<PAGE>

                               "ISRAMCO - NEGEV 2"
                               LIMITED PARTNERSHIP

                              FINANCIAL STATEMENTS
                      AS AT DECEMBER 31, 2006 AND 2005 AND
              FOR EACH OF THE YEARS IN THE THREE-YEAR PERIOD ENDED
                               DECEMBER 31, 2006

<PAGE>

                                         "Isramco - Negev 2" Limited Partnership

FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

CONTENTS

                                                                            PAGE
                                                                            ----

Auditors' Report                                                               2

Balance Sheets                                                                 3

Statements of Earnings                                                         4

Statements of Changes in Limited Partnership's Capital                         5

Statements of Cash Flows                                                       6

Notes to the Financial Statements                                              8

<PAGE>

[KPMG LOGO]

                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

We have audited the accompanying balance sheets of "Isramco - Negev 2" Limited
Partnership (hereinafter - "the Limited Partnership") as at December 31, 2006
and 2005, and the 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, 2006. 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 as to 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, the financial statements referred to above present fairly, in
all material respects, the financial position of the Limited Partnership as at
December 31, 2006 and 2005, and the results of its operations, the changes in
its capital and its cash flows for each of the years in the three-year period
ended December 31, 2006, in conformity with generally accepted accounting
principles in Israel.

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, 2006 and 2005 and the results of its operations, the changes in its
capital and its cash flows for each of the years in the three-year period ended
December 31, 2006, to the extent summarized in Note 12 to the financial
statements.

As discussed in Note 3C, the above-mentioned financial statements are stated in
reported amounts, in accordance with Accounting Standards published by the
Israel Accounting Standards Board.

Somekh Chaikin
Certified Public Accountants (Isr.)
Member Firm of KPMG International
Tel Aviv, Israel

March 13, 2007

Somekh Chaikin, a partnership registered under the Israeli Partnership
Ordinance, is a member of KPMG International, a Swiss cooperative.


                                        2

<PAGE>

                                         "Isramco - Negev 2" Limited Partnership

BALANCE SHEETS AS AT DECEMBER 31
--------------------------------------------------------------------------------

REPORTED AMOUNTS

                                                         2006           2005
                                                    -------------  -------------
                                             NOTE   NIS THOUSANDS  NIS THOUSANDS
                                            ------  -------------  -------------
CURRENT ASSETS

Cash and cash equivalents                               15,208          2,720
Marketable securities                            4     558,065        583,569
Joint ventures for oil and gas exploration       5         625          1,328
Sundry receivables                                         310              9
                                                       -------        -------
                                                       573,908        587,626
                                                       -------        -------

INVESTMENTS

Investment in oil and gas properties            5A       7,609          7,609
                                                       -------        -------

                                                       581,817        595,235
                                                       =======        =======

CURRENT LIABILITIES

Sundry payables                                  6       4,034            501
Joint ventures for oil and gas exploration       5         173            183
                                                       -------        -------
                                                         4,207            684
                                                       -------        -------
CONTINGENT LIABILITIES AND COMMITMENTS           7

LIMITED PARTNERSHIP'S CAPITAL                    8     577,610        594,551
                                                       -------        -------
                                                       581,817        595,235
                                                       =======        =======

<TABLE>
---------------------------  --------------------------  --------------------------
<S>                          <C>                         <C>
  Pinkstone Ltd. - Director       Yossi Levy - CEO           Ami Krupik - CFO
 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
</TABLE>

March 13, 2007

The accompanying notes are an integral part of the financial statements.


                                        3

<PAGE>

                                         "Isramco - Negev 2" Limited Partnership

STATEMENTS OF EARNINGS FOR THE YEAR ENDED DECEMBER 31
--------------------------------------------------------------------------------

REPORTED AMOUNTS

<TABLE>
<CAPTION>
                                                           2006           2005            2004
                                                       -------------  -------------   -------------
                                                NOTES  NIS THOUSANDS  NIS THOUSANDS   NIS THOUSANDS
                                                -----  -------------  -------------   -------------
<S>                                                <C>     <C>            <C>            <C>
INCOME
Income from sale of oil and gas rights                        812             --             --
Financing income, net                              9A      65,229         71,388         58,623
                                                           ------         ------         ------
                                                           66,041         71,388         58,623
                                                           ------         ------         ------
EXPENSES
Participation in oil and gas exploration, net      9B       1,263         30,802            925
General and administrative expenses                9C       2,896          2,650          2,693
                                                           ------         ------         ------
                                                            4,459         33,452          3,618
                                                           ------         ------         ------
NET INCOME                                                 61,882         37,936         55,005
                                                           ======         ======         ======
INCOME PER PARTICIPATION UNIT:
                                                              NIS            NIS            NIS
                                                           ------         ------         ------
Basic income per participation unit                9D      0.0146         0.0089         0.0129
                                                           ======         ======         ======
</TABLE>

The accompanying notes are an integral part of the financial statements.


                                        4

<PAGE>

                                         "Isramco - Negev 2" Limited Partnership

STATEMENTS OF CHANGES IN LIMITED PARTNERSHIP'S CAPITAL
--------------------------------------------------------------------------------

REPORTED AMOUNTS

<TABLE>
<CAPTION>
                                                  PARTNERSHIP     ACCUMULATED
                                                    CAPITAL           LOSS           TOTAL
                                                 -------------   -------------   -------------
                                                 NIS THOUSANDS   NIS THOUSANDS   NIS THOUSANDS
                                                 -------------   -------------   -------------
<S>                                                  <C>           <C>              <C>
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 units*                               --         (3,619)         (3,619)
                                                     -------       --------         -------

BALANCE AS AT DECEMBER 31, 2004                      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 units*                               --         (5,074)         (5,074)
                                                     -------       --------         -------

BALANCE AS AT DECEMBER 31, 2005                      856,391       (261,840)        594,551

Net income for the year                                   --         61,882          61,882

Tax deposits paid on behalf of holders of
   the participation units*                               --         (8,823)         (8,823)

Distribution of Partnership earnings to
   holders of the participation units                     --        (70,000)        (70,000)
                                                     -------       --------         -------
BALANCE AS AT DECEMBER 31, 2006                      856,391       (278,781)        577,610
                                                     =======       ========         =======
</TABLE>

*    Regarding the tax deposits paid on behalf of holders of the participation
     units - see Note 8E.

The accompanying notes are an integral part of the financial statements.


