<PAGE>

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K


[X]  ANNUAL REPORT PURSUANT TO SECTION 13  OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934  FOR THE

FISCAL YEAR ENDED DECEMBER 31, 2004

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934

                         COMMISSION FILE NUMBER: 0-12500

                                  ISRAMCO, INC.
             (Exact name of registrant as specified in its charter)


          Delaware                                     13-3145265
(State or Other Jurisdiction                 IRS Employer Identification No.)
      of Incorporation)

                      11767 KATY FREEWAY, HOUSTON, TX 77079
                    (Address of Principal Executive Offices)

                                  713-621-3882
              (Registrant's Telephone Number, including Area Code)

       Securities registered under Section 12(b) of the Exchange Act: None

         Securities registered under Section 12(g) of the Exchange Act:
                         Common Stock, par value $0.001
                                (Title of Class)

        Indicate by check mark whether the issuer (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the past
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. |X| Yes |_| No

        Indicate by check mark if disclosure of delinquent filers in response to
Item 405 of Regulation S-K is not contained in this Form, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. |X|

        Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). | | Yes |X| No

        As of March 30, 2005, the Registrant had outstanding 2,717,891 shares of
$0.01 par value Common Stock. The aggregate market value of such Common Stock
held by non-affiliates of the Registrant at March 30, 2005 was approximately
$11.8 million. Such market value was calculated by using the closing price of
such common stock as of such date reported on the NASDAQ market.

                       DOCUMENTS INCORPORATED BY REFERENCE

        The information called for in Items 10, 11, 12 and 13 in Part III will
be contained in the issuer's definitive proxy statement which the issuer intends
to file within 120 days after the end of the Issuer's fiscal year ended December
31, 2004 and such information is incorporated herein by reference.

                                       -1-

<PAGE>

                                  ISRAMCO, INC.
                          2004 FORM 10-K ANNUAL REPORT


                                TABLE OF CONTENTS

                                     PART I

ITEM 1.    DESCRIPTION OF BUSINESS.........................................  3

ITEM 2.    DESCRIPTION OF PROPERTY......................................... 15

ITEM 3.    LEGAL PROCEEDINGS............................................... 15

ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............. 15

                                     PART II

ITEM 5.    MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS........ 15

ITEM 6.    SELECTED FINANCIAL DATA......................................... 16

ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION..... 17

ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS..... 23

ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..................... 23

ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
           AND FINANCIAL DISCLOSURE........................................ 23

ITEM 9A.   CONTROLS AND PROCEDURES......................................... 24

ITEM 9B.   OTHER INFORMATION............................................... 24

                                    PART III

ITEM 10.   DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
           COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT............... 24

ITEM 11.   EXECUTIVE COMPENSATION.......................................... 24

ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
           AND RELATED STOCKHOLDER MATTERS................................. 24

ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................. 24

ITEM 14.   PRINCIPAL ACCOUNTANT FEES & SERVICES............................ 24

ITEM 15.   EXHIBITS........................................................ 26


                                       -2-

<PAGE>

                           FORWARD LOOKING STATEMENTS

        CERTAIN STATEMENTS MADE IN THIS ANNUAL REPORT ON FORM 10-K ARE
"FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995. FORWARD-LOOKING STATEMENTS CAN BE IDENTIFIED BY
TERMINOLOGY SUCH AS "MAY", "WILL", "SHOULD", "EXPECTS", "INTENDS",
"ANTICIPATES", "BELIEVES", "ESTIMATES", "PREDICTS", OR "CONTINUE" OR THE
NEGATIVE OF THESE TERMS OR OTHER COMPARABLE TERMINOLOGY AND INCLUDE, WITHOUT
LIMITATION, STATEMENTS BELOW REGARDING exploration and drilling plans, future
general and administrative expenses, future growth, future exploration, future
geophysical and geological data, generation of additional properties, reserves,
new prospects and drilling locations, future capital expenditures, sufficiency
of working capital, ability to raise additional capital, projected cash flows
from operations, outcome of any legal proceedings, drilling plans, the number,
timing or results of any wells, interpretation and results of seismic surveys or
seismic data, future production or reserves, lease options or rights,
PARTICIPATION OF OPERATING PARTNERS, CONTINUED RECEIPT OF ROYALTIES, and any
other statements regarding future operations, financial results, opportunities,
growth, business plans and strategy. BECAUSE FORWARD-LOOKING STATEMENTS INVOLVE
RISKS AND UNCERTAINTIES, THERE ARE IMPORTANT FACTORS THAT COULD CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED OR IMPLIED BY THESE
FORWARD-LOOKING STATEMENTS. ALTHOUGH THE COMPANY BELIEVES THAT EXPECTATIONS
REFLECTED IN THE FORWARD-LOOKING STATEMENTS ARE REASONABLE, IT CANNOT GUARANTEE
FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS. MOREOVER, NEITHER THE COMPANY NOR
ANY OTHER PERSON ASSUMES RESPONSIBILITY FOR THE ACCURACY AND COMPLETENESS OF
THESE FORWARD-LOOKING STATEMENTS. THE COMPANY IS UNDER NO DUTY TO UPDATE ANY
FORWARD-LOOKING STATEMENTS AFTER THE DATE OF THIS REPORT TO CONFORM SUCH
STATEMENTS TO ACTUAL RESULTS.

                                     PART I
ITEM 1. BUSINESS

GENERAL

        Since its formation in 1982, Isramco, Inc. ("Isramco" or the "Company")
has been active in the exploration of oil and gas in Israel and in the United
States. In Israel, the Company holds a participation interest in two long- term
off-shore leases and serves as an operator of one. In addition the Company holds
a participation interest in an off-shore license and also serves as the
operator. See "Summary of exploration efforts in Israel".

        In the United States, the Company, through its wholly-owned
subsidiaries, Jay Petroleum LLC ("Jay Petroleum") and Jay Management LLC ("Jay
Management"), is involved in oil and gas exploration and production in the
United States. Jay Petroleum owns varying working interests in oil and gas wells
in Louisiana, Texas, Oklahoma and Wyoming. Independent estimates of the reserves
held by Jay Petroleum as of December 31, 2004 are approximately 140,000 net
barrels of proved developed producing oil and 2,011 MMCFs of proved developed
producing natural gas. See "Summary of Exploration Efforts in United States".

THE OPERATOR OF THE ISRAELI LEASES/LICENSES

        Under a joint operating agreement entered into among the participants in
the off-shore leases and licenses (collectively, the "JOA"), each party
participates in all the costs, expenses and obligations incurred in relation to
a contract area in the same proportion as its rights and interests in such
contract area. Under the JOA, the Operator carries out all the operations
contemplated in the JOA, in the framework of approved Work Programs and within
the limitations of approved budgets (AFE's). The Operator may be removed for
cause, by notice in writing given by two or more of the other parties
representing at least 65% of the total interests in a contract area.

        The Company is currently the Operator of the Med Ashdod Lease . As the
Operator, the Company is responsible for directing the oil exploration and
drilling activities of the Venture through its Branch Office in Petach Tikva,
Israel.

                                       -3-

<PAGE>

        With eight full-time employees, outside consultants and subcontractors,
the Company carries out the operations of the Venture within the framework of
approved work programs and budgets and pursuant to the terms of a JOA. With
respect to the Med Yavne Lease, the Company furnishes to BG International
Limited, a member of the British Gas Group ("BG"), the operator of the lease,
consulting services of an administrative and technical nature for which it
receives a monthly fee equal to $10,000.

        As operator, the Company charges each venture participant for all costs
incurred in connection with the exploration and drilling activities conducted by
the Med Ashdod venture and is entitled to receive a fee for its administrative
overhead equal to 6% of all direct charges or minimum monthly compensation of
$6,000 per each License/Lease. During the year ended December 31, 2004, the
Company was paid a total of $137,000 as operator fees.

GENERAL PARTNER FOR THE ISRAMCO NEGEV 2 LIMITED PARTNERSHIP

        In 1989 the Company formed in Israel the Isramco Negev 2 Limited
Partnership (the "Limited Partnership") to acquire from the Company a
substantial portion of its working interest in the Negev 2 Venture, the venture
which the Company and related parties established to hold the rights to the
certain oil and gas properties. In exchange for working interests, the Limited
Partnership granted to the Company certain overriding royalties. In 1992, the
Company transferred to the Limited Partnership additional rights in exchange for
additional overriding royalties and reimbursement of expenses. The Company
created Isramco Oil and Gas Ltd. ("IOG"), a wholly-owned subsidiary to act as
the General Partner for the Limited Partnership and formed Isramco Management
(1988) Ltd., a wholly-owned subsidiary to act as the Limited Partner and the
nominee of Limited Partnership units held by public investors in Israel.

        Pursuant to the Limited Partnership Agreement and the Trust Agreement, a
Supervisor was appointed on behalf of the Limited Partnership unit holders, with
sole authority to appoint the sole director for Isramco Management (1988) Ltd.
and to supervise its activities on behalf of and for the benefit of the Limited
Partnership unit holders. The control and management of the Limited Partnership
vests with the General Partner, however, matters involving certain rights of the
Limited Partnership unit holders are subject to the supervision of the
Supervisor and in certain instances the approval of the Limited Partnership unit
holders. The firm of Igal Brightman & Co., Accountants and Mr. David Valiano,
Accountant has been appointed as Supervisors.

        The Company currently receives through IOG a management fee of $40,000
per month from the Limited Partnership for office space, management and other
services. It has been significant to the Company that the Limited Partnership
(in part through the efforts of the Company and others), has been able to raise
monies from the public in Israel to fund the Limited Partnership's share of the
work programs for the Petroleum Assets in connection with the continuation of
oil and gas exploration activities in Israel and to preserve the existence of
the Company's overriding royalties. The Company currently holds 6.65% of the
issued Partnership units and IOG holds an additional 0.008% of the Partnership
units. On December 31, 2004, the Limited Partnership had cash, cash equivalents,
certificates of deposit and marketable securities with a value of approximately
$129 million.

        Additionally, IOG (as the general partner) is entitled to 5% overriding
royalties in certain petroleum assets held by the Limited Partnership.

NON-OIL AND GAS PROPERTIES

        In June 2002, the Company purchased non oil and gas producing real
estate located in Israel at an aggregate cost of $1,887,000. Concurrently with
the purchase of the real estate, the Company entered into a lease agreement with
a third party to lease the property for a 24-month period at a monthly rent of
$7,000. As of January 1, 2004, the Company entered into an agreement with a
related entity pursuant to which the property is leased to such entity at a
monthly rent of $7,000.

        In March 2004, the Company purchased a luxury cruise liner for aggregate
consideration of $8,050,000. The vessel, a Bahamas flagged ship, contains 270
passenger cabins spread out over nine decks. The Company, through its wholly
owned subsidiary, leased the vessel to Israeli based tour operators between July
and October of fiscal 2004 and, commencing April 14, 2005, the vessel has been
leased to tour operator for a period through October 31, 2005.

        In addition, the Company holds certain equity interests in a high-tech
venture.

                                       -4-

<PAGE>

                    OIL AND GAS VENTURES AND PETROLEUM ASSETS

           OIL AND GAS VENTURES AND PETROLEUM ASSETS LOCATED IN ISRAEL

        The table below sets forth the Working Interests and Petroleum Assets of
the Company and all affiliated and non-affiliated participants in (i) the
Ventures, (ii) the Petroleum Assets, (iii) the total acreage of each Petroleum
Asset, and (iv) the expiration dates of each of the licenses as of December 31,
2004. This information pertains only to Petroleum Assets located in Israel. The
Company also holds Overriding Royalties in the Petroleum Assets. See "Table of
Overriding Royalties".

<TABLE>
<CAPTION>

                     TABLE OF PETROLEUM ASSETS (WORKING INTEREST)
                              OIL AND GAS VENTURES (1)(3)
                                 (% Interest of 100%)


Name of Participant                       Med Yavne Lease*      Med Ashdod Lease**(2)
<S>                                            <C>                    <C>
The Company                                    0.4584                  0.3625

Affiliates

Isramco Negev 2, Limited                       32.411                 19.1370
Partnership

I.O.C.                                          7.800                   7.800

I.N.O.C. Dead Sea                                  --                  5.0525
Limited Partnership

Naphtha                                        1.8033                      --

Naphtha Explorations                           2.2826                  1.8411
Limited Partnership

JOEL                                           2.8807                      --

Equital                                        2.1639                      --

Non-affiliated entities

Delek Drilling LP                                  --                 21.7658

GRANIT - SONOL LP                                  --                  35.000

BG International Ltd.                          35.000                      --

Middle East Energy (MEE) LP                     5.400                   5.400

DOR - Gas LP                                    1.800                  1.8000

Other                                                                  1.8411

Total                                         100.000                 100.000

Area (acres)                                   13,100                  61,800

Expiration Date                             6/10/2030               6/15/2030
</TABLE>


                                       -5-
<PAGE>

* The lease was granted in June 2000 and is scheduled to expire in June 2030.

** The lease was granted in January 2002 and is scheduled to expire in June
2030.

(1) Subject to the fulfillment of applicable provisions of the Israel Petroleum
Law and Regulations, and the conditions and work obligations of each of the
above licenses/Leases.

(2) Under the Grant Agreement with the Government of Israel, the Government may
claim that the Company is contingently obligated to repay to the Government the
Grant monies in the amount of $110,000 and to pay a 6.5 % Overriding Royalty on
all production from the area.

