospects had         been mapped, one for each license.          In November 2002, the operator recommended to the partners to execute         "Tamar 1" well in the "Matan" License (hereinafter - "Tamar 1" well) at         an expected cost of $40 million.          On February 4, 2003, the partners in the Licenses reached an agreement,         according to which each partner specified the percentage at which it         wished to participate in the "Tamar 1" well.          The Partnership undertook to participate in the "Tamar 1" well to the         full extent of its rights in the said Licenses, (5%). As a result of the         withdrawal of some of the partners and the decision of other to reduce         their participation in the "Tamar 1" well, the partners decided to         authorize BG International Ltd. (hereinafter - "BG") (which was a         partner in the Licenses and served as operator of the Licenses) to         endeavor to market the balance of the participation percentages to a         third party.          In December 2004, the Commissioner approved extension of the Licenses up         to June 2, 2005. During the said extension period, the operator (BG)         must undertake to execute a drilling of the well as an essential         condition for an additional extension. Nonetheless, the Commissioner         noted that if the said obligation is not complied with, he will consider         an additional extension of the Licenses, on the condition that the         operator undertakes to recruit investors for the well.          In March 2005, BG notified the partners in the Licenses and the         Commissioner that it relinquishes its rights in the Licenses and resigns         it position as operator of the Licenses. As a result of that stated and         pursuant to the joint operating agreement, BG's rights were transferred         to the other partners in the Licenses based on their proportionate         shares therein. Accordingly, the rate of the rights in the Licenses         transferred to the Partnership come to 20.510%.          In May 2005, an agreement was pursuant to which Dor Chemicals Ltd. And         the Dor Gas Explorations, Limited Partnership transferred, for no         consideration, to the Partnership and to the limited partnership Delek         Drillings (hereinafter - "Delek") and Avner Petroleum Exploration         (hereinafter - "Avner") participation rights in the Licenses, such that         the Partnership was transferred 4.885% and Delek and Avner were         transferred 15.197% each.          In light of that stated, as at the balance sheet date, the rate of the         Partnership's rights in the Licenses was 30.395%.                                          21   NOTE 5 - JOINT VENTURE FOR OIL AND GAS EXPLORATION (CONT'D)          D.      THE "GAL" LICENSES (CONT'D)          MICHAL AND MATAN LICENSES (cont'd)          The partners in the Licenses notified the Commissioner of their         intention to execute "Tamar 1" well subject to the joining of a         professional operator having deep - water drilling experience and         subject to the drilling budget not exceeding 40$ million (hereinafter -         "the Notification"). As a result of the notification on May 26, 2005,         the Commissioner extended the validity of the Licenses up to December 2,         2006. It was provided in the extension conditions that by June 2, 2006,         the partners must present to Commissioner an agreement with a contractor         or operator for execution of "Tamar 1" well. Upon fulfillment of the         said conditions, the Commissioner will act to extend the validity of the         Licenses up to December 2, 2007.          At the meeting of the partners held in August 2005, the partners         approved Isramco Inc.'s continued appointment as temporary operator of         the Licenses for a period up to December 1, 2005 and authorized the         operator to contact drilling companies in order to locate an appropriate         drilling rig for performance of the drilling. As at the signing date of         the financial statements, a permanent operator for the Licenses had not         yet been appointed and offers from drilling contractors to perform the         drilling had not yet been received.          As this stage, and as long as no obligation exists for participation in         the full amount of this rights (100%) in the drilling of the "Tamar 1"         well, and an offer from drilling contractors to perform the drilling has         not been received, the General Partners is unable to estimate of and         when the said drilling will be executed.          Regarding the Partnership's liability for an overriding royalty - see         9B., below.  NOTE 6 - SUNDRY RECEIVABLES                                                      DECEMBER 31     DECEMBER 31                                                            2005            2004                                                   -------------   -------------                                                   NIS THOUSANDS   NIS THOUSANDS                                                   -------------   -------------          Institutions                                          9               9                                                   =============   =============  NOTE 7 - INVESTMENTS IN OIL AND GAS PROPERTIES                                                      DECEMBER 31     DECEMBER 31                                                            2005            2004                                                   -------------   -------------                                                   NIS THOUSANDS   NIS THOUSANDS                                                   -------------   -------------          Investment in "Or 1" well (1)                     7,609           7,609                                                   =============   =============           (1)     See Note 5A.                                          22   NOTE 8 - SUNDRY PAYABLES                                                      DECEMBER 31     DECEMBER 31                                                            2005            2004                                                   -------------   -------------                                                   NIS THOUSANDS   NIS THOUSANDS                                                   -------------   -------------          Accrued expenses                                    501             458                                                   =============   =============  NOTE 9 - CONTINGENT LIABILITIES AND COMMITMENTS          A.      In the event of discovery of oil and/or gas and/or other                 valuable material that can be produced within the licenses and                 leases in which the Partnership is active at present and other                 licenses and leases in which the Partnership will participate,                 the Partnership undertook to pay royalties from the revenues                 generated from the first 10% of its share in the license/lease,                 as follows:                                                    ONSHORE LICENSES                         OFFSHORE LICENSES                                     --------------------------------------    -------------------------------------                                      UP TO THE DATE OF       FOLLOWING THE      UP TO THE DATE        FOLLOWING THE                                          RETURN OF THE   DATE OF RETURN OF    OF RETURN OF THE    DATE OF RETURN OF                                             INVESTMENT      THE INVESTMENT          INVESTMENT       THE INVESTMENT                                     ------------------   -----------------    ----------------    -----------------                      To Isramco Inc.                  5.00%              13.00%               1.00%               13.00%                   In addition, in the event of a discovery of oil and/or gas                 and/or other valuable material that will be extracted and                 realized from the Med Ashdod Lease and the Med Yavneh Lease, the                 Limited