                                        5

<PAGE>

                                         "Isramco - Negev 2" Limited Partnership

STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31
--------------------------------------------------------------------------------

REPORTED AMOUNTS

<TABLE>
<CAPTION>
                                                                   2006            2005            2004
                                                              -------------   -------------   -------------
                                                              NIS THOUSANDS   NIS THOUSANDS   NIS THOUSANDS
                                                              -------------   -------------   -------------
<S>                                                             <C>             <C>             <C>
CASH FLOWS GENERATED BY OPERATING ACTIVITIES:
Net income                                                        61,882          37,936          55,005
Adjustment to reconcile net income to net cash flows
   generated by operating activities (A)                         (37,498)        (20,003)        (32,666)
                                                                --------        --------        --------
NET CASH INFLOW GENERATED BY OPERATING ACTIVITIES                 24,384          17,933          22,339
                                                                --------        --------        --------
CASH FLOWS GENERATED BY INVESTING ACTIVITIES:
Investment in oil and gas properties                                  --         (30,370)             --
Investment in marketable securities                             (458,285)       (487,366)       (204,464)
Proceeds from sale of marketable securities                      524,400         493,318         174,086
Proceeds from sale of oil and gas rights                             812              --              --
                                                                --------        --------        --------
NET CASH INFLOW (OUTFLOW) GENERATED BY INVESTING ACTIVITIES       66,927         (24,418)        (30,378)
                                                                --------        --------        --------
CASH FLOWS GENERATED BY FINANCING ACTIVITIES:
Distribution of Partnership earnings to holders
   of the participation units                                    (70,000)             --              --
Tax deposits paid on behalf of holders of the
   participation units                                            (8,823)         (5,074)         (3,619)
                                                                --------        --------        --------
NET CASH OUTFLOW GENERATED BY FINANCING ACTIVITIES               (78,823)         (5,074)         (3,619)
                                                                --------        --------        --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                  12,488         (11,559)        (11,658)

BALANCE OF CASH AND CASH EQUIVALENTS AT BEGINNING OF
   THE YEAR                                                        2,720          14,279          25,937
                                                                --------        --------        --------
BALANCE OF CASH AND CASH EQUIVALENTS AT END OF THE YEAR           15,208           2,720          14,279
                                                                ========        ========        ========
</TABLE>

The accompanying notes are an integral part of the financial statements.


                                        6

<PAGE>

                                         "Isramco - Negev 2" Limited Partnership

STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31 (CONT'D)
--------------------------------------------------------------------------------

REPORTED AMOUNTS

<TABLE>
<CAPTION>
                                                                 2006            2005            2004
                                                            -------------   -------------   -------------
                                                            NIS THOUSANDS   NIS THOUSANDS   NIS THOUSANDS
                                                            -------------   -------------   -------------
<S>                                                            <C>             <C>             <C>
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                           (40,611)        (50,479)        (36,006)
Gain from sale of oil and gas rights                              (812)             --              --
Amortization of investment in oil and gas properties                --          30,370              --

Changes in asset and liability items:
------------------------------------
Decrease (increase) in sundry receivables                         (301)             --             309
Increase in sundry payables                                      3,533              43              46
Change in joint ventures for oil and gas exploration, net          693              63           2,985
                                                               -------         -------         -------
                                                               (37,498)        (20,003)        (32,666)
                                                               =======         =======         =======
</TABLE>

The accompanying notes are an integral part of the financial statements.


                                        7

<PAGE>

                                     DRAFT

                                         "Isramco - Negev 2" Limited Partnership

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2006, 2005
AND 2004
--------------------------------------------------------------------------------

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
          (that has been 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 Israeli 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 a 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 Israeli Income Tax
          Commissioner for purposes of the Israeli 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. As at the signing date of the financial statements, the
          Regulations had not been extended.


                                        8

<PAGE>

                                         "Isramco - Negev 2" Limited Partnership

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2006, 2005
AND 2004
--------------------------------------------------------------------------------

NOTE 2 - 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 joint operating agreements (J.O.A.) with its
          partners in various joint ventures.

     B.   As at the approval date of the financial statements, February __,
          2007, the Limited Partnership's rights in oil and/or gas properties
          are as follows:

<TABLE>
<CAPTION>
                                                         PARTICIPATION RATE   DATE OF EXPIRATION
                                                                  %                OF RIGHTS
                                                         ------------------   ------------------
<S>                                                            <C>             <C>
     "Med Yavne" lease                                         32.4111           June 10, 2030
     "Med Ashdod" lease                                        19.1369           June 15, 2030
     Michal license                                            27.5000         December 31, 2008
     Matan license                                             27.5000         December 31, 2008
     Shikma Carveout (depth of 1,500 meters and under)         10.0000           April 1, 2009
</TABLE>

     For additional details in connection with the Partnership's rights in oil
     and/or gas properties - see Note 5.

NOTE 3 - REPORTING PRINCIPLES AND ACCOUNTING POLICIES

     A.   GENERAL

     These financial statements are presented in accordance with generally
     accepted accounting principles in Israel and the principles provided in the
     Israeli 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 Israeli Securities
          Law.

     3.   CPI - the Consumer Price Index published by the Central Bureau of
          ---
          Statistics in Israel.

     4.   Dollar - the United States 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, 2003), with the addition of amounts in historical values
          that were added after the transition date and less amounts eliminated
          after the transition date.

     7.   Nominal Financial Report - the financial report based on reported
          ------------------------
          amounts.


                                        9

<PAGE>

                                         "Isramco - Negev 2" Limited Partnership

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2006, 2005
AND 2004
--------------------------------------------------------------------------------

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 2002, the
          adjustment of financial statements for the effect of inflation was
          discontinued as of January 1, 2004. Up to December 31, 2003, the
          Partnership continued to prepare adjusted financial statements in
          accordance with Opinion No. 36 of the Institute of Certified Public
          Accountants in Israel. 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 of December 31, 2003 (the transition date) constituted
          the starting point for the nominal financial report as of January 1,
          2004. Additions subsequent to December 31, 2003, made during the
          period are included according to their historical values.

     (3)  Amounts of the non-monetary assets do not necessarily reflect their
          realizable value or updated economic value but, rather, only the
          Reported Amount of such assets.

     (4)  The term "cost" in these financial statements means cost in the
          Reported Amount.

     D.   REPORTING PRINCIPLES

     (1)  Balance sheets:

          a.   Non-monetary items (investment in oil and gas properties and
               partnership capital) are stated at Reported Amount.

          b.   Monetary items are stated in the balance sheet at their
               historical values as at the balance sheet date.

     (2)  Statements of earnings:

          a.   Income and expenses deriving from non-monetary items (such as,
               depreciation and amortization, prepaid revenues and expenses,
               etc.) and 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 historical value.

     E.   CASH AND CASH EQUIVALENTS

     Cash and cash equivalents include bank deposits having an original
     maturity, as at the date of the investment therein, not in excess of three
     months.


                                       10

<PAGE>

                                         "Isramco - Negev 2" Limited Partnership

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2006, 2005
AND 2004
--------------------------------------------------------------------------------

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 stage and
          in 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") of ICPAI. The Standard
     provides procedures which the Partnership 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
     financial assets. 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.


                                       11

<PAGE>

                                         "Isramco - Negev 2" Limited Partnership

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2006, 2005
AND 2004
--------------------------------------------------------------------------------

NOTE 3 - REPORTING PRINCIPLES AND ACCOUNTING POLICIES (CONT'D)

     I.   INCOME PER PARTICIPATION UNIT

     Commencing from January 1, 2006, the Partnership applies Accounting
     Standard No. 21, "Earnings per Share" (hereinafter - "the Standard"), of
     the Israel Accounting Standards Board. Pursuant to the Standard's
     provisions, the Partnership calculates the amounts of the basic earnings
     per participation unit in respect of income or loss. The basic earnings in
     respect of the participation units is calculated by dividing the income or
     loss allocable to the holders of the participation units by the
     weighted-average number of the participation units that were outstanding
     during the period.

     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 periods reported. It is clarified that the actual results may
     differ from these estimates.

     K.   DERIVATIVE FINANCIAL INSTRUMENTS

     (1)  Results of derivative financial instruments held for purposes of
          hedging existing assets and liabilities, are recorded on the statement
          of earnings in correspondence with the recording of the results of the
          hedged assets and liabilities.

     (2)  Results of derivative financial instruments held for purposes of
          hedging firm commitments and anticipated transactions are deferred and
          included in the statement of earnings at the time the results of the
          hedged transactions are recorded.