(3) All of the Petroleum Assets are subject to a 12.5% Overriding Royalty due to
the Government of Israel under the Petroleum Law.

                    OVERRIDING ROYALTIES HELD BY THE COMPANY

        The Company holds overriding royalties in certain petroleum assets.
Additionally, in connection with the BG Transaction, the Company is entitled to
receive from each member of the Isramco Group overriding royalties equal to 2%
of each such member's rights to any oil/gas produced within the existing
offshore licenses or within any new licenses or to any oil or gas rights which
may be obtained in lieu of existing offshore licenses. The Company holds the
following Overriding Royalties:

                          TABLE OF OVERRIDING ROYALTIES

        From the Limited Partnership, on the first 10% of the Limited
Partnership's share of the following Petroleum Licenses

<TABLE>
<CAPTION>
<S>                                                                           <C>
                                                       Before Payout    After Payout

         Med Yavne Lease*                                    1%             13%

         Med Ashdod Lease**                                  1%             13%

         From JOEL                                        On 8% of JOEL's Interest


                                                       Before Payout    After Payout
         Med Ashdod Lease                                  2.5%           12.5%

         From Delek Oil Exploration Ltd.
            (DOEX) (1)(2)                               On 6% of DOEX's Interest

                                                       Before Payout    After Payout

        Med Ashdod Lease                                   2.5%           12.5%

        From Naphtha, Naphtha Exploration LP,
        Joel, Equital, INOC Dead Sea L P
        on oil and/or gas produced on the
        Med Leases                                                   2%

        To IOC On Certain petroleum rights held by
        Limited Partnership                                          5%
</TABLE>

* A 30 year lease covering an area of approximately 53 square kilometers
(including the area of the gas discovery) was granted in June 2000.

** A 30-year lease covering an area of approximately 250 square kilometers
(including the area of the gas discovery) was granted in January 2002.

                                         -6-
<PAGE>

(1) The Working Interests of Delek and DOEX have been assigned to Delek Drilling
Limited Partnership.

(2) In a prospectus of the Delek Limited Partnership dated January 26, 1994 it
is stated that the Interest which the Delek L.P, received from Delek and DOEX is
free from any encumbrances except that Isramco, Inc. may argue that the
Interests are subject to an overriding royalty. The Company has no information
available to it as to why this statement is in the Delek L.P. prospectus.
Summary Description of the Ventures, the Petroleum Assets, Related Work
Obligations and Exploration Efforts.

        The Company has no financial obligation with regard to the Overriding
Royalties, however, in the event the Limited Partnership, JOEL, DOEX or Delek,
fails to fund its obligation with regard to a Petroleum Asset to which an
Overriding Royalty exists, the Company could lose its interest in such
Overriding Royalty. See Glossary for definition of "Payout ".

                    SUMMARY OF EXPLORATION EFFORTS IN ISRAEL

MED YAVNE LEASE

        Based on the gas finds known as "Or 1" and "Or South" , a 30 years lease
was granted in June 2000 (hereinafter: the "Med Yavne Lease"). The Med Yavne
Lease covers 53 square kilometers (approximately 13,000 acres) offshore Israel.
The operator of the Med Yavne Lease is BG International Limited, a member of the
British Gas Group ("BG").

        According to the operator's estimates, which are based on the results of
the drillings in the "Or 1" and "Or South" wells, and a three-dimensional
seismic survey performed in the area of the lease which also covered parts of
nearby gas reserves (outside the area of the lease), the recoverable gas
reserves in the Med Yanve Lease is estimated at 93 billion cubic feet, out of
which it is estimated that approximately 51 billion cubic feet are in Or 1. In
November 2002, the Company received an opinion from a consulting firm in the
United States that performed a techno-economic examination for the development
of the "Or 1" reserve. The opinion indicates that, under certain assumptions,
development of the reserve by connection to a nearby platform (at a distance of
7 Miles) and from there via an existing transportation pipeline to the coast,
may be economically feasible.

        As of the filing of this annual report no decision has been made
regarding the development of "Or 1" reserve.

        The Company's participation share of the Med Yavne Lease is 0.4585%.

MED ASHDOD LEASE

        GENERAL

        Following the results of "Nir 1" drilling, a 30 year lease was granted
in January 2002. The Med Ashdod Lease covers approximately 250 square kilometers
(approximately 62,000 acres) offshore Israel. The Company serves as the operator
of the Med Ashdod Lease and holds a 0.3625% interest therein.

        On February 15, 2004, the operator presented the partners with two
drilling prospect (a) Nizanim 1 Well (b) Yam 3 Well to a total depth of 5,700
meter (18,700 feet), at a total budget of $40 million. The drilling of "Yam 3"
is subject to the approval of the Ministry of Defense. The Company has received
notice from partners representing approximately 38.5% interest in the lease of
their readiness to invest in Yam 3 Well. On July 25, 2004 the Company, or behalf
of Isramco Negev 2 L.P. well will be drilled issued a Sole Risk notice to the
other partners in the Lease to drill Yam 3 well. On July 27, 2004, the Israeli
Ministry of Defense advised the Company that the Ministry will not approve the
drilling of Yam 3 on the basis of the data submitted. The Company and the
Ministry are currently in the process of exploring other alternatives. In
October 2004 the Commissioner granted the Operator's request and approved
postponement of execution of the Drilling in "Yam 3" up to December 1, 2005. As
of March 30, 2005, the Company is unable to estimate if and when the said
drilling will be executed. No assurance can be given that the Ministry will in
fact approve any alternative that is acceptable to the partners.

        On February 28, 2005, the Company ,on behalf of Isramco Negev 2
LP,issued a Sole Risk notice to the other partners in the Leas to drill a gas
well to a total depth of 2,600 meter (8,530)at a total budget of $13 million. As
of March 30, 2005, the Company is unable to estimate if the well will be
drilled.

                                         -7-
<PAGE>

               SUMMARY OF EXPLORATION EFFORTS IN THE UNITED STATES

        The Company, through its wholly-owned subsidiaries, Jay Petroleum LLC
("Jay Petroleum") and Jay Management LLC ("Jay Management"), is involved in oil
and gas production in the United States. Jay Petroleum owns varying working
interests in oil and gas wells in Louisiana, Texas, Oklahoma and Wyoming.
Independent estimates of the reserves held by Jay Petroleum as of December 31,
2004 are approximately 140,000 net barrels of proved developed producing oil and
2,011 net MMCFs of proved developed producing natural gas. Jay Management acts
as the operator of certain of the producing oil and gas interests owned or
acquired by Jay Petroleum.

        In March 2004, the Company initiated the drilling of a proved
undeveloped well located in Enid County Oklahoma. With respect to this well the
Company entered into participation agreement with a company in Oklahoma. Under
the agreement the Company will invest 75% and will hold 50% working interest in
the well. The well was drilled to a total depth of 6,920 feet and completed for
production from two zones. The average daily production is 100 Mcf of gas and 7
BBL of oil. The total investment of the Company in this well is in a sum of
$472,000.

        In December 2004, the Company drilled a well in East Texas to a total
depth of 3,393 feet. The daily production from the well is 300 Mcf of gas. The
total investment of the Company in this well is $273,000. The Company holds 80%
working interests in the well.

        The Company holds 15% working interest in an additional well in Dune
Energy Hamilton, Texas. The well was drilled do a total depth of 9,900 feet. The
total investment of the Company in this well is in a sum of $227,000.

        The Company holds 5% working Interest in a third well Dune Energy
Vaquero, Texas. As of the filing of this Annual Report on Form 10-K, drilling
has begun. The total budget of the well is in a sum of $3,500,000. At present,
the well's data (drilling results, logs) are being analyzed to determine the
testing zones.

        Management is currently evaluating a number of potential prospects to be
drilled in 2005.

NON-OIL AND GAS PROPERTIES

                                 MIRAGE 1 CRUISE LINER

OVERVIEW

        In March 2004, the Company purchased a luxury cruise liner (the
"Vessel") for aggregate consideration of $8,050,000. The Vessel, a Bahamas
flagged ship, contains 270 passenger cabins spread out over nine decks. The
Company leased the Vessel to an Israeli based tour operator for the period from
July 1, 2004 through October 17, 2004 at a daily rate of $21,500.

        Title to the Vessel is in Magic 1 Cruise Line Corp., a wholly owned
subsidiary of the Company ("Magic").As of December 31, 2004 the Company expended
approximately $1 million in respect of the maintenance, repairs renovation, and
upkeep of the vessel.

CRUISE LINE BUSINESS

        Cruise lines compete for consumers' disposable leisure time spending
with other vacation alternatives such as land-based resort hotels and
sightseeing destinations. Demand for such activities is influenced by, among
other things, geo-political and general economic conditions. The Company
believes that cruise passengers currently represent only a small share of the
vacation market and that a significant portion of cruise passengers carried are
first-time cruisers.

        The Company's principal operating strategy is to lease the Vessel
through time charter or bareboat charter. Under a bareboat charter the lessee
operates the vessel and solely bears all expenses associated with the operation,
maintenance

                                      -8-
<PAGE>

and upkeep of the Vessel. Under a time charter the owner of the Vessel is
responsible for those expenses and provides a crew. Under a time charter, the
lessee is responsible for marketing, itinerary and providing all cruise line
services to passengers. Generally, revenue from time charter are higher than
with respect to bareboat charters.

        Cruising in the Mediterranean is generally from April to October. So
long as the Vessel is leased for use in the Mediterranean, the Company
anticipates that revenues from the lease of the Vessel will remain seasonal. In
May 2004, Magic entered into a time charter with an Israeli based tour operator
for the period from July 1, 2004 through October, 2004 at a daily rate of
$21,500. The tour operator targeted the Israeli consumer market and promoted
Vessel cruises to various destinations in the Mediterranean including Cyprus,
Greek islands and Turkey.

        In March 2005 Magic entered into a bareboat charter with a European
based tour operator for the lease of the Vessel for the period from April 14,
2005 through October 31, 2005 at a daily rate of $8,000. Under the bareboat
charter the tour operator will operate the Vessel in and around the
Mediterranean and will solely bear all outlays associated with the operation,
maintenance and upkeep of the Vessel.

        Contemporaneous with its entry into the bareboat charter the tour
operator entered into an agreement (the "Marketing Agreement") with a subsidiary
of one of the leading transportation companies in Israel ("the "Marketing
Party") pursuant to which the operator granted to the Marketing Party the
exclusive marketing of the tours on the Vessel, and under which the Operator is
entitled to minimum payments from the Marketing Party.

        In connection with the bareboat charter, on March 9, 2005, the Company
furnished a limited guarantee (the "Guarantee") to and in favor of the Marketing
Party, pursuant to which the Company undertook to indemnify the Marketing Party
in an amount not exceeding $1 million in respect of any loss or damage incurred
by the Marketing Party arising out of the breach by the Operator of its
obligations under the Marketing Agreement. To induce the Company to issue the
Guarantee, the Operator granted to the Company a security interest on all
amounts due to it under the Marketing Agreement and agreed to provide the
Company with a bank guarantee in the amount of $600,000 (which will secure its
obligations under the bareboat charter as well).

        Recent actions by Israeli authorities to declare the Vessel an `Israeli
vessel' under a time charter is likely to increase the costs associated with the
operation of the vessel and may potentially reduce the net income for leasing
the Vessel. See "Risk Factors"

                                       -9-

<PAGE>

REGULATORY

        The operation of the Vessel is subject to various international laws and
regulations relating to environmental protection. Under such laws and
regulations, the Company are prohibited from, among other things, discharging
certain materials, such as petrochemicals and plastics, into the waterways. The
Company have made, and will continue to make, capital and other expenditures to
comply with environmental laws and regulations. From time to time, environmental
and other regulators consider more stringent regulations which may affect
operations and increase Company's compliance costs. The Company believes that
the impact of cruise ships on the global environment will continue to be an area
of focus by the relevant authorities throughout the world and, accordingly, this
will likely subject to increasing compliance costs in the future.

        The Company believes that The Company is in material compliance with all
the regulations applicable to the Vessel and that have all licenses necessary to
conduct our business. Health, safety, security and financial responsibility
issues are, and believe will continue to be, an area of focus by the relevant
government authorities . From time to time, various regulatory and legislative
changes may be proposed that could impact our operations and would likely
subject to increasing compliance costs in the future.

REAL ESTATE IN ISRAEL

        In June 2002, the Company purchased non oil and gas producing real
estate located in Israel at an aggregate cost of $1,887,000. Concurrently with
the purchase of the real estate, the Company entered into a lease agreement with
a third party to lease the property for a 24-month period at a monthly rent of
$7,000. The lease agreement was terminated on December 31, 2003 and as of
December 1, 2004, the Company entered into an agreement with a related entity
pursuant to which the property is leased to such entity at a monthly rent of
$7,000 through December 31, 2005.

EMPLOYEES

        As of March 30, 2005, the Company had eight employees at its branch
office in Israel and three employees in its office in Houston, Texas.

                                  RISK FACTORS

        In addition to the other information contained in this Annual Report on
Form 10-K, investors should consider carefully the following risks. If any of
these risks occurs, the Company's business, financial condition or operating
results could be adversely affected.