Partnership has undertaken to pay royalties from the                 revenues generated from the first 10% of its share in the lease                 as specified below:                                                                                        THE MED ASHDOD LEASE AND                                                                                         MED YAVNEH LEASE                                                                              --------------------------------------                                                                              UP TO THE DATE OF        FOLLOWING THE                                                                                  RETURN OF THE    DATE OF RETURN OF                                                                                     INVESTMENT       THE INVESTMENT                                                                              -----------------    -----------------                    To J. O. E. L. Jerusalem Oil                 Exploration Ltd.                                                         0.51%                6.58%                 To Equital Ltd.                                                          0.38%                4.93%                 To Isramco Inc.                                                          0.06%                0.83%                   Isramco Inc. is entitled to an overriding royalty of 2% from the                 Partnership's share in the oil and/or gas, that is produced from                 the Med Ashdod and Med Yavneh lease and/or of any petroleum                 right that comes in their place, this being in addition to any                 other royalty and/or consideration to which Isramco Inc. is                 entitled at present.          B.      The Partnership has an obligation for the payment of an                 overriding royalty to the General Partner of 5% of the                 Partnership's share of the revenues from oil and/or gas (gross,                 before expenses and other payments including a royalty to the                 State according to the Petroleum Law, 1952) that is produced                 from the Matan and Michal Licenses, including any petroleum                 asset that may come in their place.                                          23   NOTE 9 - CONTINGENT LIABILITIES AND COMMITMENTS (CONT'D)          C.      According to an agreement dated February 1997, the Partnership                 acquired the full rights of Equital Ltd., a related party, in                 the Shikma Carveout in the Ashdod Lease (10%) to a depth of                 1,500 meters and below.                  The Partnership has undertaken to pay Equital Ltd. if the well                 is found to be commercial, the amount of $84.5 thousand, as well                 as a royalty at the rate of 6% before and after the return of                 the investment.          D.      The Partnership has an undertaking to pay royalties to the State                 of Israel in accordance with the Petroleum Law, 1952          E.      According to an amendment to the Limited Partnership agreement,                 dated August 6, 1993, that is valid from June 1993, it was                 determined that the Limited Partnership shall pay the General                 Partner an amount that is the equivalent of $35,000 a month for                 placing the services of the employees of the General Partner, as                 needed, at the disposal of the Limited Partnership and for rent                 and regular maintenance of part of the offices of Isramco Inc.                 in Israel that is also used by the Limited Partnership.                  At the General Meeting of owners of the participation units,                 that was held in February 1997, it was decided to approve an                 update of the payment to the General Partner to a sum that is                 the equivalent of $42,000 (plus Value Added Tax) from January                 1997. At that meeting, a commitment was given by the General                 Partner according to which the General Partner would collect a                 monthly payment of only $40,000 (plus Value Added Tax).          F.      According to an agreement (hereinafter - "the Marketing                 Agreement") signed in March 1989 between the Limited Partnership                 and the East Mediterranean Oil and Gas Company Ltd. (hereinafter                 - "EMOG"), EMOG was granted the right to be appointed the                 exclusive marketing agent of the Limited Partnership in Israel                 and areas under its control for the wholesale marketing of crude                 oil from the oil fields of the Negev 2 Venture to which the                 Limited Partnership is entitled. In an agreement signed in March                 1992 between the Limited Partnership and other companies some of                 whom at that time were parties having an interest in the General                 Partner (J. O. E. L. Jerusalem Oil Explorations Ltd. and Isramco                 Inc.), various oil rights were transferred to the Limited                 Partnership, including the "Negev Med" preliminary permit on the                 basis of which the Med Ashdod and Med Yavneh leases were issued                 later on (hereinafter - "the Rights Transfer Agreement"). In the                 Rights Transfer Agreement, it was determined that the marketing                 of the crude oil produced from the petroleum assets that had                 been transferred to it from the above interested parties                 according to the Rights Transfer Agreement would be carried out                 by EMOG in accordance with the Marketing Agreement.                  The period of the agreement is fifteen years from the first                 commercial production. EMOG may assign its rights and                 obligations under the agreement.                                          24   NOTE 9 - CONTINGENT LIABILITIES AND COMMITMENTS (CONT'D)          G.      The oil rights in which the Limited Partnership has a share are                 allocated for a fixed term and on certain conditions. An                 extension of the validity of a petroleum asset is usually at the                 discretion of the authorities in accordance with the Petroleum                 Law as well as the renewal of any part thereof or the                 stipulating of additional conditions. In the event of failure to                 fully comply with the conditions, the right may be cancelled or                 reduced. The ability to exploit the petroleum assets in                 accordance with the lease and the licenses is contingent, among                 other things, on the Limited Partnership and the partners                 therein being willing and able to finance the various operations                 therein as well as the availability of appropriate equipment and                 personnel in Israel. The lack of equipment or personnel is                 liable to increase the costs or totally prevent fulfillment of                 the terms of the lease or the license or the permit or prevent                 or reduce the period of their extension or even lead to their                 cancellation.                  In addition, in accordance with the Petroleum Law, if within the                 first three years of the granting of the lease, oil/gas is not                 produced from the lease site in commercial quantities, the                 appointed Minister is permitted to send the lease owner a                 notification demanding that production of oil/gas in commercial                 quantities be commenced within the time period determined by the                 Minister in the notification - which may not be less than 60                 days. If production, as stated, is not commenced, the lease will                 expire. In the estimation of the General Partner and based on                 discussions with the Commissioner of Petroleum Matters, a                 notification as stated will not be sent with respect to the Med                 Ashdod lease - up to the end of the time allocated for execution                 of a drilling for oil prospects (that is, July 1, 2007) and with                 respect to the Med Yavneh lease - so long as development from                 the "Noa" gas field has not been started, which is nearby and                 subject to development from the "Or 1" gas field having been                 started at the same time.          