     (3)  Derivative financial instruments not designated or qualifying for
          hedging purposes are presented in the balance sheet based on their
          fair values. Changes in the fair values are recorded in the statement
          of earnings in the "financing" category in the period the change takes
          place.

     The fair value of derivative financial instruments is determined in
     accordance with their market prices or quotes from financial institutions,
     and in the absence of a market price or a quote from a financial
     institution, the fair value is determined based on a model for appraisal of
     market value.

     L.   REVENUE RECOGNITION

     Revenues from sales of oil and gas rights are recognized upon the transfer
     of the principal risks and rewards arising from ownership over the sold
     rights.


                                       12

<PAGE>

                                         "Isramco - Negev 2" Limited Partnership

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2006, 2005
AND 2004
--------------------------------------------------------------------------------

NOTE 3 - REPORTING PRINCIPLES AND ACCOUNTING POLICIES (CONT'D)

     M.   DISCLOSURE OF EFFECT OF NEW ACCOUNTING STANDARDS IN THE PERIOD PRIOR
          TO THEIR IMPLEMENTATION

     1.   Accounting Standard No. 29 regarding adoption of International
          --------------------------------------------------------------
          Financial Reporting Standards
          -----------------------------

          In July 2006, the Israel Accounting Standards Board published
          Accounting Standard No. 29, "Adoption of International Financial
          Reporting Standards (IFRS)" (hereinafter - "the Standard"). The
          Standard provides that entities subject to the Israeli Securities Law,
          1968, that are required to report according to the regulations of this
          law, are to prepare their financial statements for periods beginning
          as from January 1, 2008 according to IFRS. The Standard permits early
          adoption as from financial statements published after July 31, 2006.
          In addition, the Standard provides that entities that are not subject
          to the Securities Law, 1968 and not required to report according to
          the regulations of this law, are also permitted to prepare their
          financial statements according to IFRS commencing with financial
          statements published after July 31, 2006. The initial adoption of IFRS
          will be effected in accordance with the provisions of IFRS 1, "Initial
          Implementation of IFRS", for purposes of the transition.

          In accordance with the Standard, the Partnership is required to
          include in a note to the annual financial statements for December 31,
          2007, the balance sheet data as at December 31, 2007 and the statement
          of earnings' data for the year then ended, that have been prepared
          according to the recognition, measurement and presentation principles
          of IFRS.

          The Partnership is examining the implications of the transition to
          IFRS, however, it has not yet determined the impact of adoption of
          IFRS on its financial statements.

     2.   Accounting Standard No. 23 regarding the Accounting Treatment of
          ----------------------------------------------------------------
          Transactions between an Entity and a Controlling Interest Therein
          -----------------------------------------------------------------

          In December 2006, the Israel Accounting Standards Board published
          Accounting Standard No. 23, "The Accounting Treatment of Transactions
          between an Entity and the Controlling Interest Therein" (hereinafter -
          "the Standard"). The Standard supersedes Israeli Securities
          Regulations (Presentation of Transactions between a Company and a
          Controlling Interest Therein in the Financial Statements), 1996, and
          provides that assets and liabilities regarding which a transaction was
          executed between the entity and the controlling interest therein are
          to be measured on the transaction date based on fair value and the
          difference between the fair value and the consideration recorded in
          the transaction is to be recorded in shareholders' equity. A "debit
          balance" difference constitutes essentially a dividend and, therefore,
          it reduces the retained earnings. A "credit balance" difference
          constitutes essentially a shareholder's investment and, therefore, it
          is presented in a separate section in the shareholders' equity
          category entitled "capital reserve from transaction between an entity
          and the controlling interest therein".


                                       13

<PAGE>

                                         "Isramco - Negev 2" Limited Partnership

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2006, 2005
AND 2004
--------------------------------------------------------------------------------

NOTE 3 - REPORTING PRINCIPLES AND ACCOUNTING POLICIES (CONT'D)

     M.   DISCLOSURE OF EFFECT OF NEW ACCOUNTING STANDARDS IN THE PERIOD PRIOR
          TO THEIR IMPLEMENTATION (CONT'D)

     2.   Accounting Standard No. 23 regarding the Accounting Treatment of
          ----------------------------------------------------------------
          Transactions between an Entity and a Controlling Interest Therein
          -----------------------------------------------------------------
          (cont'd)

     The Standard addresses three issues involved with transactions between an
     entity and the controlling interest therein, as follows: transfer of an
     asset to the entity from the controlling interest or, alternatively,
     transfer of an asset from the entity to the controlling interest;
     assumption of a liability of the entity to a third party, in whole or in
     part, by the controlling interest therein, indemnification of the entity by
     the controlling interest therein in respect of an expense, and waiver by
     the controlling interest in favor of the entity of a debt due to the
     controlling interest from the entity, in whole or in part; and loans made
     to the controlling interest or loans received from the controlling
     interest. In addition, the Standard provides the disclosure required to be
     made in the financial statements in connection with transactions between
     the entity and the controlling interest therein during the period.

     The Standard applies to transactions between an entity and a controlling
     interest therein executed after January 1, 2007, and to a loan made to or
     received from the controlling interest prior to the effective date of this
     Standard commencing from its effective date.

     In the Partnership's estimation, application of the new Standard is not
     expected to have a material impact on its results of operations and its
     financial position.

     N.   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 the 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 is data with respect to the Consumer Price Index and the dollar
     exchange rate:

                                      DECEMBER 31         % CHANGE
                                     -------------   --------------------
                                      2006    2005    2006   2005   2004
                                     -----   -----   -----   ----   -----
Index - in points                    102.9   103.0   (0.10)  2.39    1.20
Exchange rate of the dollar in NIS   4.225   4.603   (8.21)  6.85   (1.62)


                                       14

<PAGE>

                                         "Isramco - Negev 2" Limited Partnership

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2006, 2005
AND 2004
--------------------------------------------------------------------------------

NOTE 4 - MARKETABLE SECURITIES

<TABLE>
<CAPTION>
                                                                     DECEMBER 31     DECEMBER 31
                                                                        2006            2005
                                                                    -------------   -------------
                                                                    NIS THOUSANDS   NIS THOUSANDS
                                                                    -------------   -------------
<S>                                                                    <C>              <C>
Shares and options (1)                                                 118,914           82,396
Government debentures (2)                                                   --           33,094
Convertible debentures (1)                                              97,877           86,370
Corporate debentures (3)                                               322,162          364,940
Participation units in mutual funds                                     11,633           10,871
Participation units in limited partnerships (1)                          7,479            5,898
                                                                       -------          --------
                                                                       558,065          583,569
                                                                       =======          =======
(1) INCLUDING MARKETABLE SECURITIES OF RELATED PARTIES (NOTE 10B)       36,047            8,638
                                                                       =======          =======
</TABLE>

<TABLE>
<CAPTION>
                                                                     DECEMBER 31     DECEMBER 31
                                                                        2006            2005
                                                                    -------------   -------------
                                                                    NIS THOUSANDS   NIS THOUSANDS
                                                                    -------------   -------------
<S>                                                                    <C>              <C>
(2) GOVERNMENT DEBENTURES - LINKAGE BASE
    Unlinked                                                                --           33,094
                                                                       =======          =======
(3) CORPORATE DEBENTURES - LINKAGE BASES
    CPI linked                                                         250,822          292,475
    Linked to dollar                                                    60,816           62,574
    Unlinked                                                            10,524            9,891
                                                                       -------          --------
                                                                       322,162          364,940
                                                                       =======          =======
</TABLE>