                RISKS RELATED THE COMPANY'S OIL AND GAS BUSINESS

        OIL AND GAS DRILLING IS A SPECULATIVE ACTIVITY AND risky

        The Company is engaged in the business of oil and natural gas
exploration and the resulting development of productive oil and gas wells. The
Company's growth will be materially dependent upon the success of its future
drilling program. Drilling for oil and gas involves numerous risks, including
the risk that no commercially productive oil or natural gas reservoirs will be
encountered. The cost of drilling, completing and operating wells is substantial
and uncertain, and drilling operations may be curtailed, delayed or cancelled as
a result of a variety of factors beyond the

                                      -10-

<PAGE>

Company's control, including unexpected drilling conditions, pressure or
irregularities in formations, equipment failures or accidents, adverse weather
conditions, compliance with governmental requirements and shortages or delays in
the availability of drilling rigs or crews and the delivery of equipment.
Although the Company believes that its use of 3-D seismic data and other
advanced technology should increase the probability of success of its wells and
should reduce average finding costs through elimination of prospects that might
otherwise be drilled solely on the basis of 2-D seismic data and other
traditional methods, drilling remains an inexact and speculative activity. In
addition, the use of 3-D seismic data and such technologies requires greater
pre-drilling expenditures than traditional drilling strategies and the Company
could incur losses as a result of such expenditures. The Company's future
drilling activities may not be successful and, if unsuccessful, such failure
could have an adverse effect on the Company's future results of operations and
financial condition. Although the Company may discuss drilling prospects that
have been identified or budgeted for, the Company may ultimately not lease or
drill these prospects within the expected time frame, or at all. The Company may
identify prospects through a number of methods, some of which do not include
interpretation of 3-D or other seismic data. The drilling and results for these
prospects may be particularly uncertain. The final determination with respect to
the drilling of any scheduled or budgeted wells will be dependent on a number of
factors, including (i) the results of exploration efforts and the acquisition,
review and analysis of the seismic data, (ii) the availability of sufficient
capital resources to the Company and the other participants for the drilling of
the prospects, (iii) the approval of the prospects by other participants after
additional data has been compiled, (iv) economic and industry conditions at the
time of drilling, including prevailing and anticipated prices for oil and
natural gas and the availability of drilling rigs and crews, (v) the Company's
financial resources and results (vi) the availability of leases and permits on
reasonable terms for the prospects and (vii) the payment of royalties to
lessors. There can be no assurance that these projects can be successfully
developed or that the wells discussed will, if drilled, encounter reservoirs of
commercially productive oil or natural gas. There are numerous uncertainties in
estimating quantities of proved reserves, including many factors beyond the
Company's control.

        THE OIL AND NATURAL GAS RESERVE DATA INCLUDED IN THIS REPORT ARE ONLY
ESTIMATES AND MAY PROVE TO BE INACCURATE.

        There are numerous uncertainties inherent in estimating oil and natural
gas reserves and their estimated values. The reserve data in this report
represent only estimates that may prove to be inaccurate because of these
uncertainties. Estimates of economically recoverable oil and natural gas
reserves depend upon a number of variable factors, such as historical production
from the area compared with production from other producing areas and
assumptions concerning effects of regulations by governmental agencies, future
oil and natural gas prices, future operating costs, severance and excise taxes,
development costs and workover and remedial costs, some or all of these
assumptions may in fact vary considerably from actual results. For these
reasons, estimates of the economically recoverable quantities of oil and natural
gas attributable to any particular group of properties, classifications of such
reserves based on risk of recovery, and estimates of the future net cash flows
expected therefrom prepared by different engineers or by the same engineers but
at different times may vary substantially. Accordingly, reserve estimates may be
subject to downward or upward adjustment. Actual production, revenue and
expenditures with respect to the Company's reserves will likely vary from
estimates, and such variances may be material.

        THERE IS A POSSIBILITY THAT THE COMPANY WILL LOSE THE LEASES TO ITS OIL
AND GAS PROPERTIES.

        The Company's oil and gas revenues are generated through leases to the
oil and gas properties or, in the case of Israeli based properties, licenses
that, subject to certain conditions, may result in leases being granted. The
leases are subject to certain obligations and are renewable at the discretion of
various governmental authorities, as such, the Company may not be able to
fulfill its obligations under the leases which may result in the modification or
cancellation of such leases, or such leases may not be renewed or may be renewed
on terms different from the current leases. The modification or cancellation of
the Company's leases may have a material impact on the Company's revenues.

        COMPETITION IN THE INDUSTRY MAY IMPAIR THE COMPANY'S ABILITY TO EXPLORE,
DEVELOP AND COMMERCIALIZE ITS OIL AND GAS PROPERTIES.

        The oil and natural gas industry is very competitive. Competition is
particularly intense in the acquisition of prospective oil and natural gas
properties and oil and gas reserves. The Company competes with a substantial
number of other companies having larger technical staffs and greater financial
and operational resources. Many such companies not

                                      -11-

<PAGE>

only engage in the acquisition, exploration, development and production of oil
and natural gas reserves, but also carry on refining operations, electricity
generation and the marketing of refined products. The Company also competes with
major and independent oil and gas companies in the marketing and sale of oil and
natural gas, and the oil and natural gas industry in general competes with other
industries supplying energy and fuel to industrial, commercial and individual
consumers. The Company competes with other oil and natural gas companies in
attempting to secure drilling rigs and other equipment necessary for drilling
and completion of wells. Such equipment may be in short supply from time to
time.

        THE COMPANY'S BUSINESS MAY BE AFFECTED BY OIL AND GAS PRICE VOLATILITY.

        Historically, natural gas and oil prices have been volatile. These
prices rise and fall based on changes in market demand and changes in the
political, regulatory and economic climate and other factors that affect
commodities markets that are generally outside of the Company's control. Some of
the Company's projections and estimates are based on assumptions as to the
future prices of natural gas and crude oil. These price assumptions are used for
planning purposes. The Company expects that its assumptions will change over
time and that actual prices in the future may differ from its estimates. Any
substantial or extended decline in the actual prices of natural gas and/or crude
oil may have a material adverse effect on the Company's financial position and
results of operations (including reduced cash flow and borrowing capacity), the
quantities of natural gas and crude oil reserves that it can economically
produce and the quantity of estimated proved reserves that may be attributed to
its properties

        THE COMPANY HAS NO MEANS TO MARKET ITS OIL AND GAS PRODUCTION WITHOUT
THE ASSISTANCE OF THIRD PARTIES.

        The marketability of the Company's production depends upon the proximity
of its reserves to, and the capacity of, facilities and third party services,
including oil and natural gas gathering systems, pipelines, trucking or terminal
facilities, and processing facilities. The unavailability or lack of capacity of
such services and facilities could impair or delay the production of new wells
or the delay or discontinuance of development plans for properties. A shut-in or
delay or discontinuance could adversely affect the Company's financial
condition. In addition, regulation of oil and natural gas production
transportation in the United States or in other countries may affect its ability
to produce and market its oil and natural gas on a profitable basis.

        THE COMPANY IS SUBJECT TO RISKS ASSOCIATED WITH INTERNATIONAL
OPERATIONS.

        The Company conducts business from its facilities in Israel and the
United States. Its international operations and activities subject the Company
to a number of risks, including the risk of political and economic instability,
difficulty in managing foreign operations, potentially adverse taxes, higher
expenses and difficulty in collection of accounts receivable. Although the
Company Israeli subsidiary receives most of its operating funds in U.S. dollars,
a portion of its payroll and other expenses and certain of its investments are
fixed in the currency of Israel. Because the Company's financial results are
reported in U.S. dollars, they are affected by changes in the value of the
various foreign currencies that the Company uses to make payments in relation to
the U.S. dollar.

        THE COMPANY'S OPERATIONS MAY BE IMPACTED BY CERTAIN RISKS COMMON IN THE
INDUSTRY.

        The Company's exploration and drilling operations are subject to various
risks common in the industry, including cratering, explosions, fires and
uncontrollable flows of oil, gas or well fluids. The drilling operations are
also subject to the risk that no commercially productive natural gas or oil
reserves will be encountered. The cost of drilling, completing and operating
wells is often uncertain, and drilling operations may be curtailed, delayed or
canceled as a result of a variety of factors, including drilling conditions,
pressure or irregularities in formations, equipment failures or accidents and
adverse weather conditions.

        In accordance with industry practice, the Company maintains insurance
against some, but not all, of the risks described above. The Company cannot
provide assurance that its insurance will be adequate to cover losses or
liabilities. Also, it cannot predict the continued availability of insurance at
premium levels that justify its purchase.

                                      -12-

<PAGE>

        GOVERNMENT REGULATION AND LIABILITY FOR ENVIRONMENTAL MATTERS MAY
ADVERSELY AFFECT THE COMPANY'S BUSINESS AND RESULTS OF OPERATIONS.

        Oil and natural gas operations are subject to various federal, state and
local government regulations, which may be changed from time to time. Matters
subject to regulation include discharge permits for drilling operations,
drilling bonds, reports concerning operations, the spacing of wells, unitization
and pooling of properties and taxation. From time to time, regulatory agencies
have imposed price controls and limitations on production by restricting the
rate of flow of oil and natural gas wells below actual production capacity in
order to conserve supplies of oil and natural gas. There are federal, state and
local laws and regulations primarily relating to protection of human health and
the environment applicable to the development, production, handling, storage,
transportation and disposal of oil and natural gas, by-products thereof and
other substances and materials produced or used in connection with oil and
natural gas operations. In addition, the Company may be liable for environmental
damages caused by previous owners of property it purchases or leases. As a
result, the Company may incur substantial liabilities to third parties or
governmental entities. The Company is also subject to changing and extensive tax
laws, the effects of which cannot be predicted. The implementation of new, or
the modification of existing, laws or regulations could have a material adverse
effect on the Company's business.

                           RISKS RELATED TO THE VESSEL

        THE DESIGNATION OF THE VESSEL AS AN `ISRAELI VESSEL' COULD INCREASE THE
COST OF OPERATING THE VESSEL AND MAY POTENTIALLY REDUCE THE INCOME FROM LEASING
THE VESSEL.

        In January 2005, Israeli authorities advised Naphtha Israel Petroleum
Corp. that in their view the Vessel qualified as an Israeli vessel
(notwithstanding its foreign registration and ownership) as Naphtha holds 49.8%
of the issued and outstanding shares of the Company. Consequently, the
authorities contend that certain Israeli maritime rules and regulations govern
the Vessel and its operations. These rules impose certain requirements as to
operation of the vessel and require among other things that the vessel be
staffed by Israeli crew, satisfy certain security requirements and allow for the
mobilization of the Vessel by the Israeli authorities during periods of war or
hostilities.

        In February 2005 Naphtha applied to the Israeli high court for a
declaratory order that the Vessel is not an Israeli vessel. In the event that
the Israeli court declines to grant Naphtha's application, the operating costs
of the Vessel will increase and result in a reduction of potential charter
(lease) opportunities for exploitation of the Vessel. In March 2005, Naphtha was
advised that under a 'bareboat charter' the authorities will not deem the vessel
to be an Israeli vessel.

        As of the filing of the annual report on Form 10-K, the Company cannot
determine the outcome of the matter.

        A POTENTIAL LOSS OF BUSINESS DUE TO COMPETITORS THROUGHOUT THE VACATION
MARKET.

        The Company faces significant competition from other cruise lines, in
terms of the types of ships and services. Additionally, oceanline cruises are
only one of many alternatives for people choosing a vacation. Therefore risk
losing potential lessors of the Vessel due to competition form other cruise
lines and also due to other vacation operators that provide other travel and
leisure options, including hotels, resorts and package holidays and tours. Any
failure to lease the Vessel for a significant period of time may adversely
affect Company's results of operations and financial condition.

        THE POLITICAL AND ECONOMIC CLIMATE AND OTHER WORLD EVENTS AFFECTING
SAFETY AND SECURITY COULD ADVERSELY AFFECT THE DEMAND FOR CRUISES AND COULD HARM
THE FUTURE LEASING AND PROFITABILITY.

        Demand for cruises and other vacation options has been, and is expected
to continue to be, affected by the public's attitude towards the safety of
travel, the international political climate and the political climate of
destination countries. Events such as the terrorist attacks in the U.S. on
September 11, 2001 and the instability in much of the Mediterranean region (the
region in which our Vessel operates) and the threats of attacks in the
Mediterranean and elsewhere, concerns of an

                                      -13-

<PAGE>

outbreak of additional hostilities, national government travel advisories, the
resulting political instability and concerns over safety and security aspects of
traveling, have had a significant adverse impact on demand and pricing in the
travel and vacation industry and may continue to do so in the future. Demand for
cruises is also likely to be increasingly dependent on the underlying economic
strength of the countries from which cruise companies source their passengers.
Economic or political changes that reduce disposable income or consumer
confidence in the countries may affect demand for vacations, including cruise
vacations, which are a discretionary purchase. Decreases in demand could
adversely affect our ability to lease the Vessel and negatively affect
profitability.

        ACCIDENTS AND OTHER INCIDENTS OR ADVERSE PUBLICITY CONCERNING THE CRUISE
INDUSTRY AND COULD AFFECT COMPANY'S REPUTATION AND HARM FUTURE LEASING AND
PROFITABILITY.