H.      According to the trust agreement, in the event of termination of                 the trust, the cash received as a result of the realization of                 the trust assets less the costs involved in the realization and                 termination of the trust, will be divided among the owners of                 the participation units and the holders of the options (if any)                 less the exercise premium.          I.      The Supervisor is entitled to receive wages from the Limited                 Partnership in an amount in shekels which is equivalent to                 $3,500 per month, as long as the trust agreement remains in                 effect. Similarly, the Supervisor is entitled to receive from                 the Limited Partnership expenses that were duly incurred in the                 discharge of his duties and that were approved by the General                 Meeting. The Supervisor received approval for a budget for                 purposes of legal consultation, in the amount of $10,000 per                 year. In addition, the Supervisor is entitled to additional                 compensation for his work in connection with issuance of                 additional rights, in the amount of $20,000 in respect of every                 issuance, or such higher amount that will be approved by the                 General Meeting.          J.      According to the trust agreement, the Limited Partner (the                 trustee) is entitled to receive annual wage of $1,000.          K.      The Limited Partnership has undertaken to indemnify the General                 Partner and any of its employees and/or directors for any loss,                 expenses or damage that they or their agents bear or are                 required to bear, whether directly or indirectly, as a result of                 any act or omission in accordance with the provisions of the                 Limited Partnership agreement or in accordance with law.                                          25   NOTE 9 - CONTINGENT LIABILITIES AND COMMITMENTS (CONT'D)          L.      Some of the offshore drillings in which the Partnership may be a                 partner, are subject to the conditions and restrictions that                 determined or that may be determined in future by the Defense                 System. These conditions and restrictions could cause a change                 and delay in the time schedules and, as a result, could generate                 an increase in expected costs and a failure to comply with the                 lease.          M.      (1)     The Limited Partnership shall be dissolved upon the                         occurrence of any of the following instances:                          a.      At the end of the period in which the Limited                                 Partnership holds, directly or indirectly, a                                 valid petroleum asset or rights therein or in                                 the petroleum to be produced.                          b.      If the General Partner should cease to fulfill                                 its position and no other partner is appointed                                 in its place within 6 months from the date on                                 which he left office.                          c.      If the partners agree to dissolve the Limited                                 Partnership.                  (2)     According to the directives of the Stock Exchange, the                         Board of Directors of the Stock Exchange may remove the                         Limited Partnership's securities from trading in the                         following instances (this being in addition to the                         causes of action included in the Stock Exchange's                         Articles of Association in respect of suspending of                         trade and cancellation of the registration of securities                         of companies):                          a.      If the Limited Partnership ceases to operate in                                 the area of the activities that were specified                                 by the Limited Partnership before the                                 registration for trading, for a period of nine                                 consecutive months in which the most of the                                 Partnership's expenses are not expenses for                                 exploration and development, within the meaning                                 of the Income Tax Regulations (Deductions from                                 Income of Holders of Oil Rights), 1956.                          b.      The Limited Partnership commences to also engage                                 in areas of activity that are not within the                                 limits of its exclusive occupation.                          c.      The Limited Partnership commences to also engage                                 in projects other than those that were specified                                 by the Limited Partnership before the first                                 registration for trading or other than those                                 that were specified in the Limited Partnership                                 agreement after the first registration for                                 trading and that an amendment of the partnership                                 agreement was approved by the General Meeting of                                 the owners of the participation units.          N.      On July 13, 2005, a Request for Instructions (hereinafter -"the                 Request") was filed with the District Court of Tel-Aviv                 (hereinafter - "the Court") by the Partnership's Supervisor and                 the General Partner, wherein the Court was requested to decide                 the question whether pursuant to the provisions of Partnership                 Agreement the General Partner is required to distribute to the                 Limited Partner earnings of the Partnership accrued during the                 years 2003 and 2004, in the amount of NIS 102,644 thousand                 (hereinafter - "the Earnings").                  The position to the General Partner is that the Earnings should                 not be distributed since, among other reasons, they constitute                 "fruits of interim investments" within the meaning thereof in                 Partnership Agreement. In light of the uncertainties arising                 from this issue, the Court was requested to decided whether the                 Earnings constitute "fruits of interim investments" within the                 meaning thereof in Partnership Agreement that are not to be                 distributed, or not.                                          26   NOTE 9 - CONTINGENT LIABILITIES AND COMMITMENTS (CONT'D)          N.      (CONT'D)                  If the Court decides that the Earnings are distributable based                 on the provisions of the Partnership Agreement and since the                 provisions of the Partnership Agreement provide that earnings                 shall not be distributed if their receipt by the Limited Partner                 will be considered a withdrawal of all or part of his investment                 in the Partnership, within the meaning of Section 63(B) of the                 Partnership Ordinance [New Version], 1975, the Court will be                 requested to decide the question whether receipt of the Earnings                 by the Limited Partner constitutes withdrawal or receipt of part                 of his investment in the Partnership, within the meaning of                 Section 63(B), as stated, where the Limited Supervisor's                 position is that that the tests included in the Companies Law                 should be applied to the Partnership and that the Partnership is                 in compliance with these tests, whereas the General Partner has                 not taken a position with respect to the matter.                  