                                       15

<PAGE>

                                         "Isramco - Negev 2" Limited Partnership

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2006, 2005
AND 2004
--------------------------------------------------------------------------------

NOTE 5 - JOINT VENTURE FOR OIL AND GAS EXPLORATION

COMPOSITION
                                    DECEMBER 31     DECEMBER 31
                                       2006            2005
                                   -------------   -------------
                                   NIS THOUSANDS   NIS THOUSANDS
                                   -------------   -------------
Debit Balances
--------------
"Med Yavne" Joint Venture               625            1,120
"Nir 2" Joint Venture                    --              208
                                        ---            -----
                                        625            1,328
                                        ===            =====
Credit Balances
---------------
"Med Ashdod" Lease Joint Venture         52               63
"Nordon 1" Joint Venture                 42               42
"Gad 1" Joint Venture                    79               78
                                        ---            -----
                                        173              183
                                        ===            =====

ADDITIONAL INFORMATION:

GENERAL
-------

Oil and gas exploration activities are generally performed through oil and gas
exploration joint ventures having various partners, this being due to the high
costs involved with these types of activities and the wish/need to spread the
risk. The manner of operating in the framework of the joint ventures is as
follows: the partners in the joint ventures are required to approve the expense
budget in connection with the various activities involved in the oil and gas
exploration activities. After approval of the expenses, the joint venture makes
a "cash call" to the partners, each one in accordance with its share in the
budget approved by the partners.

The Partnership records its share of the cash calls from the joint venture in an
"exchange" account and, upon payment of the amounts by the joint venture, the
Partnership records its share on the statement of earnings or in an investment
account (similar to proportional consolidation), based on its accounting policy,
as stated in Note 3G, above.

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.


                                       16

<PAGE>

                                         "Isramco - Negev 2" Limited Partnership

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2006, 2005
AND 2004
--------------------------------------------------------------------------------

NOTE 5 - JOINT VENTURE FOR OIL AND GAS EXPLORATION (CONT'D)

     A.   "MED YAVNE" LEASE

     1.   General
          -------

          In June 2000, the Petroleum Commissioner (hereinafter - "the
          Commissioner") granted the partners in 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" drilling.

          The lease 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. In June 2005, the Commissioner approved the operator's
          request for a change in the terms of the lease in such a manner that
          the work plan for development of the lease will be submitted to the
          Commissioner at the time applicable to development of the "Noa" well
          (see Section 3, below).

          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, an area of 105 square
          kilometers of the northern area of the lease was returned 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 execute any
          drillings in accordance with the conditions of the lease since, based
          on the existing data, the prospects currently indicated are at a high
          level of risk. The remaining lease area after return of the said
          portions is 53 square kilometers.

          Regarding the lease period - see Note 7G., below.

          Regarding the Partnership's liability for payment of royalties - see
          Note 7A., below.

     2.   The "Or 1" well in the "Med Yavne" License
          ------------------------------------------

          In October 1999, the "Or 1" drilling was executed 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" well is
          32.4111%. The cost of the well amounted to $5.2 million. The
          Partnership's share in the well costs amounted to NIS 7.6 million, and
          was recorded in the category "Investment in oil and gas properties".


                                       17

<PAGE>

                                         "Isramco - Negev 2" Limited Partnership

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2006, 2005
AND 2004
--------------------------------------------------------------------------------

NOTE 5 - JOINT VENTURE FOR OIL AND GAS EXPLORATION (CONT'D)

     A.   "MED YAVNE" LEASE (CONT'D)

     3.   The gas reserves in the "Or 1" Well in the "Med Yavne" Lease
          ------------------------------------------------------------

          According to the operator's estimations, based on the drilling results
          of the "Or 1" Well, along with a three-dimensional seismic survey
          performed in the area of the lease, the recoverable gas reserves in
          the "Or 1" well in the lease, is about 50 billion cubic feet.

          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" well. The said opinion indicates that, under certain assumptions,
          development of the reserve, by connecting it to the production
          platform in the adjacent "Meri" well (at a distance of 12 km) and from
          there via a transportation pipe to Ashdod, is economically feasible.
          In January 2007, the Partnership received an updated opinion
          (including an update of the development costs and the sales prices)
          that also indicates that development in the "Or 1" well, assuming
          connection of the well to the production platform in the "Meri" well
          as stated, is economically feasible.

          In 2005, the operator of the "Med Yavne" lease contacted Noble Energy
          Mediterranean Ltd. (hereinafter - "Noble"), operator of the "Yam
          Tatis" joint venture (the holder of the rights in the "Noa", "Noa
          South" and "Meri" wells), to examine the possibility (including an
          estimate of the expenses) to connect the "Or 1" well to the gas
          pipeline Noble plans to install between the "Noa" well and the
          production platforms in the "Meri" well, which is supposed to run
          close to the "Or 1" well in order to pipe the gas produced from the
          "Or 1" well to the production platforms in the "Meri" gas field, and
          from there to Ashdod.

          Noble notified the operator of the lease that it is prepared to
          discuss a joint venture with respect to development of the "Or 1" well
          together with the "Noa" well, the development of which is planned for
          2009-2010.

          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" well is not less than
          its value as recorded.

     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 (commencing 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 19.1369%.

          Regarding the lease period - see Note 7G., below.

          Regarding obligations of the Partnership to pay royalties - see
          Note79A., below.


                                       18

<PAGE>

                                         "Isramco - Negev 2" Limited Partnership

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2006, 2005
AND 2004
--------------------------------------------------------------------------------

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 (after
          extensions and changes), includes presentation of a drilling agreement
          for prospects from the Jurassic age up to May 1, 2007, and commencing
          of the drilling no later than May 1, 2008. If no further discovery is
          made beneath the Pliocene base, the Lease shall be restricted to the
          Pliocene base.

          In February 2004, Isramco Inc., the operator of the lease (hereinafter
          - "the Operator") presented to the Partners the "Yam 3" prospect - a
          drilling 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.

          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).

          In 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. 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.

     2.   "Gad 1" Well
          ------------

          In February 2005, the operator recommended to the partners in the
          Lease to execute a drilling for gas prospects - the "Gad 1" Well
          (hereinafter - "the Well"). In the absence of a unanimous decision of
          all the partners with respect to execution of the Well, 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 his rights or a 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.


                                       19

<PAGE>

                                         "Isramco - Negev 2" Limited Partnership

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2006, 2005
AND 2004
--------------------------------------------------------------------------------

NOTE 5 - JOINT VENTURE FOR OIL AND GAS EXPLORATION (CONT'D)

     B.   THE "MED ASHDOD" LEASE (CONT'D)

     2.   "Gad 1" Well (cont'd)
           -----------

          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 production tests (if any). In addition, the
               Partnership will grant Palace an 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 decided to abandon the Well. The
          Well costs amounted to roughly $16.4 million.

          The Partnership's share in the Well costs amounted to NIS 30.4 million
          and this amount was recorded on the statement of earnings in 2005.

     C.   MICHAL AND MATAN MARINE LICENSES

     In March 2005, the operator (BG) notified the partners in the Michal and
     Matan licenses (hereinafter - "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 notification 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
     participation rate of the rights in the Licenses transferred to the
     Partnership was 20.510%.


                                       20

<PAGE>

                                         "Isramco - Negev 2" Limited Partnership

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2006, 2005
AND 2004
--------------------------------------------------------------------------------

NOTE 5 - JOINT VENTURE FOR OIL AND GAS EXPLORATION (CONT'D)

     C.   MICHAL AND MATAN MARINE LICENSES (CONT'D)

     In May 2005, an agreement was reached 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 January 2006, additional participation rights, at the rate
     of 11.55%, were transferred to the Partnership by STX (2000) Limited
     Partnership.