        The operation of cruise ships involves the risk of accidents, passenger
and crew illnesses, mechanical failures and other incidents at sea or while in
port, which may bring into question passenger safety, health, security and
vacation satisfaction and thereby adversely effect future industry performance,
sales and profitability. It is possible that these factors could adversely
affect our leasing ability or existing charter, which would have an adverse
affect on profitability. In addition, adverse publicity concerning the vacation
industry in general or the cruise industry or us in particular could affect our
reputation and impact demand and, consequently, have an adverse affect on our
profitability.

        NEW REGULATIONS OF HEALTH, SAFETY, SECURITY, ENVIRONMENTAL AND OTHER
REGULATORY ISSUES COULD INCREASE COMPANY'S OPERATING COSTS AND ADVERSELY AFFECT
NET INCOME.

        The Company are subject to various international, national, state and
local health, safety and security laws, regulations and treaties. We believe
that health, safety, security and other regulatory issues will continue to be
areas of focus by relevant government authorities. Resulting legislation or
regulations, or changes in existing legislation or regulations, could impact
Company's operations and would likely subject to increasing compliance costs in
the future.

        PROBLEMS ENCOUNTERED AT PORTS COULD REDUCE COMPANY'S PROFITABILITY.

        Industrial actions and insolvency or financial problems of the ports
where The Vessel is docked could adversely affect Company's profitability.

                      RISKS RELATED TO OPERATIONS GENERALLY

        THE COMPANY IS SUBJECT TO RISKS ASSOCIATED WITH OPERATIONS IN ISRAEL.

        The Company is involved in oil and gas exploration activities in Israel
as operator of certain offshore licenses or otherwise. The Company also
purchased significant non-oil and gas real-estate properties in Israel. The
Company also maintains a significant presence within Israel. Accordingly, a
significant portion of the Company's business is directly affected by prevailing
economic, military and political conditions that affect Israel. Any major
hostilities involving Israel might have a material adverse effect on the
Company's business, financial condition or results of operations.

        THE COMPANY'S STOCK PRICE IS VOLATILE AND COULD CONTINUE TO BE VOLATILE.

        Investor interest in the Company's common stock may not lead to the
development of an active or liquid trading market. The market price of the
Company's common stock has fluctuated in the past and is likely to continue to
be volatile and subject to wide fluctuations. In addition, the stock market has
experienced extreme price and volume fluctuations. The stock prices and trading
volumes for the Company's stock has fluctuated widely and may continue to so for
reasons that may be unrelated to business or results of operations. General
economic, market and political conditions could also materially and adversely
affect the market price of the Company's common stock and investors may be
unable to resell their shares of common stock at or above their purchase price.

        PENNY STOCK REGULATIONS ARE APPLICABLE TO INVESTMENT IN SHARES OF THE
COMPANY'S COMMON STOCK.

        Broker-dealer practices in connection with transactions in "penny
stocks" are regulated by certain penny stock rules

                                      -14-

<PAGE>

adopted by the Securities and Exchange Commission. Penny stocks generally are
equity securities with a price of less than $5.00 (other than securities
registered on certain national securities exchanges or quoted on the Nasdaq
system, provided that current prices and volume information with respect to
transactions in such securities are provided by the exchange or system). The
penny stock rules require a broker-dealer, prior to a transaction in a penny
stock not otherwise exempt from the rules, to deliver a standardized risk
disclosure document that provides information about penny stocks and the risks
in the penny stock market. The broker-dealer also must provide the customer with
current bid and offer quotations for the penny stock, the compensation of the
broker-dealer and its salesperson in the transaction, and monthly account
statements showing the market value of each penny stock held in the customer's
account. In addition, the penny stock rules generally require that prior to a
transaction in a penny stock the broker-dealer make a special written
determination that the penny stock is a suitable investment for the purchaser
and receive the purchaser's written agreement to the transaction. These
disclosure requirements may have the effect of reducing the level of trading
activity in the secondary market for a stock that becomes subject to the penny
stock rules. Many brokers will not deal with penny stocks; this restricts the
market.

ITEM 2. PROPERTIES

        The Company maintains offices in Houston, Texas. The Company has a lease
for office premises (approximately 2,015 square feet) at 11767 Katy Freeway,
Houston, TX 77079 expiring in October 2006 with a monthly rental of $2,508. The
Company anticipates that it will be able to extend the lease, or find
replacement premises, on commercially reasonable terms.

        The Company also leases office space in Israel from Naphtha at 8 Granit
St., Petach Tikva, Israel. In 2004, the Company paid Naphtha an aggregate of
$226,000 for rental space, office services, secretarial services and computer
services. The Company believes that the payment for the above services are
reasonable compared to other similar locations.

ITEM 3. LEGAL PROCEEDING

        From time to time, the Company is involved in disputes and other legal
actions arising in the ordinary course of business. In management's opinion,
none of these other disputes and legal actions is expected to have a material
impact on the Company's consolidated financial position or results of
operations.

RECENT DEVELOPMENT

        On February 10, 2004, the Company initiated a lawsuit in the Superior
Court of California, County of Los Angeles, against several named defendants
(collectively, the "Defendants"), alleging breach of contract and tort claims in
connection with an agreement between the Company and the Defendants to jointly
purchase and develop certain parcels of real estate outside Los Angeles. In its
lawsuit, the Company is seeking damages in excess of $50 million.

        In March 2005, the Defendants filed motion for summery judgment in favor
of the Defendants on the ground that there is no triable issue of any material
fact and Defendants are entitled to judgment as a matter of law. A hearing date
to consider the motion has been set for May 25, 2005.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

        During the fourth quarter of the fiscal year covered by this report, no
matter was submitted to a vote of security holders of the Company.

                                     PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

        The number of record holders of the Company's Common Stock on March 30,
2005 was approximately 456, not including an undetermined number of persons who
hold their stock in street name.

        Our common stock is listed on the Nasdaq Smallcap Market under the
symbol "ISRL". The following table sets forth for the periods indicated, the
reported high and low closing prices for our common stock.

                                      -15-

<PAGE>


                                                           Common Stock

Quarter Ended                                             High       Low

2004

March 31                                                 $7.59      $7.01
June 30                                                  $6.50      $6.40
September 30                                             $6.08      $6.08
December 31                                              $5.28      $5.24


2003
March 31                                                 $4.43      $2.35
June 30                                                  $4.60      $2.78
September 30                                             $4.60      $3.66
December 31                                              $7.74      $3.95


        The Company has not declared or paid any cash dividends on its Common
Stock. The Company does not anticipate paying any cash dividends on its Common
Stock in the foreseeable future. The Company intends to retain all earnings for
use in its business operations and in expansion.

        (ii) The following table sets forth certain required information
relating to the shares of Common Stock issuable on an aggregated basis under the
Company's 1993 Stock Option Plan.

<TABLE>
<CAPTION>
                                                  EQUITY COMPENSATION PLAN INFORMATION

            Plan Category                    Number of         Weighted-          Number of
                                           securities to        average           securities
                                             be issued      exercise price of     remaining
                                               upon            outstanding      available for
                                            exercise of         options,           future
                                            outstanding                            issuance.
                                             options,
<S>                                           <C>                <C>                <C>
Equity compensation plans approved by
         security holders                      29,750            $21.00             20,250

Equity compensation plans not approved
         by security holders                  139,990            $ 4.28                 --
                                           ----------           --------           --------
               Total                          169,740            $ 7.21             20,250
</TABLE>

ITEM 6. SELECTED FINANCIAL DATA (CONSOLIDATED)

        The data presented below with respect to the Company should be read in
conjunction with the Consolidated

                                      -16-

<PAGE>

Financial Statements and related Notes thereto of the Company included elsewhere
in this Report and Item 7-- "Management's Discussion and Analysis of Financial
Condition and Results of Operations." (in Thousands)

<TABLE>
<CAPTION>
                                                       2004           2003         2002          2001         2000
<S>                                                <C>           <C>          <C>           <C>           <C>
Operator's fees                                         $137          $753         $249          $234        $1,265
Oil and Gas Sales                                     $3,137        $3,439       $2,423        $3,068        $2,080
Revenue from vessel                                   $2,034
Interest income                                         $729          $760         $738          $541        $1,277
Office services to related parties
and other                                               $772          $939         $913          $857        $1,018
Equity in earnings (losses) of investees              $1,365        $1,098        $(440)        $(177)         $106
Gain from sale of oil and gas properties
and equipment                                                           --           --            $4            $6
Capital Gain                                              --          $549           --            --            --
Gain (Loss) on marketable securities                    $240          $872        $(189)        $(199)          $(9)
Other                                                   $492          $475          $49           $--           $--
Gain on BG Transaction                                    --            --           --           $--        $3,626
Impairment of oil & gas properties                      $268          $617           --           $--        $2,550
Impairment of Investment                                  --            --           --           $--          $400
Exploration costs                                         --          $165       $1,747          $204        $2,956
Lease operating expenses and severance
Taxes                                                 $1,149          $872         $844          $905          $630
Depreciation, depletion and
Amortization                                          $1,334          $621         $642          $564          $443
Operator expense                                        $807          $795         $791          $696          $634
General and administrative expenses                   $1,717        $2,012       $1,422        $2,048        $1,740
Interest Expense                                        $168           $52         $210           $--           $55
Accretion Expense                                         $5           $43           --            --            --
Income tax expense (benefit)                          $1,589        $1,188         $114           $50         $(356)
Net Income (loss) before cumulative
effect                                                  $(20)       $2,520      $(1,799)        $(139)         $317
Cumulative effect of change in
accounting principles                                     --         $(264)      $3,516            --            --
Basic and diluted earnings (loss)
per share for:
Net income (loss) before
cumulative effect                                   $  (0.00)        $0.95       $(0.68)       $(0.05)        $0.12
Cumulative effect of accounting change, net               --        $(0.10)        1.33            --            --
Net income (loss)                                   $  (0.00)        $0.85       $ 0.65        $(0.05)        $0.12

Weighted average number of
Common shares outstanding - basic                  2,639,853     2,639,853    2,639,853     2,639,853     2,639,853

Weighted average number of
Common shares outstanding - diluted                2,639,853     2,639,853    2,639,853     2,639,853     2,706,731
</TABLE>

                                                  December 31,

                                  2004         2003        2002          2001

     Balance Sheet Data

     Total assets                $41,358     $32,614      $28,667      $26,615
     Total liabilities           $10,842      $2,733       $2,175       $1,160
     Shareholders' equity        $30,516     $29,881      $26,492      $25,455


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

        THE FOLLOWING COMMENTARY SHOULD BE READ IN CONJUNCTION WITH THE
CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES CONTAINED ELSEWHERE IN THIS
FORM 10-K. THE DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS
AND UNCERTAINTIES. THESE STATEMENTS RELATE TO FUTURE EVENTS OR OUR FUTURE
FINANCIAL PERFORMANCE. IN SOME CASES, YOU CAN IDENTIFY THESE FORWARD-LOOKING
STATEMENTS BY TERMINOLOGY SUCH AS "MAY," "WILL," "SHOULD," "EXPECT," "PLAN,"
"ANTICIPATE," "BELIEVE," "ESTIMATE," "PREDICT," "POTENTIAL," "INTEND," OR
"CONTINUE," AND SIMILAR EXPRESSIONS. THESE STATEMENTS ARE ONLY PREDICTIONS. OUR
ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE
FORWARD-LOOKING

                                      -17-

<PAGE>

STATEMENTS AS A RESULT OF A VARIETY OF FACTORS, INCLUDING, BUT NOT LIMITED TO,
THOSE SET FORTH UNDER "RISK FACTORS" AND ELSEWHERE IN THIS FORM 10-K.

OVERVIEW

        Isramco, Inc., a Delaware company, is active in the exploration of oil
and gas in Israel and the United States. The Company acts as an operator of
certain leases and licenses and also holds participation interests in certain
other interests. The Company also holds certain non-oil and gas properties
discussed below.

CRITICAL ACCOUNTING POLICIES

        In response to the Securities and Exchange Commission's Release No.
33-8040 "Cautionary Advice Regarding Disclosure And Critical Accounting
Policies", the Company identified the accounting principles which it believes
are most critical to the reported financial status by considering accounting
policies that involve the most complex of subjective decisions or assessment.

        The Company's consolidated financial statements and accompanying notes
have been prepared in accordance with accounting principles generally accepted
in the United States of America. The preparation of these financial statements
requires the Company's management to make estimates, judgments and assumptions
that affect the reported amounts of assets, liabilities, revenues and expenses.
The Company continually evaluates the accounting policies and estimates it uses
to prepare the consolidated financial statements. The Company bases its
estimates on historical experience and assumptions believed to be reasonable
under current facts and circumstances. Actual amounts and results could differ
from these estimates made by management.

        Evaluations of oil and gas reserves are important to the effective
management of the Company. They are integral to making investment decisions
about oil and gas properties such as whether development should proceed or
enhanced recovery methods should be undertaken. Oil and gas reserve quantities
are also used as the basis of calculating the unit-of-production rates for
depreciation and evaluating for impairment. Oil and gas reserves are divided
between proved and unproved reserves. Proved reserves are the estimated
quantities of crude oil, natural gas and natural gas liquids that geological and
engineering data demonstrate with reasonable certainty to be recoverable in
future years from known reservoirs under existing economic and operating
conditions; i.e., prices and costs as of the date the estimate is made. Unproved
reserves are those with less than reasonable certainty of recoverability and are
classified as either probable or possible.