The request in scheduled for hearing by the Court on February                 16, 2006.          O.      In July 2005, a representative of several holders of                 participation units (hereinafter - "the Representative")                 contacted the Trustee claiming that the Trustee was required to                 report to the Stock Exchange that most of the Partnership's                 expenses during a period in excess of 9 months, are not                 "exploration and development expenses" within the meaning of the                 Income Tax Regulations (Deductions from Income of Holders of                 Petroleum Rights), 1956, since most of the Partnership's                 expenses are administrative and general expenses that, he                 claims, do not fall within the ambit of "exploration and                 development expenses" within the meaning thereof in the said                 Regulations. The Trustee responded to the Representative that to                 the best of his knowledge, "exploration and development                 expenses" within the meaning of the Articles of Association of                 the Stock Exchange, include administrative and general expenses                 incurred in connection with the current management of the                 Partnership's activities.                  It is noted that the Articles of Association of the Stock                 Exchange and its directives provide that the Board of Directors                 of the Stock Exchange is permitted to suspend trading of the                 securities of a petroleum partnership and to remove them from                 trading if, among other things, during a period of 9 consecutive                 months most of the partnership's expenses are not "exploration                 and development expenses" within the meaning thereof in the said                 Regulations. The authority to suspend trading of the                 partnership's securities and/or to remove them from trading is                 subject to the discretion of the Board of Directors of the Stock                 Exchange, as the Stock Exchange's authoritative body.                  In light of the legal dispute between the Trustee and the                 Representative, on August 8, 2005, the Trustee requested that                 the Stock Exchange's management present its position with                 respect to the matter. On August 15, 2005, the Stock Exchange                 responded to the Trustee that the interpretation of term                 "exploration and development expenses" within the meaning                 thereof in the Directives of the Articles of Association of the                 Stock Exchange also include expenses incurred for the current                 management of a Petroleum Exploration Partnership as provided in                 the Income Tax Regulations (Rules for Calculating the Tax on the                 Holding and Sale of Participation Units in a Petroleum                 Exploration Partnership), 1988.                  The Trustee notified the Stock Exchange that as at August 2005,                 the Partnership is in compliance with the conditions required in                 the Directives of the Stock Exchange, as stated, that is, the                 Partnership's expenses are "exploration and development                 expenses".                                          27   NOTE 10 - LIMITED PARTNERSHIP'S CAPITAL                                                      DECEMBER 31     DECEMBER 31                                                            2005            2004                                                   -------------   -------------                                                   NIS THOUSANDS   NIS THOUSANDS                                                   -------------   -------------          Participation units of NIS 0.01         par value (in thousands)                      4,250,908       4,250,908                                                   =============   =============          A.      THE GENERAL PARTNER - ISRAMCO OIL AND GAS LTD.          Up to December 31, 2005, the General Partner invested NIS 389 thousand         in the capital of the Limited Partnership, and it participates in the         Limited Partnership's expenses and losses and is entitled to its income         according to the share of the General Partner in the capital invested in         the Limited Partnership's capital.          As at December 31, 2005, the share of the General Partner in the capital         is 0.05% and is progressively reduced with every increase in capital.          B.      THE LIMITED PARTNER - ISRAMCO MANAGEMENT (1988) LTD.          As at December 31, 2005, the Limited Partner invested in the capital of         the Limited Partnership, NIS 856,002 thousand (after deduction of the         issuance costs) and it participates in the Limited Partnership's         expenses and losses and is entitled to its income according to its share         in the capital invested in the Limited Partnership's capital. As at         December 31, 2005, the share of the Limited Partner in the capital is         99.95% and is progressively increased with every increase in capital.          C.      THE CAPITAL OF THE LIMITED PARTNERSHIP          The composition of the capital of the Limited Partnership is as follows:                                                                  LIMITED PARTNER    GENERAL PARTNER              TOTAL                                                              ----------------   ----------------   ----------------                                                                 NIS THOUSANDS      NIS THOUSANDS      NIS THOUSANDS                                                              ----------------   ----------------   ----------------              Investment in the Partnership, net                           856,002                389            856,391                                                              ----------------   ----------------   ----------------           Loss balance at beginning of the year                       (294,500)              (202)          (294,702)           Net income for the year                                       37,917                 19             37,936           Tax deposits paid on behalf of holders of           the participation certificates                               (5,074)                 -             (5,074)                                                              ----------------   ----------------   ----------------           Loss balance at end of the year                             (261,657)              (183)          (261,840)                                                              ----------------   ----------------   ----------------           Limited Partnership capital at end of the year               594,345                206            594,551                                                              ================   ================   ================                                           28   NOTE 10 - LIMITED PARTNERSHIP'S CAPITAL (CONT'D)          D.      In accordance with a legal opinion received by the Limited                 Partnership, it was recommended that when the partners will have                 accrued profits, the Limited Partner and/or the Supervisor would                 request the Court to issue instructions in respect of the doubts                 raised in the opinion regarding the distributable profits and if                 and when distribution of profits by the Limited Partnership will                 be deemed to be a withdrawal of part of the investment of the                 Limited Partner within the meaning of Section 63(B) of the                 Partnerships Ordinance.          