     After transfer of the rights as stated, the participation rate of the
     Partnership's rights in the Licenses was 41.95%.

     Further to notification of the partners in the Licenses to the Commissioner
     of their intention to execute "Tamar 1" well in the Matan License
     (hereinafter - "the Tamar Well"), the Commissioner extended the validity of
     the Licenses up to the end 2008.

     On July 24, 2006, an agreement was signed (hereinafter - "the Agreement")
     between the Partnership and additional partners in the Licenses, on the one
     side, and Noble, pursuant to which participation rights in the Licenses at
     the rate of 33% were transferred to Noble and Noble was appointed as
     operator of the Licenses. The Agreement provides, among other things, that
     Noble will act to the best of its ability to enter into an agreement with a
     drilling contractor for execution of the "Tamar" well, in such a manner
     that the drilling will be performed no later than the end of 2007. If a
     well agreement, as stated, is not signed by June 30, 2007, the Agreement
     will come to an end and Noble will return its rights in the Licenses and
     will leave its position as operator.

     In accordance with the Agreement, Noble paid the existing partners $1
     million, of which $550 thousand was paid to third parties in connection
     with marketing the Licenses to international entities. Out of the balance,
     the Partnership received $188 thousand based on its proportionate share
     (41.95%). This amount was recorded on the statement of earnings as "gain on
     sale of oil and gas rights".

     In August 2006, approvals for the agreement were received from the
     Commissioner and the Supervisor of Restrictive Business Practices, and the
     agreement entered into effect. After transfer of the rights to Nobel, the
     Partnership holds rights in the Licenses at the rate of 27.5%.

     The decision of the Supervisor of Restrictive Business Practices includes a
     number of limitations, the main ones of which are: the Avner and Delek
     partnerships and the Partnership and/or any party related thereto, shall
     not hold jointly (including together with other holders), in any gas right,
     except for the Licenses, except with the express approval of the Supervisor
     of Restrictive Business Practices. In any arrangement relating to
     determination of a mechanism for making decisions between the holders in
     the Licenses with respect to marketing natural gas, none of the said
     parties shall hold, directly or indirectly, any right to prevent the other
     holders from making a decision or taking an action in connection with
     marketing of the natural gas.

     In November 2006, the operator presented a budget for execution of the
     "Tamar" well, in the amount of $69 million, as well as an operating budget
     for the years 2006 and 2007, in the aggregate amount of $2.2 million.

     On December 14, 2006, the Partnership notified the operator that it
     approves its share of the said well and operating budgets.

     At this stage, and as long as no contract has been signed with a drilling
     contractor, the General Partner is unable to estimate if and when the said
     drilling will be executed.

     Regarding the Partnership's liability for an overriding royalty - see 7B.,
     below.


                                       21

<PAGE>

                                         "Isramco - Negev 2" Limited Partnership

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2006, 2005
AND 2004
--------------------------------------------------------------------------------

NOTE 6 - SUNDRY PAYABLES

<TABLE>
<CAPTION>
                                                         DECEMBER 31     DECEMBER 31
                                                             2006            2005
                                                        -------------   -------------
                                                        NIS THOUSANDS   NIS THOUSANDS
                                                        -------------   -------------
<S>                                                         <C>              <C>
     Payables in respect of financial instruments (1)       3,560             --
     Accrued expenses                                         474            501
                                                            -----            ---
                                                            4,034            501
                                                            =====            ===
</TABLE>

     (1)  See Note 11B(2).

NOTE 7 - 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 is obligated
          to pay royalties from the revenues generated from the first 10% of its
          share in the license/lease, as follows:

<TABLE>
<CAPTION>
                                       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
                            -----------------   -----------------   -----------------   -----------------
<S>                               <C>                 <C>                 <C>                <C>
          To Isramco Inc.         5.00%               13.00%              1.00%              13.00%
</TABLE>

          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 is
          obligated to pay royalties from the revenues generated from the first
          10% of its share in the lease as specified below:

<TABLE>
<CAPTION>
                                                                 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
                                                          -----------------   -----------------
<S>                                                             <C>                 <C>
          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%
</TABLE>

          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, which is in addition to any other royalty and/or
          consideration to which Isramco Inc. is entitled at present.


                                       22

<PAGE>

                                         "Isramco - Negev 2" Limited Partnership

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2006, 2005
AND 2004
--------------------------------------------------------------------------------

NOTE 7 - CONTINGENT LIABILITIES AND COMMITMENTS (CONT'D)

     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 Israeli
          Petroleum Law, 1952) that is produced from the Matan and Michal
          Licenses, including any petroleum asset that may come in their place.

     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 an obligation 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 obligation 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.


                                       23

<PAGE>

                                         "Isramco - Negev 2" Limited Partnership

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2006, 2005
AND 2004
--------------------------------------------------------------------------------

NOTE 7 - 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
          could 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 referred to in Note 1D, 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 options (if any)
          less the exercise premium.

     I.   The Supervisor is entitled to receive wages from the Limited
          Partnership in an amount in shekels that is equivalent to $3,500 per
          month, as long as the trust agreement, referred to in Note 1D, 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, referred to in Note 1D, 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.


                                       24

<PAGE>

                                         "Isramco - Negev 2" Limited Partnership

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2006, 2005
AND 2004
--------------------------------------------------------------------------------

NOTE 7 - 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 it left office.

               c.   If the partners agree to dissolve the Limited Partnership.

          (2)  According to the directives of the Israeli 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 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
                    activities in areas that are not within the limits of its
                    exclusive area of 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.

               It is noted that further to the Trustee's inquiry to the Stock
               Exchange in 2005, the Stock Exchange responded to the Trustee
               that the interpretation of the term "exploration and development
               expenses", within the meaning of the guidelines of the Stock
               Exchange's Articles of Association, also includes expenses
               incurred for management of the Partnership's current oil
               exploration activities, pursuant to the provisions of the Income
               Tax Regulations (Rules for Recording the Tax due to the Holding
               and Sale of Participation Units in Oil Exploration Partnerships),
               1988.


                                       25

<PAGE>

                                         "Isramco - Negev 2" Limited Partnership

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2006, 2005
AND 2004
--------------------------------------------------------------------------------

NOTE 8 - LIMITED PARTNERSHIP'S CAPITAL

<TABLE>
<CAPTION>
                                                                DECEMBER 31   DECEMBER 31
                                                                    2006          2005
                                                                -----------   -----------
<S>                                                              <C>           <C>
     Participation units of NIS 0.01 par value (in thousands)    4,250,908     4,250,908
                                                                 =========     =========
</TABLE>

     A.   THE GENERAL PARTNER - ISRAMCO OIL AND GAS LTD.

     Up to December 31, 2006, 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, 2006, the share of the General Partner in the capital is
     0.05% and is progressively reduced with every increase in capital, in which
     the General Partner does not participate.

     B.   THE LIMITED PARTNER - ISRAMCO MANAGEMENT (1988) LTD.

     As at December 31, 2006, 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, 2006, the
     share of the Limited Partner in the capital is 99.95% and is progressively
     increased with every increase in capital, in which the General Partner does
     not participate.