         The estimation of proved reserves, which is based on the requirement of
reasonable certainty, is an ongoing process based on rigorous technical
evaluations and extrapolations of well information such as flow rates and
reservoir pressure declines. Although the Corporation is reasonably certain that
proved reserves will be produced, the timing and amount recovered can be
affected by a number of factors including completion of development projects,
reservoir performance, regulatory approvals and significant changes in long-term
oil and gas price levels.

        The calculation of unit-of-production depreciation is a critical
accounting estimate that measures the depreciation of upstream assets. It is the
ratio of (1) actual volumes produced to (2) total proved developed reserves
(those proved reserves recoverable through existing wells with existing
equipment and operating methods) applied to the (3) asset cost. The volumes
produced and asset cost are known and, while proved developed reserves have a
high probability of recoverability, they are based on estimates that are subject
to some variability.

         Our cruise line operation is capital intensive. At December 31, 2004,
we have approximately $8,590,000 of net investment in the vessel recorded on our
balance sheet. We depreciate our assets on a straight-line basis over their
estimated useful lives. The estimates of the useful lives are based on the
nature of the assets as well as our current operating strategy. Future events,
such as property expansions, new competition and new regulations, could result
in a change in the manner in which we are using certain assets requiring a
change in the estimated useful lives of such assets. In assessing the
recoverability of the carrying value of property and equipment, we must make
assumptions regarding estimated future cash flows and other factors. If these
estimates or the related assumptions change in the future, we may be required to
record impairment charges for these assets.

        The Company maintains allowances for doubtful accounts for estimated
losses resulting from the inability of customers to make required payments. If
the financial condition of customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be
required.

        The Company records an investment impairment charge when it believes an
investment has experienced a decline in value that is other than is temporary.
Future adverse changes in market conditions or poor operating results of
underlying investments could result in losses or an inability to recover the
carrying value of the investment that may not be reflected in an investment's
current carrying value, thereby possibly requiring an impairment charge in the
future.

        The Company records a valuation allowance to reduce its deferred tax
assets to the amount that is more likely than not to be realized. While the
Company has considered future taxable income and ongoing prudent and feasible
tax planning strategies in assessing the need for the valuation allowance, in
the event that the Company were to determine that it would be able to realize
its deferred tax assets in the future in excess of its net recorded amount, an
adjustment to the deferred tax asset would increase net income in the period
such determination was made.

        The Company does not participate in, nor has it created, any off-balance
sheet special purpose entities or other off-balance sheet financing. In
addition, the Company does not enter into any derivative financial instruments.

        The Company records a liability for asset retirement obligation at fair
value in the period in which it is incurred and a corresponding increase in the
carrying amount of the related long live assets.

LIQUIDITY AND CAPITAL RESOURCES

        The Company finances its operations primarily from cash generated by
operations. The Company's operating activities provided net cash of $1,573,000,
$1,288,000 and $1,372,000 for the years ended December 31, 2004, 2003 and 2002,
respectively. The availability of cash generated by operations could be affected
by other business risks discussed in the "Risk Factors" section of this annual
report.

        Working capital (current assets minus current liabilities) was
$7,009,000 and $6,645,000 at December 31, 2004 and 2003, respectively. The
increase in working capital is primarily attributable to increase of the value
of marketable securities. Net cash used in investing activities in fiscal 2004
was $8,195,000 compared to $476,000 in fiscal 2003. The

                                      -18-

<PAGE>

increase in net cash used in investing activities is primarily attributable to
the purchase in March 2004 and maintenance, repairs and renovation of the Vessel
($9,028,000) and the outlays associated with the drilling of wells in Texas and
Oklahoma ($1,096,000), offset by the increase in the value of marketable
securities. The cash used in investing activities in 2003 was primarily
attributable to purchase of oil and gas properties.

        Capital expenditures for property and equipment were $10,126,000 and
$674,000 in fiscal 2004 and 2003, respectively. Capital expenditures in 2004
were primarily attributable to purchase the cruise line vessel.

RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 2004 COMPARED TO YEAR ENDED DECEMBER 31, 2003.

        The company reported net loss of $20,000 (loss of 0.00 per share) in
2004 compared to a net income of $2,256,000 (net income of $0.85 per share) in
2003. The decrease in the net income in 2004 compared to 2003 is primarily
attributable to: (i) a decrease in operators fee collected during 2004 (ii)
decrease in oil and gas sales due to decline in gas production, (iii) decrease
in the gain on marketable securities and (iv) increase of deferred tax
liability.

        Set forth below is a break-down of these results.

   United States

   Oil and Gas Volume and Revenues (in thousands)

                                               2004          2003
   Oil Volume Sold (Bbl)                         18            19
   Gas Volume Sold (MCF)                        470           600
   Oil Sales ($)                                678           542
   Gas Sales ($)                              2,524         2,897

   Average Unit Price
   Oil ($/Bbl) *                              38.12         28.09
   Gas ($/MCF) **                              5.38          4.82

* Bbl - Barrel Equivalent to 42 U.S. Gallons
** MCF - 1,000 Cubic Feet

THE OFFSHORE LICENSES (ISRAEL)

        The Company did not expend any amount in respect of the offshore
licenses compare to $27,000 in 2003.

OIL AND GAS EXPLORATION COSTS

        During 2004 the Company did not expand any amounts in respect of oil and
gas exploration, as compared to $165,000 in 2003.

OPERATOR'S FEES

        In 2004 the Company earned $137,000 in operator fees compared to
$753,000 in 2003.

        The decrease in operator fees is due to the decrease in oil and gas
exploration activity in 2004 compared to 2003 in which the Company drilled the
Nir 2 well offshore Israel.

OIL AND GAS REVENUES

        In 2004 and 2003 the Company had oil and gas revenues of $3,173,000 and
$3,439,000, respectively. The decrease is due mainly to the decline of gas
production in 2004.

                                      -19-

<PAGE>

LEASE OPERATING EXPENSES AND SEVERANCE TAXES

        Lease operating expenses and severance taxes were incurred primarily in
connection with oil and gas fields in the United States. Oil and gas lease
operating expenses and severance taxes were $1,149,000 and $872,000 for 2004 and
2003, respectively. The relatively higher amounts in 2004 in lease operating
expenses and severance taxes is primarily due to the workovers performed in
connection with producing wells in 2004.

INTEREST AND DIVIDEND INCOME

        Interest income during the year ended December 31, 2004 was $729,000
compared to $760,000 for the year ended December 31, 2003. The income is
primarily attributable to interest receivable on marketable securities
(Debentures).

GAIN ON MARKETABLE SECURITIES

        In 2004, the Company recognized net realized and unrealized gains on
marketable securities of $240,000 compared to net realized and unrealized gains
on marketable securities of $872,000 in 2003.

        Increases or decreases in the gains and losses from marketable
securities are dependent on the market prices in general and the composition of
the portfolio of the Company.

OPERATOR EXPENSES

        In 2004 the Company expended $807,000 in respect of operator expenses
compared to $795,000 in 2003.

GENERAL AND ADMINISTRATIVE EXPENSES

        In 2004, the Company incurred $1,705,000 as general and administrative
expenses compared to $2,012,000 incurred in 2003. The relatively higher amount
in 2003 is primarily attributable to bonuses awarded to senior officers and
increase in legal and other professional fees paid by the Company.

EQUITY IN NET INCOME OF INVESTEE

        The Company's equity in the net income of Investee for 2004 was
$1,365,000 compared to its equity in net income of $1,098,000 for 2003. The
increase is primarily attributable to the increase in the marketable value of
the marketable securities hold by Isramco Negev 2 and I.O.C Dead Sea LP,
affiliates of the Company.

CRUISE LINE VESSEL INCOME AND EXPENSES

        Income from the leasing of the cruise line vessel for 2004 (July through
October 2004) were $2,034,000. The associated expenses in 2004 were $1,926,000
and are primarily attributable to insurance, maintenance, repair upkeep and
payroll.

        Additionally, deprectiation expenses of $438,000 for the vessel was
recorded in 2004.

DEPRECIATION, DEPLETION AND AMORTIZATION

        Depreciation depletion and amortization expenses are connected to the
producing wells in the United States and to the Cruise line vessel.

        During 2004, the Company recorded $1,334,000 compared to $621,000 in
2003. The increase in 2004 compared to 2003 is attributable to depreciation of
the Vessel ($438,000) and increase of $315,000 in the depreciation of the wells
in the United Stated due to the decline in production of the gas wells.

        During 2004 and 2003, the Company recorded impairment charges of
$268,000 and $617,000 respectively relating to oil and gas assets.

OTHER INCOME

        Other Income in 2004 was $492,000 compared to $475,000 in 2003. Other
Income is primarily attributable to

                                      -20-

<PAGE>

monthly income of $7,000 related to lease of the real estate in Israel and
$369,000 related to a change of estimate for asset retirement obligations. Other
Income in the year 2003 included the sum of $350,000 which represents the
settlement of a liability recorded in connection which a well drilled in Marine
9 permit offshore Congo, and was recorded during 2002 as exploration costs.

YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002.

        The Company reported net income before cumulative effect of $2,520,000
(income of $0.95 per share) in 2003 compared to a net loss before cumulative
effect of $1,799,000 (loss of $0.68 per share) in 2002. The increase in the net
income is primarily attributable to an increase in oil and gas price in 2003 and
due to the gain in marketable securities and net income of investees.


      Set forth below is a break-down of these results.

   United States

   Oil and Gas Volume and Revenues (in thousands)

                                          2003           2002
   Oil Volume Sold (Bbl)                    19             21

   Gas Volume Sold (MCF)                   600            720

   Oil Sales ($)                           542            470

   Gas Sales ($)                         2,897          1,953

   Average Unit Price

   Oil ($/Bbl) *                         28.09          22.54
   Gas ($/MCF) **                         4.82           2.71

* Bbl - Barrel Equivalent to 42 U.S. Gallons

** MCF - 1,000 Cubic Feet

THE OFFSHORE LICENSES (ISRAEL)

        In each of 2003 and 2002, the Company expended approximately $88,243 and
$27,000, respectively, in respect of the Offshore Licenses.

OIL AND GAS EXPLORATION COSTS

        The Company expended in 2003 approximately $165,000 in oil and gas
exploration costs as compared to approximately $1,747,000 expended in 2002. The
exploration cost in 2003 attributable to the investment in Tilapia (Congo) and
in respect of the Israeli offshore wells (Nir 2 and Nir 2). The oil and gas
exploration costs in 2002 are primarily attributable to the unsuccessful
drilling of the Read well in Texas and the unsuccessful drilling in the Marine 9
permit (the Congo).

OPERATOR'S FEES

        In 2003 the Company earned $753,000 in operator fee compared to $249,000
in 2002. The increase is due to the drilling of Nir 2 well.

                                      -21-
<PAGE>

OIL AND GAS REVENUES

        In 2003 and 2002 the Company had oil and gas revenues of $3,439,000 and
$2,423,000, respectively. The increase is due mainly to the increase in the oil
and gas price during 2003.

LEASE OPERATING EXPENSES AND SEVERANCE TAXES

        Lease operating expenses and severance taxes were incurred primarily in
connection with oil and gas fields in the United States. Oil and gas lease
operating expenses and severance taxes were $872,000 and $844,000 for 2003 and
2002, respectively.

INTEREST AND DIVIDEND INCOME

        Interest income during the year ended December 31, 2003 was $760,000
compared to 738,000 for the year ended December 31, 2002. The increase in
interest income is primarily attributable to interest receivable on marketable
securities (Debentures).

GAIN ON MARKETABLE SECURITIES

        In 2003, the Company recognized net realized and unrealized gain on
marketable securities of $872,000 compared to net realized and unrealized losses
on marketable securities of $189,000 in 2002.

        Increases or decreases in the gains and losses from marketable
securities are dependent on the market prices in general and the composition of
the portfolio of the Company.

OPERATOR EXPENSES

        In 2003 the Company expended $795,000 in respect of the operator
expenses compare to $791,000 in 2002.

GENERAL AND ADMINISTRATIVE EXPENSES

        In 2003, the Company incurred $2,012,000 as general and administrative
expenses compared to $1,422,000 incurred in 2001. The relatively higher amount
in 2002 is primarily attributable to bonuses awarded to senior officers and
increase in legal fees.

CONTRACTUAL OBLIGATIONS

        The Company leases office facilities in Texas and in Israel and certain
equipment pursuant to non-cancelable operating lease agreements. Future minimum
lease payments pursuant to these leases as of December 31, 2004 were as follows
(in thousands).

<TABLE>
<CAPTION>
                         TOTAL        2004        2005        2006       2007      2008     Thereafter
                         -----        ----        ----        ----       ----      ----     ----------
<S>                      <C>         <C>         <C>         <C>          <C>        <C>           <C>
Operating Leases:
         Texas:          83,000      28,000      29,000      26,000       --         --            --
                             --          --          --          --       --         --            --
</TABLE>

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

     In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, and subsequently revised the Interpretation in
December 2003 (FIN 46R). This Interpretation of Accounting Research Bulletin No.
51, Consolidated Financial Statements, addresses consolidation by business
enterprises of variable interest entities, which have certain characteristics.
As revised, FIN 46R is now generally effective for financial statements for
interim or annual periods ending on or after March 15, 2004. We have no
identified any variable interest entities. In the event a

                                      -22-
<PAGE>

variable interest entity is identified, we do not expect the requirements of FIN
46R to have a material impact on our consolidated financial statements.