E.      In the framework of discussions held with the Tax Authorities                 during the years 2002 - 2004, in connection with the                 Partnership's request to receive an exemption from withholding                 of tax at the source, the Tax Authorities raised a requirement                 that the tax deriving from the taxable income attributable to                 the holders of the participation certificates, shall be paid by                 the Partnership on behalf of the holders of the participation                 certificates.                  On December 15, 2004, an agreement was signed between the                 Partnership and the Tax Authorities, according to which it was                 provided that the Partnership shall be entitled to receive an                 exemption from withholding of tax at the source on its income,                 subject to the condition that beginning from 2004, the                 Partnership will pay to the Tax Authorities, at the end of every                 tax year, an advance deposit on account of the tax liability of                 the holders of the participation certificates, which shall be                 calculated based on the amount of the Partnership's income for                 tax purposes in the relevant tax year by category (interest,                 dividends, gains/losses from sale of securities) less the                 Partnership's allowable deductions for tax purposes in a manner                 proportionate to the income, multiplied by the rates fixed in                 the agreement. The said payment will be attributed to the credit                 of every certificate holder (as defined in the Income Tax                 Regulations) based on his proportionate share, as an advance                 deposit on account of the tax.                  Pursuant to the agreement, in the current year the Partnership                 paid NIS 5,074 thousand (in 2004 - NIS 3,619 thousand), which                 was recorded to the credit of every certificate holder based on                 his proportionate share, as a deposit on account of the tax and                 that will be included as part of the certificate for purposes of                 calculating the deduction to which the holder is entitled due to                 the holding of participation certificates.                  The amounts paid by the Partnership, as stated, are presented as                 a reduction of Partnership capital.   NOTE 11 - DETAILS TO STATEMENT OF EARNINGS CATEGORIES          A.      FINANCING INCOME, NET                                                                                      FOR THE YEAR ENDED 31 DECEMBER                                                                        ----------------------------------------------------                                                                                  2005               2004               2003                                                                        --------------     --------------     --------------                                                                         NIS THOUSANDS      NIS THOUSANDS      NIS THOUSANDS                                                                        --------------     --------------     --------------             Gain from marketable securities, net                                   50,479             36,005             67,183         Interest on deposits in banks and exchange rate differences               281                553                690         Dividend and interest income from marketable securities                24,432             25,955             25,492         Commissions, management fees and others                                (3,804)            (3,890)            (3,671)                                                                        --------------     --------------     --------------                                                                                 71,388             58,623             89,694                                                                        ==============     ==============     ==============    NOTE 11 - DETAILS TO STATEMENT OF EARNINGS CATEGORIES (CONT'D)          B.      PARTICIPATION IN GAS AND OIL EXPLORATION, NET                                                                                       FOR THE YEAR ENDED 31 DECEMBER                                                                        ----------------------------------------------------                                                                                  2005               2004               2003                                                                        --------------     --------------     --------------                                                                         NIS THOUSANDS      NIS THOUSANDS      NIS THOUSANDS                                                                        --------------     --------------     --------------             "Med Ashdod" Lease (including "Nir 1" and "Nir 2" wells)                   91                106             35,617         "Center Marine" License (including "Romi 1" well)                            -                  -               (459)         "South Marine" License                                                       -                187                227         "Med Yavne" Lease                                                          279                231                315         "Gal" Licenses                                                              62                 23                429         "Shikma Sea" License - "Nordon 1" well                                       -                366               (382)         "Med Ashdod" Lease - "Gad 1" well                                       30,370                  -                  -         Others                                                                       -                 12                 22                                                                        --------------     --------------     --------------                                                                                   30,802                925             35,769                                                                        ==============     ==============     ==============          Including expenses to related parties                                    2,910                664              4,942                                                                        ==============     ==============     ==============            C.     GENERAL AND ADMINISTRATIVE EXPENSES                                                                                       FOR THE YEAR ENDED 31 DECEMBER                                                                        ----------------------------------------------------                                                                                  2005               2004               2003                                                                        --------------     --------------     --------------                                                                         NIS THOUSANDS      NIS THOUSANDS      NIS THOUSANDS                                                                        --------------     --------------     --------------             Management fee to the General Partner - related party                   2,157              2,154              2,168         Professional services                                                     151                160                126         Taxes and permits                                                         105                105                122         Wages to limited partner and supervisor                                   195                192                219         Others                                                                     42                 82                 32                                                                        --------------     --------------     --------------                                                                                  2,650              2,693              2,667                                                                        ==============     ==============     ==============           D.      