     C.   THE CAPITAL OF THE LIMITED PARTNERSHIP

     The composition of the capital of the Limited Partnership is as follows:

<TABLE>
<CAPTION>
                                                       LIMITED PARTNER   GENERAL PARTNER       TOTAL
                                                       ---------------   ---------------   -------------
                                                        NIS THOUSANDS     NIS THOUSANDS    NIS THOUSANDS
                                                       ---------------   ---------------   -------------
<S>                                                       <C>                 <C>            <C>
     Partners' investment, net                             856,002             389            856,391
                                                          --------            ----           --------
     Loss balance at beginning of the year                (261,657)           (183)          (261,840)
     Net income for the year                                61,851              31             61,882
     Distribution of Partnership earnings to holders
        of the participation units                         (70,000)             --            (70,000)
     Tax deposits paid on behalf of holders of the
        participation units                                 (8,823)             --             (8,823)
                                                          --------            ----           --------
     Loss balance at end of the year                      (278,629)           (152)          (278,781)
                                                          --------            ----           --------
     Limited Partnership capital at end of the year        577,373             237            577,610
                                                          ========            ====           ========
</TABLE>


                                       26

<PAGE>
                                         "Isramco - Negev 2" Limited Partnership

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2006, 2005
AND 2004
--------------------------------------------------------------------------------

NOTE 8 - 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.   Further to the demand of the Israeli Tax Authorities that the tax
          deriving from the taxable income attributable to the holders of the
          participation units shall be paid by the Partnership on behalf of the
          holders of the participation units, 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
          units, 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 8,823 thousand (in 2005 - NIS 5,074 thousand and in 2004 - NIS
          3,615 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 units.

          The amounts paid by the Partnership, as stated, are presented as a
          reduction of Partnership capital.

     F.   At the General Meeting of the holders of the participation units, held
          on April 25, 2006, changes were approved to the Partnership Agreement
          and to the Trust Agreement in connection with distribution of the
          Partnership's earnings for 2006 and thereafter, mainly as follows:

          1.   Calculation of the earnings will always be made for the year
               ended December 31. Earnings shall not be distributed if receipt
               thereof by the limited partner will be considered a withdrawal of
               his investment or a portion thereof, within the meaning thereof
               in Section 63(B) of the Partnerships Ordinance (New Version),
               1975.


                                       27

<PAGE>

                                         "Isramco - Negev 2" Limited Partnership

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2006, 2005
AND 2004
--------------------------------------------------------------------------------

NOTE 8 - LIMITED PARTNERSHIP'S CAPITAL (CONT'D)

     F.   (CONT'D)

          2.   Distribution of the Partnership's earnings to the Trustee in
               respect of any year, shall be made on the date determined by the
               General Partner and shall be no later than June 30 of the
               following year, as follows:

               a.   The Partnership shall distribute all its earnings deriving
                    from oil and/or gas production activities that it may
                    distribute under law as earnings, less the amounts required
                    by the Partnership in order to meet its liabilities, as
                    provided in the Partnership Agreement.

               b.   The Partnership shall distribute 40% of its earnings
                    deriving from its activities other than oil and/or gas
                    production, including income from securities and other
                    interim investments that it may distribute under law as
                    earnings, less amounts designated for taxes that it shall
                    transfer to the Assessing Officer (pursuant to the agreement
                    therewith), and subject to the liquid resources remaining in
                    its accounts immediately after the said distribution not
                    being less than $100 million. If it is possible to
                    distribute in respect of such year less than 40% of the said
                    amounts, in such a manner that the balance of the liquid
                    resources remaining in the Partnership's accounts
                    immediately after the said distribution will be $100 million
                    - the amount shall be distributed accordingly.

               c.   The General Partner and the Trustee shall issue an Immediate
                    Report detailing the amount of the earnings available for
                    distribution, the tax rate with respect to withholding at
                    the source, the effective date for holding of the
                    participation units for purposes of eligibility to receive a
                    distribution and the actual distribution date.

               In addition, the above-mentioned General Meeting approved an
               agreed-to arrangement whereby a one-time amount of NIS 70 million
               will be distributed in respect of the Partnership's earnings for
               the years 2003, 2004 and 2005, which is to be paid to the Trustee
               on the date determined by the General Partner and no later than
               60 days after fulfillment of the following cumulative conditions:
               (i) receipt of court approval for the agreed-to arrangement as a
               final arrangement and (ii) receipt of approval from the Taxes
               Authority regarding the rate for withholding of tax at the source
               in respect of the said distribution.

               In July 2006, the court approved distribution of NIS 70 million
               pursuant to the agreed-to arrangement and approval was received
               from the Taxes Authority according to which the distribution is
               exempt from withholding of tax at the source.

               Pursuant to the decision of the General Partner and the Trustee,
               the effective date for purposes of eligibility regarding the
               above-mentioned distribution was set as September 4, 2006. On
               September 18, 2006, the distribution was made.


                                       28

<PAGE>

                                         "Isramco - Negev 2" Limited Partnership

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2006, 2005
AND 2004
--------------------------------------------------------------------------------

NOTE 9 - DETAILS TO STATEMENT OF EARNINGS CATEGORIES

     A.   FINANCING INCOME, NET

<TABLE>
<CAPTION>
                                                                    FOR THE YEAR ENDED 31 DECEMBER
                                                            ---------------------------------------------
                                                                 2006            2005            2004
                                                            -------------   -------------   -------------
                                                            NIS THOUSANDS   NIS THOUSANDS   NIS THOUSANDS
                                                            -------------   -------------   -------------
<S>                                                             <C>             <C>             <C>
     Gain from marketable securities, net *                     40,611          50,479          36,005
     Unrealized loss from derivative financial instrument       (3,560)             --              --
     Interest on deposits in banks and exchange
        rate differences                                           585             281             553
     Dividend and interest income from
        marketable securities                                   31,777          24,432          25,955
     Commissions, management fees and others                    (4,184)         (3,804)         (3,890)
                                                                ------          ------          ------
                                                                65,229          71,388          58,623
                                                                ======          ======          ======
     * Including gain from investment in securities
       of third parties                                          9,713           2,107           2,524
                                                                ======          ======          ======
</TABLE>

     B.   PARTICIPATION IN OIL AND GAS EXPLORATION, NET

<TABLE>
<CAPTION>
                                                                    FOR THE YEAR ENDED 31 DECEMBER
                                                            ---------------------------------------------
                                                                 2006           2005            2004
                                                            -------------   -------------   -------------
                                                            NIS THOUSANDS   NIS THOUSANDS   NIS THOUSANDS
                                                            -------------   -------------   -------------
<S>                                                              <C>            <C>              <C>
     "Med Ashdod"                                                  344              91           106
     "South Marine" License                                         --              --           187
     "Med Yavne" Lease                                             726             279           231
     "Gal" Licenses                                                192              62            23
     "Shikma Sea" License - "Nordon 1" well                         --              --           366
     "Med Ashdod" Lease - "Gad 1" well                               1          30,370            --
     Others                                                         --              --            12
                                                                 -----          ------           ---
                                                                 1,263          30,802           925
                                                                 =====          ======           ===
     Including expenses to related parties                         536           2,910           664
                                                                 =====          ======           ===
</TABLE>


                                       29

<PAGE>

                                         "Isramco - Negev 2" Limited Partnership

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2006, 2005
AND 2004
--------------------------------------------------------------------------------

NOTE 9 - DETAILS TO STATEMENT OF EARNINGS CATEGORIES (CONT'D)