     In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Instruments with Characteristics of Both Liabilities and Equity," ("SFAS 150")
which establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. SFAS
150 requires that an issuer classify a financial instrument that is within its
scope, which may have previously been reported as equity, as a liability (or an
asset in some circumstances). This statement is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003 for public companies. The adoption of SFAS No 150 did not have a material
impact on our consolidated financial statements.

     In July 2003, an issue was bought before the Financial Accounting Standards
Board regarding whether or not contract-based oil and gas mineral rights held by
lease or contact ("mineral rights") should be recorded or disclosed as
intangible assets. The issue presents a view that these mineral rights are
classified assets as defined in SFAS No. 141, "Business Combinations," and
therefore, should be classified separately on the balance sheet as intangible
assets. SFAS No. 141 and SFAS No. 142, "Goodwill and Other Intangible Assets,"
became effective for transactions subsequent to June 30, 2001, with the
disclosure requirements of SFAS No. 142 required as of January 1, 2002. SFAS No.
141 requires that all business combinations initiated after June 30, 2001 be
accounted for using the purchase method and that intangible assets be
disaggregated and reported separately from goodwill SFAS No. 142 established new
accounting guidelines for both finite lived intangible assets and indefinite
lived intangible assets. Under the statement, intangible assets should be
separately reported on the face of the balance sheet and accompanied by
disclosure in the notes to financial statements. SFAS No. 142 does not apply to
accounting utilized by the oil and gas industry as prescribed by SFAS No. 19,
and is silent about whether at not its disclosure provisions apply to oil and
gas mineral rights to an upcoming agenda, which may result in a change in how
Isramco classifies these assets.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     The Company is exposed to market risk, including adverse changes in
commodity prices.

     The Company produces and sells natural gas and crude oil. As a result, the
Company's financial results can be significantly affected if these commodity
prices fluctuate widely in response to changing market forces.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The information called for by this Item 8 is included following the "Index
to Financial Statements" contained in this Annual Report on Form 10-K.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

     On January 13, 2005, the audit committee of the board of directors (the
"Audit Committee") of the Company accepted the resignation of UHY - Mann
Frankfort Stein & Lipp CPAS, LLP ("UHY LLP") (formerly - Mann Frankfort Stein &
Lipp CPAS, L.L.P.) as the Company's independent accountants. Concurrent with UHY
LLP's resignation, the Audit Committee appointed Malone & Bailey, PC (the "New
Accountants") as the independent accounting firm to audit the financial
statements of the Company for the year ended December 31, 2004.

     The reports by UHY LLP with respect to the Company's financial statements
for each of the years ended December 31, 2002 and 2003 did not contain any
adverse opinion or disclaimer of opinion and were not qualified or modified as
to uncertainty, audit scope or accounting principles. During the fiscal years
ended December 31, 2002 and

                                      -23-
<PAGE>

     2003 and during the subsequent interim period, there were no disagreements
between the Company and UHY LLP on any matter of accounting principles or
practices, financial statement disclosure or auditing scope or procedure, which,
if not resolved to the satisfaction of UHY LLP, would have caused it to make
reference to the subject matter of thereof in connection with its reports.

     During the fiscal years ended December 31, 2002 and 2003, and through the
date of their resignation, UHY LLP did not advise the Company with respect to
any matters described in paragraphs (a)(1)(v)(A) through (D) of Item 304 of
Regulation S-K.

     During the fiscal years ended December 31, 2002 and 2003, and through the
date of their engagement, the Company did not consult with the New Accountants
regarding either (i) the application of accounting principles to a specified
transaction, either completed or proposed; (ii) the type of audit opinion that
might be rendered on the Company's financial statements; (iii) any matter that
was either the subject of disagreement (as defined in Item 304(a)(1)(iv) of
Regulation S-K) or a reportable event (as defined in Item 304(a)(1)(v) of
Regulation S-K).

     The Company has provided UHY LLP with a copy of the foregoing disclosure.
Attached as an exhibit hereto is a copy of UHY LLP's letter, dated January 13,
2005, in response to the foregoing disclosure.

ITEM 9A. CONTROLS AND PROCEDURES

     EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. The Company maintains
disclosure controls and procedures that are designed to ensure that information
required to be disclosed in the Company's Exchange Act reports is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms, and that such information is accumulated and communicated
to management, including our Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding required disclosure
based closely on the definition of "disclosure controls and procedures" in Rule
13a-14(c).

     As of the end of the period covered by this report, we carried out an
evaluation, under the supervision and with participation of management,
including our Chief Executive Officer (and our Principal Financial Officer), of
the effectiveness of the design and operation of our disclosure controls and
procedures. Based on the foregoing, our Chief Executive Officer (and Principal
Financial Officer) concluded that our disclosure controls and procedures were
effective.

     CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING. During the quarter
ended December 31, 2004, there have been no changes in our internal controls
over financial reporting that have materially affected, or are reasonably likely
to materially affect, these controls.

ITEM 9B. OTHER INFORMATION

        On March 24, 2005, the Company issued 38,919 shares of Common Stock, of
the Company to each of Haim Tsuff, Chairman and Chief Executive Officer of the
Company, and Jackob Maimon, President of the Company. The shares were issued
upon the exercise of options to purchase 69,995 shares of Common Stock at an
exercise price of $4.28 per share granted to each of Mr. Tsuff and Mr. Maimon on
March 24, 2000. The options were exercised pursuant to "cashless" exercise
provisions under which each holder received a lesser number of shares based on
the difference between the closing bid price of the common stock on the trading
day immediately preceding the exercise of the options and the specified exercise
price. The Company did not receive any cash proceeds from that exercise. The
shares were issued in a transaction not involving a public offering and were
issued without registration under Section 5 of the Securities act of 1933, as
amended (the "Act"), in reliance upon the exemption from registration afforded
by Section 4(2) of the Act and Regulation D promulgated thereunder.

                                    PART III

     The information called for by items 10, 11, 12 13 and 14 will be contained
in the Company's definitive proxy statement which the Company intends to file
within 120 days after the end of the Company's fiscal year ended December 31,
2004 and such information is incorporated herein by reference.

GLOSSARY

"Grant Agreement" shall mean the agreement between the Company and the
Government of Israel pursuant to which the Government of Israel has provided
assistance to the Company in connection with its investment in the Negev 2
Venture by providing a grant of 44.34(cent) for each U.S. dollar ($1.00)
invested and expended by the Company in oil and gas activities in Israel within
the framework of the Negev 2 Venture. The Government financing provided for
under the Grant is repayable only from funds emanating from commercial
production in any payout area and then, only to the extent of 30% of the
recipient's share of the net revenue from said payout area, as and when
received. The Grant Agreement entitles the Government of Israel, to receive a
12.5% royalty on oil sales, as well as an overriding royalty of 6.5% of the
Company's share in the petroleum produced and saved after payout. If there is no
commercial discovery of oil, the Company will not be required to repay the grant
monies. A grant agreement was also entered into between the Government of Israel
and HEI, Donesco, L.P.S. and Mazal Oil.

"Joint Operating Agreement" shall mean the Joint Operating Agreement of the
Negev 2 Venture which was signed as of the 30th day of June, 1988, between the
participants in the Negev 2 Venture, as amended or as shall be amended from time
to time.

                                      -24-

<PAGE>

"Joint Venture Agreement" shall mean the Joint Venture Agreement of the Negev 2
Venture which was signed as of the 30th of June, 1988 between the participants
in the Negev 2 Venture, as amended from time to time.

"Limited Partnership" shall mean Isramco-Negev 2 Limited Partnership, a Limited
Partnership founded pursuant to a Limited Partnership Agreement made on the 2nd
and 3rd days of March, 1989 (as amended on September 7, 1989, July 28, 1991,
March 5, 1992 and June 11, 1992) between the Trustee on part as Limited Partner
and Isramco Oil and Gas Ltd., as General Partner on the other part.

"Limited Partnership Agreement" shall mean the Limited Partnership Agreement
made the 2nd and 3rd days of March, 1989 (as amended September 7, 1989, July 28,
1991, March 5, 1992 and June 11, 1992), between Isramco Oil and Gas Ltd., as
General Partner, and Isramco Management (1988) Ltd. as the Limited Partner.

"Negev 2 Venture Agreements" shall mean the Joint Venture Agreement, the Joint
Operating Agreement, the Voting Agreement and every agreement into which the
parties to said agreements have entered, in connection with the Negev 2 Venture.

"Overriding Royalty Interest" shall mean a percentage interest over and above
the base royalty and is free of all costs of exploration and production, which
costs are borne by the Grantor of the Overriding Royalty Interest and which is
related to a particular Petroleum License.

"Payout" shall mean the defined point at which one party has recovered its prior
costs.

"Petroleum" shall mean any petroleum fluid, whether liquid or gaseous, and
includes oil, natural gas, natural gasoline, condensates and related fluid
hydrocarbons, and also asphalt and other solid petroleum hydrocarbons when
dissolved in and producible with fluid petroleum.

"Petroleum Exploration" shall mean test drilling; any other operation or search
for petroleum, including geological, geophysical, geochemical and similar
investigations and tests; and, drilling solely for obtaining geological
information.

"Petroleum Production" shall mean the production of petroleum from a petroleum
field and all operations incidental thereto, including handling and treatment
thereof and conveyance thereof to tankers, a pipe line or a refinery in or in
the vicinity of the field.

"Preliminary Permit", "Preferential Right to Obtain a License", "License" shall
have the meaning(s) set forth in the Petroleum Law of Israel.

"Trust Agreement" shall mean the Trust Agreement made on the 3rd day of March,
1989 (as amended September 7, 1989, July 28, 1991, March 5, 1992 and June 11,
1992) for the Trust Company of Kesselman and Kesselman.

"Working Interest" shall mean an interest in a Petroleum Asset granting the
holder thereof the right to participate pro rata in exploiting the Petroleum
Asset for petroleum exploration, development and petroleum production, subject
to its pro rata participation in the expenses involved therein after acquiring
the Working Interest.

"Israel Petroleum Law"

The Company's business in Israel is subject to regulation by the State of Israel
pursuant to the Petroleum Law, 1952. The administration and implementation of
the Petroleum Law is vested in the Minister of National Infrastructure (the
"Minister") and an Advisory Council.

The following includes brief statements of certain provisions of the Petroleum
Law in effect at the date of this Prospectus. Reference is made to the copy of
the Petroleum Law filed as an exhibit to the Registration Statement referred to
under "Additional Information" and the description which follows is qualified in
its entirety by such reference.

The holder of a preliminary permit is entitled to carry out petroleum
exploration, but not test drilling or petroleum production, within the permit
areas. The Commissioner determines the term of a preliminary permit and it may
not exceed eighteen (18) months. The Minister may grant the holder a priority
right to receive licenses in the permit areas, and for the duration of such
priority right no other party will be granted a license or lease in such areas.

Drilling for petroleum is permitted pursuant to a license issued by the
Commissioner. The term of a license is for three (3) years, subject to extension
under certain circumstances for an additional period up to four (4) years. A
license holder is required to commence test drilling within two (2) years from
the grant of a license (or earlier if required by the terms of the license) and
not to interrupt operations between test drillings for more than four (4)
months. If any well drilled by the Company is determined to be a

                                      -25-

<PAGE>

commercial discovery prior to expiration of the license, the Company will be
entitled to receive a Petroleum Lease granting it the exclusive right to explore
for and produce petroleum in the lease area. The term of a lease is for thirty
(30) years, subject to renewal for an additional term of twenty (20) years.

The Company, as a lessee, will be required to pay the State of Israel the
royalty prescribed by the Petroleum Law which is presently, and at all times
since 1952 has been, 12.5% of the petroleum produced from the leased area and
saved, excluding the quantity of petroleum used in operating the leased area.

The Minister may require a lessee to supply at the market price such quantity of
petroleum as, in the Minister's opinion, is required for domestic consumption,
subject to certain limitations.

As a lessee, the Company will also be required to commence drilling of a
development well within six (6) months from the date on which the lease is
granted and, thereafter, with due diligence to define the petroleum field,
develop the leased area, produce petroleum therefore and seek markets for and
market such petroleum.