INCOME PER PARTICIPATION UNIT                                                                                       FOR THE YEAR ENDED 31 DECEMBER                                                                        ----------------------------------------------------                                                                                  2005               2004               2003                                                                        --------------     --------------     --------------                                                                         NIS THOUSANDS      NIS THOUSANDS      NIS THOUSANDS                                                                        --------------     --------------     --------------             Number of participation units used to compute the basic           income per participation unit (in thousands)                      4,250,908          4,250,908          4,250,908          Income used in computing basic income (in NIS 000) per           participation unit                                                   37,919             54,977             51,232                                           29   NOTE 12 - INTERESTED PARTIES AND RELATED PARTIES          A.      The limited partnerships, Naphtha Explorations, I.N.O.C. Dead                 Sea and the Partnership, are managed by related companies that                 are controlled by the same controlling interest. The said                 partnerships together with Isramco Inc., which is also under the                 control of the same controlling interest, are partners, in full                 or in part, in different gas and oil exploration rights.                  The joint ventures for oil and gas explorations, in which the                 said partnerships and the Partnership participate, receive                 services from companies that are related parties and are                 controlled by the same controlling interest. Also, in most of                 the joint ventures, in which the Partnership participates, some                 of the partners are related parties and interested parties that                 also act in part as venture operators who are entitled to                 venture operator fees at a set rate of the direct expenses or                 venture operator fees at a fixed monthly amount, according to                 the joint venture agreements.          B.      Balances and transactions with related and interested parties                 are included in the notes to the financial statements in the                 appropriate categories.          C.      For information on undertakings with related and interested                 parties - See Note 9.          D.      For information on royalties to related parties and interested                 parties - See Note 9.  NOTE 13 - DIFFERENCES BETWEEN ISRAELI GAAP AND U.S. GAAP          A.      GENERAL          The Limited Partnership's financial statements are prepared in         accordance with generally accepted accounting principles in Israel         ("Israeli GAAP"), which differ in certain respects from generally         accepted accounting principles in the United States ("U.S. GAAP").         Differences which have a significant effect on the Limited Partnership's         net assets, income and equity, are set forth below.          1.      EFFECT OF INFLATION                  Up to December 2003, the Limited Partnership included the effect                 of price level changes in the accompanying financial statements,                 as required under Israeli GAAP and as discussed in Note 3 to                 these financial statements.                  U.S. GAAP does not provide for recognition of the effects of                 such price level changes. However, the U.S. Securities and                 Exchange Commission permits recognition of the effects of price                 level changes and, therefore, such effects are not included in                 the reconciliation of net income or equity presented herein.                                          30   NOTE 13 - DIFFERENCES BETWEEN ISRAELI GAAP AND U.S. GAAP (CONT'D)          A.      GENERAL (CONT'D)          2.      MARKETABLE SECURITIES                  The Limited Partnership owns 13.5% of the participation units of                 a related limited partnership, which is engaged in oil and gas                 exploration. Under Israeli GAAP, these participation units,                 which are designated for sale in the short term, are recorded at                 market value as at the balance sheet date with unrealized                 income/losses being recorded in the statements of earnings.                 Under U.S. GAAP, the participation units are recorded using the                 equity method in accordance with EITF - D-46 which requires                 implementation of Statement of Position 78-9 for the Limited                 Partnership's investments.                  The effect of reversing the unrealized income/losses on the                 participation units for Israeli GAAP, and application of the                 equity method of accounting for U.S. GAAP purposes, are                 presented below as separate adjustments.          B.      THE EFFECT OF MATERIAL DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP                 DERIVING FROM THE AFOREMENTIONED ITEMS ON THE FINANCIAL                 STATEMENTS, IS SHOWN BELOW:          1.      ON THE STATEMENTS OF EARNINGS:                                                                                          YEAR ENDED 31 DECEMBER                                                                        ----------------------------------------------------                                                                                  2005               2004               2003                                                                        --------------     --------------     --------------                                                                         NIS THOUSANDS      NIS THOUSANDS      NIS THOUSANDS                                                                        --------------     --------------     --------------                     Net income under Israeli GAAP                                  37,936             55,005             51,258                                                                        --------------     --------------     --------------                  ADJUSTMENT                 Revaluation of marketable securities                             (972)              (943)              (622)                 Partnership equity in earnings of a partnership                   265                955                465                                                                        --------------     --------------     --------------                                                                                   (707)                12               (157)                                                                        --------------     --------------     --------------                    Net income under U.S. GAAP                                   37,229             55,017             51,101                                                                        ==============     ==============     ==============                                           31   NOTE 13 - DIFFERENCES BETWEEN ISRAELI GAAP AND U.S. GAAP (CONT'D)          B.      THE EFFECT OF MATERIAL DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP                 DERIVING FROM THE AFOREMENTIONED ITEMS ON THE FINANCIAL                 STATEMENTS, IS SHOWN BELOW: (CONT'D)          1.      