     C.   GENERAL AND ADMINISTRATIVE EXPENSES

<TABLE>
<CAPTION>
                                                                    FOR THE YEAR ENDED 31 DECEMBER
                                                            ---------------------------------------------
                                                                2006             2005            2004
                                                            -------------   -------------   -------------
                                                            NIS THOUSANDS   NIS THOUSANDS   NIS THOUSANDS
                                                            -------------   -------------   -------------
<S>                                                             <C>             <C>             <C>
     Management fee to the General Partner -
        related party                                           2,133           2,157           2,154
     Professional services                                        411             151             160
     Taxes and permits                                            103             105             105
     Wages to the limited partner and the supervisor              184             195             192
     Others                                                        65              42              82
                                                                -----           -----           -----
                                                                2,896           2,650           2,693
                                                                =====           =====           =====
</TABLE>

     D.   INCOME PER PARTICIPATION UNIT

<TABLE>
<CAPTION>
                                                                    FOR THE YEAR ENDED 31 DECEMBER
                                                            ---------------------------------------------
                                                                2006             2005            2004
                                                            -------------   -------------   -------------
                                                            NIS THOUSANDS   NIS THOUSANDS   NIS THOUSANDS
                                                            -------------   -------------   -------------
<S>                                                           <C>             <C>             <C>
     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                      61,851          37,919         54,977
</TABLE>

NOTE 10 - 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.


                                       30

<PAGE>

                                         "Isramco - Negev 2" Limited Partnership

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2006, 2005
AND 2004
--------------------------------------------------------------------------------

NOTE 10 - INTERESTED PARTIES AND RELATED PARTIES (CONT'D)

     B.   MARKETABLE SECURITIES OF RELATED PARTIES

<TABLE>
<CAPTION>
                                                 FOR THE YEAR ENDED DECEMBER 31,    FOR THE YEAR ENDED DECEMBER 31,
                                                               2006                              2005
                                                --------------------------------   --------------------------------
                                                RATE OF HOLDINGS    MARKET VALUE   RATE OF HOLDINGS    MARKET VALUE
                                                ----------------   -------------   ----------------   -------------
                                                        %          NIS THOUSANDS           %          NIS THOUSANDS
                                                ----------------   -------------   ----------------   -------------
<S>                                                   <C>              <C>               <C>              <C>
     Naphta Explorations, Limited Partnership         13.52             5,104            13.52            4,114
     Hanal Dead Sea, Limited Partnership               4.43             2,376             4.43            1,784
     J.O.E.L. Jerusalem Oil Exploration Ltd.           0.74             4,936             0.90            2,740
     Isramco Inc.                                       4.7            15,942               --               --
     Nitzba Holdings 1995 Ltd.                         9.02             7,689               --               --
                                                                       ------                             -----
                                                                       36,047                             8,638
                                                                       ======                             =====
</TABLE>

     The income from the investment in marketable securities of related parties
     in the years 2006, 2005 and 2004 amounted to NIS 9,713 thousand, NIS 2,107
     thousand, and NIS 2,524 thousand, respectively.

     C.   Balances and transactions with related and interested parties are
          included in the notes to the financial statements in the appropriate
          categories.

     D.   For information on undertakings with related and interested parties -
          see Note 7.

     E.   For information on royalties to related parties and interested parties
          - see Note 7.

NOTE 11 - FINANCIAL INSTRUMENTS AND RISK MANAGEMENT

     GENERAL

     During the regular course of its business, the Partnership is exposed to
     interest risks, currency risks, risks relating to gas and oil prices and
     the market value of marketable securities.

     A.   INTEREST RISKS

     The Partnership's interest rate risk stems mainly from investment in
     debentures, presented as an investment in marketable securities, at a fixed
     rate of interest, which exposes the Partnership to an interest rate risk in
     connection with their fair value.

     Changes in the interest rate in the economy may expose the Partnership to
     losses on marketable securities, since there is a connection between the
     real (inflation-adjusted) price of the security and the difference between
     the interest rate borne by the security and the market interest rate.

                                                  DECEMBER 31, 2006
                                             -----------------------------
                                                AVERAGE
                                               EFFECTIVE         UP TO
                                             INTEREST RATE      1 YEAR
                                             -------------   -------------
                                                   %         NIS THOUSANDS
                                             -------------   -------------
     FINANCIAL INSTRUMENTS AT A FIXED RATE
     Corporate debentures                         6.16          322,162
     Convertible debentures                       2.32           97,877


                                       31

<PAGE>

                                         "Isramco - Negev 2" Limited Partnership

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2006, 2005
AND 2004
--------------------------------------------------------------------------------

NOTE 11 - FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (CONT'D)

     B.   EXCHANGE RATE RISKS

          1.   The Partnership is exposed to foreign currency risks mainly in
               connection with changes in the exchange rate of the dollar. The
               oil and gas prices, as well as the inputs relating to oil and gas
               exploration, are denominated in dollars. In addition, the
               Partnership has investments in marketable securities, some of
               which are denominated in dollars, financial derivatives and it is
               a party to agreements for payment of management fees to the
               General Partner, and fees to the Supervisor and the Trustee, that
               are also denominated in dollars.

          2.   As at the balance sheet date, the Partnership has a forward
               contract, not for hedging purposes, for acquisition of dollars in
               exchange for shekels, in the amount of $20 million, which comes
               due in July 2007. In 2006, the Partnership included in its
               financial statements an unrealized loss and a payable of NIS 3.6
               million, in respect of the aforesaid contract.

     C.   RISKS RELATING TO OIL AND GAS PRICES

          The Partnership's purpose is to participate in oil and gas exploration
          and production activities. Declines in oil and gas prices expose the
          Partnership to losses deriving from a reduction in the projected
          revenues and declines in asset values, on the one hand, while on the
          other hand, increases in oil and gas prices may expose the Partnership
          to losses resulting from an increase in the inputs required for oil
          and gas exploration.

     D.   MARKET RISKS RELATING TO MARKETABLE SECURITIES

          The Partnership invests most of its cash balances in marketable
          securities. Changes in the market prices of the marketable securities
          expose the Partnership to losses. In order to reduce the level of
          risk, the Partnership has a policy requiring wide dispersion of the
          investments' portfolio and investment of at least 70% in low-risk
          channels, such as, corporate and government debentures.

     E.   FAIR VALUE OF FINANCIAL INSTRUMENTS

          The book value of the cash and cash equivalents, marketable
          securities, other receivables and debits and other payables and
          credits, equals or approximates their fair value.


                                       32

<PAGE>

                                         "Isramco - Negev 2" Limited Partnership

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2006, 2005
AND 2004
--------------------------------------------------------------------------------

NOTE 11 - FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (CONT'D)

     F.   LINKAGE BASES OF MONETARY ITEMS

<TABLE>
<CAPTION>
                                                               DECEMBER 31, 2006
                                      ----------------------------------------------------------------
                                             ISRAELI CURRENCY         FOREIGN CURRENCY
                                      -----------------------------   ----------------
                                         UNLINKED       CPI-LINKED          DOLLAR           TOTAL
                                      -------------   -------------     -------------    -------------
                                      NIS THOUSANDS   NIS THOUSANDS     NIS THOUSANDS    NIS THOUSANDS
                                      -------------   -------------     -------------    -------------
<S>                                      <C>             <C>                <C>             <C>
     CURRENT ASSETS:
     Cash and cash equivalents            10,163              --             5,045           15,208
     Marketable securities               123,391         349,979            84,695          558,065
     Joint ventures for oil and gas
        exploration                           --              --               625              625
     Sundry receivables                      310              --                --              310