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Exhibits

3.1     Articles of Incorporation of Registrant with all amendments filed as an
        Exhibit to the S-l Registration Statement, File No. 2-83574.
3.2     Amendment to Certificate of Incorporation filed March 17, 1993, filed as
        an Exhibit with the S-l Registration Statement, File No. 33-57482.
3.3     By-laws of Registrant with all amendments, filed as an Exhibit to the
        S-l Registration Statement, File No. 2-83570.
10.1    Oil Marketing Agreement, filed as Exhibit with the S-l Registration
        Statement, File No. 2-83574.
10.2    Joint Venture Agreement and Joint Operating Agreement dated June 30,
        1988 by and among HEI Oil and Gas Limited Partnership, JOEL - Jerusalem
        Oil Exploration Ltd., Delek Oil Exploration Ltd., Delek, The Israel Fuel
        Corporation Ltd., the Company, Southern Shipping and Energy (U.K.),
        Naphtha, Israel Petroleum Company Ltd., Oil Exploration of Pat Ltd., LPS
        Israel Oil Inc., Donesco Venture Fund One, a Limited Partnership and
        Mazaloil Inc. filed as an Exhibit to Form 8-K for the month of September
        1988.
10.3    Grant Agreement with the Government of Israel, undated, between the
        Company and the Government of Israel on behalf of the State of Israel,
        filed as an Exhibit to Form 10-Q for the Company for the period ending
        September 30, 1988 and incorporated herein by reference.
10.4    Translated from Hebrew, Indemnity Agreement between the Company and
        Isramco Management (1988) Ltd. dated March _, 1989, filed as an Exhibit
        to Form 8-K for the month of March 1989 and incorporated herein by
        reference.
10.5    Amendment Agreement to Grant Agreement between the Company and the
        Government of Israel, filed as an Exhibit to this Post-effective
        Amendment No. 8 to Form S-l Registration Statement. File No. 2- 83574.
10.6    Translated from Hebrew, Limited Partnership Agreement between Isramco
        Oil and Gas Ltd. and Isramco Management (1988) Ltd. dated March 2, 1989,
        filed as an Exhibit to Form 8-K for the month of March 1989 and
        incorporated herein by reference.
10.7    Translated from Hebrew, Trust Agreement between Isramco Management
        (1988) Ltd. and Kesselman and Kesselman dated March 3, 1989, filed as an
        Exhibit to Form 8-K for the month of March 1989 and incorporated herein
        by reference.
10.8    Translated from Hebrew, Indemnity Agreement between the Company and
        Isramco Management (1988) Ltd. dated March _, 1989, filed as an Exhibit
        to Form 8-K for the month of March 1989 and incorporated herein by
        reference.
10.9    Equalization of Rights Agreement between Isramco-Negev 2 Limited
        Partnership and Delek Oil Exploration Ltd. and Delek - The Israel Fuel
        Corporation Ltd, filed as an Exhibit to Form 8-K for the month of
        January 1993 dated January 21, 1993 and incorporated herein by
        reference.
10.10   Option Agreement between Isramco Resources Inc. and Delek Oil
        Exploration Ltd. and Delek - The Israel Fuel Corporation Ltd. filed as
        an Exhibit to Form 8-K for the month of January 1993 dated January 21,
        1993 and incorporated herein by reference.
10.11   Agreement by and among Naphtha Congo Ltd., Equital Ltd. and the Company
        dated September 4, 1997, filed as an Exhibit to Form 8-K for the month
        of September, 1997 and incorporated herein by reference.
10.12   Amendment to Consulting Agreement between Goodrich Global L.T.D. B.V.I.
        and the Company dated

                                      -26-
<PAGE>

        December _, 1997, filed as an Exhibit to Form 8-K for the month of
        December, 1997 and incorporated herein by reference.
10.13   Consulting Agreement between Romulas Investment Ltd. and the Company
        dated August _, 1997, filed as an Exhibit to Form 8-K for the month of
        September, 1997 and incorporated herein by reference, assigned by
        Romulas Investment Ltd. on December 31, 1997 to Remarkable Holdings Ltd.
10.14   Inventory Services Management Agreement dated December 1997 between the
        Company and Equital Ltd. filed herewith as Exhibit 10.70.
10.15   Consulting Agreement dated as of November 1, 1999 between the Company
        and Worldtech, Inc.
10.16   Agreement dated June 12, 2002 between the Company and Mati Properties
        and Construction Ltd. and Boaz Avrahami, filed as an Exhibit to the Form
        10-Q for the quarter ended June 30, 2002.
14.1    Code of Ethics, filed as an Exhibit to Form 10-K for the year ended
        December 31, 2003.
31      Certification of Chief Executive and Principal Financial Officer
        pursuant to Section 302 of Sarbanes-Oxley Act *
32      Certification of Chief Executive and Principal Financial Officer
        pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
        of the Sarbanes-Oxley act of 2002. *
99.1    Financial Statements of Isramco Negev 2 Limited Partnership as of
        December 31, 2004 *

* Attached hereto as an exhibit

(b) Reports on Form 8-K

The Company filed a current report on Form 8-K on November 19, 2004 reporting
its financials results for the quarter ended September 30, 2004

(c) Financial Statements


                                      -27-
<PAGE>

                                   SIGNATURES

        In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.


                               /S/ HAIM TSUFF
                                   HAIM TSUFF,
                            CHAIRMAN OF THE BOARD,
                            CHIEF EXECUTIVE OFFICER
                            AND PRINCIPAL FINANCIAL OFFICER

Date: March 30, 2005

        In accordance with the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized, in the capacities and on the dates indicated.


Signature                      Title                         Date

/s/ Jackob Maimon              President, Director           March 30, 2005

Jackob Maimon

/s/ Amir Eskandari             Director                      March 30, 2005

Amir Eskandari

/s/ Max Pridgeon               Director                      March 30, 2005

Max Pridgeon

/s/  Donald D. Lovell          Director                      March 30, 2005

Donald D. Lovell



                                      -28-

<PAGE>

INDEX TO FINANCIAL STATEMENTS



                                                                           Page
                                                                           ----

Independent Auditors' Reports                                              F-1,2

Consolidated Balance Sheets at December 31, 2004 and 2003                  F-3

Consolidated Statements of Operations for the years ended December 31,
2004, 2003 and 2002                                                        F-4

Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 2004, 2003 and 2002                       F-5

Consolidated Statements of Cash Flows for the years ended December 31,
2004, 2003 and 2002                                                        F-6

Notes to Consolidated Financial Statements                                 F-7


                                      (i)




                                      -29-

<PAGE>


             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Board of Directors
   Isramco, Inc. and Subsidiaries
   Houston, Texas

We have audited the accompanying consolidated balance sheet of Isramco, Inc. and
subsidiaries as of December 31, 2004, and the related consolidated statements of
operations, shareholders' equity, and cash flows for the year then ended. These
financial statements are the responsibility of Isramco, Inc's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.

We conducted our audit in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Isramco, Inc., as of
December 31, 2004, and the results of its operations and its cash flows for the
period described in conformity with accounting principles generally accepted in
the United States of America.


MALONE & BAILEY, PC
www.malone-bailey.com
Houston, Texas

March 15, 2005




                                       F-1
<PAGE>

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and Board of Directors of Isramco, Inc. and Subsidiaries

We have audited the consolidated balance sheet of Isramco, Inc. and subsidiaries
(the "Company") as of December 31, 2003, and the related consolidated statements
of operations, changes in shareholders' equity, and cash flows for each of the
two years in the period ended December 31, 2003. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits. We did not audit the financial statements of
Isramco Oil and Gas, Ltd.; Isramco B.V., Cruquius; or Isramco, Inc. - Israel
Branch, which are wholly owned subsidiaries whose combined statements reflect
total assets of $ 11,249,799 as of December 31, 2003 , and total revenues of $
3,422,000 for the year then ended. Those statements were audited by other
auditors whose reports have been furnished to us, and our opinion, insofar as it
relates to the amounts included for these subsidiaries, is based solely on the
reports of the other auditors.

We conducted our audits in accordance with auditing standards of Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits and reports of the other auditors provide a reasonable basis for our
opinion.

In our opinion, based on our audits and the reports of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Isramco, Inc. and
subsidiaries at December 31, 2003 and the consolidated results of their
operations and their cash flows for each of the two years in the period ended
December 31, 2003 in conformity with accounting principles generally accepted in
the United States.

As discussed in Note A, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 143 "Accounting for Asset Retirement
Obligations" as of January 1, 2003. Also discussed in Note A, the Company
adopted the provisions of Atatement of Financial Accounting Standard No. 142
"Goodwill and Other Intangible Assets in 2002".


/s/ UHY MANN FRANKFORT STEIN & LIPP CPAS, LLP
-----------------------------------------------
(FORMERLY MANN FRANKFORT STEIN & LIPP CPAS, LLP)

HOUSTON, TEXAS
MARCH 5, 2004

                                       F-2

<PAGE>

<TABLE>
<CAPTION>
                                      ISRAMCO INC. AND SUBSIDIARIES
                                       CONSOLIDATED BALANCE SHEETS
                               (in thousands except for share information)

                                                                                     DECEMBER 31
                                                                            ---------------------------
                                                                                   2004          2003
                                                                            ------------   ------------
<S>                                                                            <C>            <C>
            ASSETS

CURRENT ASSETS
     Cash and cash equivalents                                                 $   2,087      $   2,429
     Marketable securities, at market                                              6,203          4,064
     Accounts receivable - Trade                                                     776            503
     Account receivable - other                                                      ---            609
     Prepaid FIT expenses                                                            ---            407
     Prepaid expenses and other current assets                                       193            197
                                                                            ------------   ------------

     TOTAL CURRENT ASSETS                                                          9,260          8,209

Property and equipment, net (successful efforts
method for oil and gas properties)                                                 3,190          3,264
Real Estate                                                                        1,887          1,887
Marketable securities, at market                                                   6,225          8,572
Investment in affiliates                                                          12,044         10,520
Investment in Vessel                                                               8,590             --
Other                                                                                162            162
                                                                            ------------   ------------

TOTAL ASSETS                                                                   $  41,358      $  32,614
                                                                            ============   ============

            LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES
     Accounts payable and accrued expenses                                     $   1,261      $     798
     Credit from Banks                                                               676             --
     Bank Loan                                                                       733             --
                                                                            ------------   ------------

     TOTAL CURRENT LIABILITIES                                                     2,670            798
                                                                            ------------   ------------

LONG-TERM LIABILITIES
     Asset retirement obligations                                                    314            766
     Deferred tax obligation                                                       2,989          1,169
     Current portion of long-term bank Loan                                        4,869             --
                                                                            ------------   ------------

     TOTAL LONG-TERM LIABILITIES                                                   8,172          1,935
                                                                            ------------   ------------

     TOTAL LIABILITIES                                                            10,842          2,733
                                                                            ------------   ------------
SHAREHOLDERS' EQUITY
     Common stock $0.0l par value; authorized 7,500,000 shares;                       27             27
     issued 2,669,120 shares; outstanding 2,639,853 shares
     Additional paid-in capital                                                   26,240         26,240
     Retained earnings (accumulated deficit)                                       3,169          3,189
     Accumulated other comprehensive income (loss)                                 1,244            589
     Treasury stock, 29,267 shares at cost                                          (164)          (164)
                                                                            ------------   ------------

     Total shareholders' equity                                                   30,516         29,881
                                                                            ------------   ------------

Total liabilities and shareholders' equity                                     $  41,358      $  32,614

See notes to the consolidated financial statements.


                                                   F-3
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
                                       ISRAMCO INC. AND SUBSIDIARIES
                                   CONSOLIDATED STATEMENTS OF OPERATIONS
                                (in thousands except for share information)


                                                                         YEAR ENDED DECEMBER 31,
                                                               -------------------------------------------
                                                                      2004            2003            2002
                                                               -----------     -----------     -----------
<S>                                                              <C>             <C>             <C>
Revenues and other income :
Operator fees from related party                                      $137           $ 753            $249
Oil and gas sales                                                    3,173           3,439           2,423
Revenue from Vessel                                                  2,034             ---             ---
Interest income                                                        729             760             738
Office services
    To related parties                                                 592             635             773
    To others                                                          180             304             140
Capital gain                                                           ---             549             ---
Gain on marketable securities                                          240             872             ---
Equity in net income of investees                                    1,365           1,098             ---
Other                                                                  492             475              49
                                                               -----------     -----------     -----------

        Total revenues and other income                              8,943           8,885           4,372
                                                               -----------     -----------     -----------
Expenses :
Interest expense                                                       168              52             210
Cost of Revenue                                                      1,926             ---             ---
Accretion expense                                                        5              43             ---
Depreciation, depletion and amortization                             1,334             621             642
Lease operation expense and severance taxes                          1,149             872             844
Exploration costs                                                      ---             165           1,747
Operator expense                                                       807             795             791
General and administrative
    To related parties                                                 358             317             120
    To others                                                        1,359           1,695           1,302
Loss on sale of marketable securities                                  ---             ---             189
Equity in net loss of investees                                        ---             ---             440
Impairment of oil and gas assets                                       268             617             ---
                                                               -----------     -----------     -----------
        Total expenses                                               7,374           5,177           6,285
                                                               -----------     -----------     -----------

Income (loss) before income taxes                                    1,569           3,708         (1,913)
Income (taxes) benefit                                             (1,589)         (1,188)             114
                                                               -----------     -----------     -----------

Net income (loss) before cumulative effect                            (20)           2,520         (1,799)
Cumulative effect of change in accounting principle, net                --           (264)           3,516
                                                               -----------     -----------     -----------

Net income (loss)                                                   $ (20)         $ 2,256          $1,717
                                                               ===========     ===========     ===========
Earnings (loss) per share
Basic and diluted earnings (loss) per share for:
   Net income (loss) before cumulative effect                       $ 0.00           $0.95          $(0.68)
   Cumulative effect of accounting change, net                          --         $ (0.10)         $ 1.33
                                                               -----------     -----------     -----------
Net income (loss)                                                   $ 0.00         $  0.85          $ 0.65
                                                               ===========     ===========     ===========
Weighted average number of shares
   outstanding-basic                                             2,639,853       2,639,853       2,639,853
                                                               ===========     ===========     ===========
Weighted average number of shares outstanding -diluted           2,639,853       2,639,853       2,639,853
                                                               ===========     ===========     ===========

See notes to the consolidated financial statements.