ON THE STATEMENTS OF EARNINGS: (cont'd)                                                                                       YEAR ENDED 31 DECEMBER                                                                      ----------------------------------------------------                                                                                2005               2004               2003                                                                      --------------     --------------     --------------                                                                       NIS THOUSANDS      NIS THOUSANDS      NIS THOUSANDS                                                                      --------------     --------------     --------------                     BASIC AND DILUTED INCOME PER                  PARTICIPATION UNIT (UNDER U.S. GAAP)                  Net income                                                   37,229             55,017             51,101                                                                      ==============     ==============     ==============                  General partner's share in the net income                        19                 28                 26                                                                      ==============     ==============     ==============                  Net income attributable to                  participation unit holder                                   37,210             54,989             51,075                                                                      ==============     ==============     ==============                  Basic net income per participation unit (NIS)                0.0088             0.0129             0.0120                                                                      ==============     ==============     ==============                  Weighted-average number of participation                  units used in calculation of basic                  income per unit (in thousands)                           4,250,908          4,250,908          4,250,908                                                                      ==============     ==============     ==============           2.      ON BALANCE SHEET ITEMS:                                                                                  DECEMBER 31                                       ---------------------------------------------------------------------------------------------                                                           2005                                            2004                                       ---------------------------------------------   ---------------------------------------------                                         AS REPORTED      ADJUSTMENT          AS PER     AS REPORTED      ADJUSTMENT          AS PER                                                                           U.S. GAAP                                       U.S. GAAP                                       NIS THOUSANDS   NIS THOUSANDS   NIS THOUSANDS   NIS THOUSANDS   NIS THOUSANDS   NIS THOUSANDS                                       -------------   -------------   -------------   -------------   -------------   -------------                ASSETS         Marketable securities (1)           583,569          (4,114)        579,455         539,042          (3,142)        535,900                                       =============   =============   =============   =============   =============   =============          Investment in affiliate (2)               -           5,609           5,609               -           5,344           5,344                                       =============   =============   =============   =============   =============   =============          EQUITY         Accumulated loss (1) (2)           (261,840)          1,495        (260,345)       (294,702)          2,202        (292,500)                                       =============   =============   =============   =============   =============   =============           (1)     Change in value of investment securities to market value.         (2)     Partnership equity in earnings of a partnership.                                          32   NOTE 13 - DIFFERENCES BETWEEN ISRAELI GAAP AND U.S. GAAP (CONT'D)          B.      THE EFFECT OF MATERIAL DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP                 DERIVING FROM THE AFOREMENTIONED ITEMS ON THE FINANCIAL                 STATEMENTS, IS SHOWN BELOW: (CONT'D)          3.      ON THE STATEMENT OF CASH FLOWS:                                                                                       YEAR ENDED 31 DECEMBER                                                                      ----------------------------------------------------                                                                                2005               2004               2003                                                                      --------------     --------------     --------------                                                                       NIS THOUSANDS      NIS THOUSANDS      NIS THOUSANDS                                                                      --------------     --------------     --------------                     Net cash inflow generated by                  operating activities - Israeli GAAP                         17,933             22,339             15,934                  ADJUSTMENTS                 Net (loss) income                                              (707)                12               (157)                 Gain from marketable securities, net                            972                943                622                 Proceeds from disposal  (investment in)                  marketable securities, net                                   5,952            (30,378)             1,820                 Partnership equity in earnings of a partnership                (265)              (955)              (465)                                                                      --------------     --------------     --------------                  Net cash inflow (outflow) generated by                  operating activities - U.S. GAAP                            23,885             (8,039)            17,754                                                                      ==============     ==============     ==============                  Net cash outflow generated by                  investing activities - Israeli GAAP                        (24,418)           (30,378)           (22,848)                  ADJUSTMENTS                 Investment in marketable securities                         487,366            204,464            187,069                 Proceeds from disposal of marketable securities            (493,318)          (174,086)          (188,889)                                                                      --------------     --------------     --------------                  Net cash outflow generated by                  investing activities - U.S. GAAP                           (30,370)                 -            (24,668)                                                                      ==============     ==============     ==============                                           33   NOTE 14 - CONDENSED OF FINANCIAL STATEMENTS IN NOMINAL VALUES          A.      