     CURRENT LIABILITIES:
     Sundry payables                      (3,912)             --              (122)          (4,034)
     Joint ventures for oil and gas
        exploration                           --              --              (173)            (173)
                                         -------         -------            ------          -------
                                         129,952         349,979            90,070          570,001
                                         =======         =======            ======          =======
</TABLE>

<TABLE>
<CAPTION>
                                                               DECEMBER 31, 2005
                                      ----------------------------------------------------------------
                                             ISRAELI CURRENCY         FOREIGN CURRENCY
                                      -----------------------------   ----------------
                                         UNLINKED       CPI-LINKED          DOLLAR           TOTAL
                                      -------------   -------------     -------------    -------------
                                      NIS THOUSANDS   NIS THOUSANDS     NIS THOUSANDS    NIS THOUSANDS
                                      -------------   -------------     -------------    -------------
<S>                                      <C>             <C>                <C>             <C>
     CURRENT ASSETS:
     Cash and cash equivalents             1,806              --               914            2,720
     Marketable securities               131,521         378,844            73,204          583,569
     Joint ventures for oil and gas
        exploration                           --              --             1,328            1,328
     Sundry receivables                        9              --                --                9

     CURRENT LIABILITIES:
     Sundry payables                        (360)             --              (141)            (501)
     Joint ventures for oil and gas
        exploration                           --              --              (183)            (183)
                                         -------         -------            ------          -------
                                         132,976         378,844            75,122          586,942
                                         =======         =======            ======          =======
</TABLE>


                                       33

<PAGE>

                                         "Isramco - Negev 2" Limited Partnership

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2006, 2005
AND 2004
--------------------------------------------------------------------------------

NOTE 12 - 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.

     2.   Marketable securities
          ---------------------

          a.   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, "Accounting for Limited Partnership
               investments" which requires implementation of Statement of
               Position 78-9, "Accounting for Investments in Real Estate
               Ventures" 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 Limited Partnership invests in marketable securities which
               are classified as trading securities, both under Israeli GAAP and
               U.S. GAAP.

               Regarding the presentation in the Statements of Cash Flows: under
               Israeli GAAP cash flows from purchases, sales and maturities of
               trading securities shall be classified as cash flows from
               investing activities, whereas under U.S. GAAP those cash flows
               shall be classified as cash flows from operating activities, in
               accordance with FAS 115, "Accounting for Certain Investments in
               Debt and Equity Securities".

               The effect of the different classification of the trading
               securities activity in the statements of cash flows for U.S. GAAP
               purposes, is presented below as separate adjustment.

     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:
          -----------------------------

<TABLE>
<CAPTION>
                                                           YEAR ENDED DECEMBER 31
                                                 ---------------------------------------------
                                                      2006            2005            2004
                                                 -------------   -------------   -------------
                                                 NIS THOUSANDS   NIS THOUSANDS   NIS THOUSANDS
                                                 -------------   -------------   -------------
<S>                                                  <C>            <C>             <C>
          Net income under Israeli GAAP              61,882         37,936          55,005
                                                     ------         ------          ------
          Adjustments
          -----------
          Revaluation of marketable securities         (990)          (972)           (943)
          Partnership equity in earnings of
             an investee partnership                  1,049            265             955
                                                     ------         ------          ------
                                                         59           (707)             12
                                                     ------         ------          ------
          Net income under U.S. GAAP                 61,941         37,229          55,017
                                                     ======         ======          ======
</TABLE>


                                       34

<PAGE>

                                         "Isramco - Negev 2" Limited Partnership

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2006, 2005
AND 2004
--------------------------------------------------------------------------------

NOTE 12 - 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)
          -----------------------------

<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31
                                                     ---------------------------------------------
                                                         2006             2005            2004
                                                     -------------   -------------   -------------
                                                     NIS THOUSANDS   NIS THOUSANDS   NIS THOUSANDS
                                                     -------------   -------------   -------------
<S>                                                    <C>             <C>             <C>
          BASIC AND DILUTED INCOME PER
             PARTICIPATION UNIT (UNDER U.S. GAAP)

          Net income                                      61,941          37,229          55,017
                                                       =========       =========       =========
          General partner's share in the net
             income                                           31              19              28
                                                       =========       =========       =========
          Net income attributable to
             participation unit holder                    61,910          37,210          54,989
                                                       =========       =========       =========
          Basic net income per participation
             unit (NIS)                                   0.0146          0.0088          0.0129
                                                       =========       =========       =========
          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
                                                       =========       =========       =========
</TABLE>

     2.   On balance sheet items:
          ----------------------

<TABLE>
<CAPTION>
                                                               DECEMBER 31
                    ---------------------------------------------------------------------------------------------
                                        2006                                             2005
                    ---------------------------------------------   ---------------------------------------------
                                                        AS PER                                         AS PER
                     AS REPORTED      ADJUSTMENT      U.S. GAAP      AS REPORTED     ADJUSTMENT       U.S. GAAP
                    -------------   -------------   -------------   -------------   -------------   -------------
                    NIS THOUSANDS   NIS THOUSANDS   NIS THOUSANDS   NIS THOUSANDS   NIS THOUSANDS   NIS THOUSANDS
                    -------------   -------------   -------------   -------------   -------------   -------------
<S>                    <C>              <C>            <C>             <C>               <C>             <C>
ASSETS
Marketable
   securities (1)       558,065         (5,104)         552,961         583,569          (4,114)          579,455
                       ========         ======         ========        ========          ======          ========
Investment in
   affiliate (2)             --          6,658            6,658              --           5,609             5,609
                       ========         ======         ========        ========          ======          ========
EQUITY
Accumulated
   loss (1) (2)        (278,781)         1,554         (277,227)       (261,840)          1,495          (260,345)
                       ========         ======         ========        ========          ======          ========
</TABLE>

(1)  Change in value of investment securities to market value.

(2)  Partnership equity in earnings of a partnership.


                                       35

<PAGE>

                                         "Isramco - Negev 2" Limited Partnership

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2006, 2005
AND 2004
--------------------------------------------------------------------------------

NOTE 12 - 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:
          ------------------------------
<TABLE>
<CAPTION>
                                                              YEAR ENDED DECEMBER 31
                                               ---------------------------------------------
                                                    2006            2005           2004
                                               -------------   -------------   -------------
                                               NIS THOUSANDS   NIS THOUSANDS   NIS THOUSANDS
                                               -------------   -------------   -------------
<S>                                               <C>             <C>             <C>
     Net cash inflow generated by
        operating activities - Israeli GAAP         24,384          17,933          22,339

     Adjustments
     -----------
     Net (loss) income                                  59            (707)             12
     Gain from marketable securities, net              990             972             943
     Proceeds from disposal (investment in)
        marketable securities, net                  66,115           5,952         (30,378)
     Partnership equity in earnings of
        a partnership                               (1,049)           (265)           (955)
                                                  --------        --------        --------
     Net cash inflow (outflow) generated by
        operating activities - U.S. GAAP            90,499          23,885          (8,039)
                                                  ========        ========        ========
     Net cash outflow generated by
        investing activities - Israeli GAAP         66,927         (24,418)        (30,378)

     Adjustments
     -----------
     Investment in marketable securities           458,285         487,366         204,464
     Proceeds from disposal of marketable
        securities                                (524,400)       (493,318)       (174,086)
                                                  --------        --------        --------
     Net cash outflow generated by
        investing activities - U.S. GAAP               812         (30,370)             --
                                                  ========        ========        ========
</TABLE>


                                       36

<PAGE>


                                      KPMG