BALANCE SHEETS                                                                DECEMBER 31     DECEMBER 31                                                                    2005            2004                                                           -------------   -------------                                                           NIS THOUSANDS   NIS THOUSANDS                                                           -------------   -------------            CURRENT ASSETS          Cash and cash equivalents                                 2,720          14,279         Marketable securities                                   583,569         539,042         Joint ventures for gas and oil exploration                1,328           1,307         Sundry receivables                                            9               9                                                           -------------   -------------                                                                 587,626         554,637                                                           -------------   -------------         INVESTMENTS          Investment in gas and oil properties                      7,186           7,186                                                           -------------   -------------                                                                  594,812         561,823                                                           =============   =============          CURRENT LIABILITIES          Sundry payables                                             501             458         Joint ventures for gas and oil exploration                  183              99                                                           -------------   -------------                                                                     684             557                                                           -------------   -------------          LIMITED PARTNERSHIP CAPITAL                             594,128         561,266                                                           -------------   -------------                                                                  594,812         561,823                                                           =============   =============                                           34   NOTE 14 - CONDENSED OF FINANCIAL STATEMENTS IN NOMINAL VALUES (CONT'D)          B.      STATEMENTS OF EARNINGS                                                                                            FOR THE YEAR ENDED                                                                        ----------------------------------------------------                                                                           31 DECEMBER        31 DECEMBER        31 DECEMBER                                                                                  2005               2004               2003                                                                        --------------     --------------     --------------                                                                         NIS THOUSANDS      NIS THOUSANDS      NIS THOUSANDS                                                                        --------------     --------------     --------------             INCOME          Financing income, net                                                  71,388             58,623             81,344                                                                        --------------     --------------     --------------          EXPENSES          Participation in gas and oil exploration, net                          30,802                925             35,216         General and administrative expenses                                     2,650              2,693              2,692                                                                        --------------     --------------     --------------                                                                                 33,452              3,618             37,908                                                                        --------------     --------------     --------------          Net income                                                             37,936             55,005             43,436                                                                        ==============     ==============     ==============                                           35   NOTE 14 - CONDENSED OF FINANCIAL STATEMENTS IN NOMINAL VALUES (CONT'D)          C.      STATEMENTS OF CHANGES IN LIMITED PARTNERSHIP CAPITAL                                                                            PARTNERSHIP'S        ACCUMULATED                                                                               CAPITAL               LOSS              TOTAL                                                                        --------------     --------------     --------------                                                                         NIS THOUSANDS      NIS THOUSANDS      NIS THOUSANDS                                                                        --------------     --------------     --------------              BALANCE AS AT JANUARY 1, 2003                                        587,280           (120,836)           466,444           Net income for the year                                                    -             43,436             43,436                                                                        --------------     --------------     --------------           BALANCE AS AT DECEMBER 31, 2003                                      587,280            (77,400)           509,880           Net income for the year                                                    -             55,005             55,005           Tax deposits paid on behalf of the           participation certificates                                                -             (3,619)            (3,619)                                                                        --------------     --------------     --------------           BALANCE AS AT DECEMBER 31, 2004                                      587,280            (26,014)           561,266           Net income for the year                                                    -             37,936             37,936           Tax deposits paid on behalf of the           participation certificates                                                -             (5,074)            (5,074)                                                                        --------------     --------------     --------------           BALANCE AS AT DECEMBER 31, 2005                                      587,280              6,848            594,128                                                                        ==============     ==============     ==============           D.      LIMITED PARTNERSHIP CAPITAL          The Limited Partnership capital is comprised as follows:                                                                                  LIMITED            GENERAL                                                                               PARTNER            PARTNER              TOTAL                                                                        --------------     --------------     --------------                                                                         NIS THOUSANDS      NIS THOUSANDS      NIS THOUSANDS                                                                        --------------     --------------     --------------             Partners' investments, net                                            587,141                139            587,280                                                                        --------------     --------------     --------------          Loss balance at beginning of year                                     (25,921)               (93)           (26,014)          Net income for the year                                                37,917                 19             37,936          Tax deposits paid on behalf of the          participation certificates                                            (5,074)                 -             (5,074)                                                                        --------------     --------------     --------------          Loss balance at end of year                                             6,922                (74)             6,848                                                                        --------------     --------------     --------------          Partnership capital at end of year                                    594,063                 65            594,128                                                                        ==============     ==============     ==============                                          36    -----END PRIVACY-ENHANCED MESSAGE-----