                                                    F-4
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
                                                    ISRAMCO INC. AND SUBSIDIARIES
                                     CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
                                        FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002


                                                COMMON STOCK
                                           ---------------------
                                                                               ACCUMULATED       RETAINED
                                                                 ADDITIONAL          OTHER       EARNINGS                     TOTAL
                                                NUMBER              PAID-IN  COMPREHENSIVE   (ACCUMULATED   TREASURY  SHAREHOLDERS'
                                             OF SHARES    AMOUNT    CAPITAL  INCOME (LOSS)       DEFICIT)      STOCK         EQUITY
                                           -----------   -------  ---------  -------------   ------------   --------  -------------
                                                                          $ IN THOUSANDS, EXCEPT SHARE AMOUNTS
                                           -----------------------------------------------------------------------------------------
<S>                                         <C>              <C>    <C>            <C>             <C>         <C>         <C>
Balances at December 31, 2001                2,669,120       $27    $26,240           $136          $(784)     $(164)       $25,455

Comprehensive income:

Net Income                                           -         -          -              -          1,717          -          1,717
Net unrealized loss on available
  for sale marketable
  securities, net of taxes                           -         -          -           (243)             -          -           (243)
Net Realized gain (loss) on foreign
  exchange rate, net of faxes                                                         (437)                                    (437)

                                           -----------   -------  ---------  -------------   ------------   --------  -------------
Total comprehensive income                                                                                                    1,037
                                                                                                                      -------------
Balances at December 31, 2002                2,669,120       $27    $26,240          $(544)         $ 933      $(164)       $26,492
Comprehensive income:

Net Income                                                                                          2,256                     2,256
Net unrealized gain on available
  for sale marketable
  securities, net of taxes                           -         -          -            524              -           -           524
Net realized gain (loss) on foreign
  exchange rate, net of taxes                                                          609                                      609

                                           -----------   -------  ---------  -------------   ------------   --------  -------------
Total comprehensive income                                                                                                    3,389
                                                                                                                      -------------
Balances at December 31, 2003                2,669,120       $27    $26,240           $589         $3,189      $(164)       $29,881

Net Loss                                                                                              (20)                      (20)
Net unrealized gain on available
  for sale marketable
  securities, net of taxes                           -         -                       504                         -            504
Net realized gain (loss) on foreign
  exchange rate, net of taxes                                                          151                                      151

                                           -----------   -------  ---------  -------------   ------------   --------  -------------
Total Comprehensive income                                                                                                      635
                                                                                                                      -------------
Balances at December 31, 2004               2,669,120        $27    $26,240         $1,244         $3,169      $(164)       $30,516
                                           ===========   =======  =========  =============   ============   ========  =============


                                                                 F-5
</TABLE>

<PAGE>
<TABLE>
<CAPTION>
                                              ISRAMCO INC. AND SUBSIDIARIES
                                          CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                     (in thousands)


                                                                                     YEAR ENDED DECEMBER 31,
                                                                         ----------------------------------------------
                                                                                 2004             2003             2002
                                                                         ------------     ------------     ------------
<S>                                                                      <C>              <C>              <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)                                                        $        (20)    $      2,256     $      1,717

Adjustments to reconcile net income (loss) to cash provided
by operating activities:

Depreciation, depletion, amortization and provision for impairment              1,140            1,238              642
Accretion of asset retirement obligation                                            5               43                -
Dry hole costs                                                                      -               99            1,642
Loss (gain) on marketable securities                                             (336)            (872)             189
Gain from sale of securities                                                        -             (549)               -
Equity in net loss (income) of investees                                       (1,366)          (1,098)             440
Cumulative effect of an accounting change                                           -              264           (3,516)
Deferred taxes                                                                  1,783            1,532              195
Changes in assets and liabilities:
Accounts receivables                                                             (272)              53             (103)
Prepaid expenses and other current assets                                         157             (163)            (329)
Accounts payable and accrued expenses                                             462           (1,377)           1,015
Marketable securities trading                                                       -             (138)            (519)
                                                                         ------------     ------------     ------------
Net cash provided by operating activities                                       1,573            1,288            1,372
                                                                         ------------     ------------     ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment                                             (1,098)            (676)          (1,617)
Investment in Vessel                                                           (9,028)
Proceeds from sale of oil and gas properties and equipment                         14                -               10
Purchase of real estate                                                             -                -           (1,887)
Purchase of marketable securities                                              (4,807)          (3,070)            (491)
Proceeds from sale of marketable securities                                     6,115            3,270                -
Proceeds from sale of other investment                                            609                -                -
                                                                         ------------     ------------     ------------
Net cash used in investing activities                                          (8,195)            (476)          (4,035)
                                                                         ------------     ------------     ------------

CASH FLOWS FROM FINANCING ACTIVITIES:

Receipt of loans from banks                                                     9,800                -                -
Payments on short-term debt                                                    (4,800)               -                -
Change in short-term credit from banks                                          1,277                -                -
                                                                         ------------     ------------     ------------
Net cash provided by financing activities                                       6,277                -                -
                                                                         ------------     ------------     ------------

NET INCREASE (DECREASE)  IN CASH AND CASH EQUIVALENTS                            (342)             812           (2,663)

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                                  2,429            1,617            4,280
                                                                         ------------     ------------     ------------

CASH AND CASH EQUIVALENTS AT END OF YEAR                                 $      2,087     $      2,429     $      1,617
                                                                         ============     ============     ============

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

CASH PAID DURING THE PERIOD FOR INTEREST                                 $          -     $          -     $          -
                                                                         ============     ============     ============

CASH PAID DURING THE PERIOD FOR TAXES                                    $          -     $          -     $          -
                                                                         ============     ============     ============
</TABLE>

See notes to the consolidated financial statements.


                                                           F-6

<PAGE>

                          ISRAMCO INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(NOTE A) -- General and Summary of Significant Accounting Policies:

[1] The Company

Isramco Inc. and subsidiaries (the Company) is primarily engaged in the
acquisition, exploration, operation and development of oil and gas properties.
As of December 31, 2004, the Company has oil and gas interest in Texas,
Louisiana, Oklahoma, Wyoming, New Mexico, and approximately a 0.5% working
interest in various properties located in Israel.

In addition, the company purchased real estate in Israel in 2002. In March 2004,
the Company purchased a luxury cruise liner which it continues to hold title to
through a wholly owned subsidiary.

[2] Consolidation

The consolidated financial statements include the accounts of the Company, its
direct wholly-owned subsidiaries, Jay Petroleum, L.L.C., (Jay), Jay Management
L.L.C (Jay Management), IsramTec Inc. (IsramTec) and a wholly-owned foreign
subsidiary, Isramco Oil and Gas and Magic 1 Cruise Line Corp. Intercompany
balances and transactions have been eliminated in consolidation.

[3] Method of Accounting for Oil and Gas Operations

The Company follows the "successful efforts" method of accounting for its oil
and gas properties. Under this method of accounting, all property acquisition
costs and costs of exploratory and development wells are capitalized when
incurred, pending determination of whether the well has found proved reserves.
If an exploratory well has not found proved reserves, the costs of the well are
charged to expense. The costs of development wells are capitalized whether
successful or unsuccessful. Geological and geophysical costs and the costs of
carrying and retaining undeveloped properties are expensed as incurred.
Management estimates that the salvage value of lease and well equipment will
approximately offset the future liability for plugging and abandonment of the
related wells. Accordingly, no accrual for such costs has been recorded.

In July 2003, an issue was brought before the Financial Accounting Standards
Board regarding whether or not contract-based oil and gas mineral rights held by
lease or contract ("mineral rights") should be recorded or disclosed as
intangible assets. The issue presents a view that these mineral rights are
intangible assets as defined in SFAS No. 141, "Business Combinations," and
therefore, should be classified separately on the balance sheet as intangible
assets. SFAS No. 141 and SFAS No. 142, "Goodwill and Other Intangible Assets,"
became effective for transactions subsequent to June 30, 2001, with the
disclosure requirements of SFAS No. 142 required as of January 1, 2002. SFAS No.
141 requires that all business combinations initiated after June 30, 2001 be
accounted for using the purchase method and that intangible assets be
disaggregated and reported separately from goodwill. SFAS No. 142 established
new accounting guidelines for both finite lived intangible assets and indefinite
lived tangible assets. Under the statement, intangible assets should be
separately reported on the face of the balance sheet and accompanied by
disclosure in the notes to financial statements. SFAS No. 142 does not apply to
accounting utilized by the oil and gas industry as prescribed by SFAS No. 19,
and is silent about whether or not its disclosure provisions apply to oil and
gas companies. The Emerging Issues Task Force (EITF) has added the treatment of
oil and gas mineral rights to an upcoming agenda, which may result in a change
in how Isramco classifies theses assets.

Beginning in 2003 in accordance with SFAS 143, the Company has recorded an asset
retirement obligation in connection with the plugging and abandonment of its oil
and gas properties. The fair value of the liability is added to the carrying
amount of the associated asset and this additional carrying amount is
depreciated over the life of the asset.

[4] Marketable Securities

Statement of Financial Accounting Standard No. 115 (SFAS No. 115), Accounting
for Certain Investments in Debt and Equity Securities, requires the Company to
classify its debt and equity securities in one of three categories: trading,
available-for-sale and held-to-maturity. Trading securities are bought and held
principally for the purposes of selling them in the near term. Held-to-maturity
securities are those securities in which the Company has both the ability and
intent to hold the security until maturity. All other securities not included in
trading or held-to-maturity are classified as available-for-sale.

Trading and available-for-sale securities are recorded at fair market value. The
Company holds no held-to-maturity securities. Unrealized holding gains and
losses on trading securities are included in earnings. Unrealized holding gains
or losses, net of the related tax effects, on available-for-sale securities are
excluded from earnings and are reported net of applicable taxes as accumulated
other comprehensive income, a separate component of shareholders' equity, until
realized.


                                       F-7
<PAGE>

[5] Investment in Affiliates

The Company accounts for its investments in affiliate entities in which it has
the ability to exercise significant influence over operating and financial
policies using the equity method.

[6] Equipment

Equipment, consisting of motor vehicles, office furniture and equipment, is
carried at cost less accumulated depreciation, computed on the straight-line
method over the estimated useful lives of the assets.

[7] Translation of Foreign Currencies

Foreign currency is translated in accordance with Statement of Financial
Accounting Standards No. 52, which provides the criteria for determining the
functional currency for entities operating in foreign countries. The Company has
determined its functional currency is the United States (U.S.) dollar since all
of its contracts are in U.S. dollars. The financial statements of Oil and Gas
and the Israel branch have been re-measured into U.S. dollars as follows: at
rates prevailing during the year for revenue and expense items (except
depreciation); at year-end rates for assets and liabilities except for fixed
assets and prepaid expenses which are translated at the rate in effect at the
time of their acquisition. Depreciation is re-measured based on the historical
dollar cost of the underlying assets. The net effects of currency translations
were not material in any period.

[8] Earnings Per Share (EPS)

The Company follows SFAS No. 128, Earnings per Share, for computing and
presenting earnings per share, which requires, among other things, dual
presentation of basic and diluted loss per share on the face of the statement of
operations. Basic EPS is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding for the
period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common shares were exercised or converted
into common shares or resulted in the issuance of common shares that then shared
in the earnings of the entity. For the years ended December 31, 2002 and 2001
the Company's stock options were anti-dilutive.

[9] Cash Equivalents

Cash equivalents include short-term investments with original maturities of
ninety days or less and are not limited in their use.

[10] Non-compete Agreements

Non-compete agreements are amortized over the period to be benefited, generally
from three to five years.

[11] Use of Estimates

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and related notes.
Actual results could differ from those estimates.

Oil and gas reserve quantities are the basis for the calculation of
depreciation, depletion and impairment of oil and gas properties. An independent
petroleum-engineering firm determines the Company's reserve estimates. However,
management emphasizes that reserve estimates are inherently imprecise and that
estimates of more recent discoveries and non-producing reserves are more
imprecise than those for properties with long production histories. At December
31, 2004, approximately 16.6% of the Company's oil and gas reserves were
attributable to non-producing reserves. Accordingly, the Company's estimates are
expected to change as future information becomes available.

As mandated under SFAS No. 144, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets" (SFAS No. 144), the Company is required under
certain circumstances to evaluate the possible impairment of the carrying value
of its long-lived assets. For proved oil and gas properties, this involves a
comparison to the estimated future undiscounted cash flows, as described in the
paragraph below. In addition to the uncertainties inherent in the reserve
estimation process, these amounts are affected by management's estimates for
projected prices for oil and natural gas, which have typically been volatile. It
is reasonably possible that the Company's oil and gas reserve estimates may
materially change in the forthcoming year.

[12] Impairment of Long-Lived Assets

The Company adopted SFAS No. 144, as from January 1, 2002. This Statement
requires that long-lived assets be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to undiscounted future


                                       F-8

<PAGE>

cash flows expected to be generated by the asset or used in its disposal. If the
carrying amount of an asset exceeds its estimated undiscounted future cash
flows, an impairment charge is recognized equal to the amount by which the
carrying amount exceeds the fair market value of the asset. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less
costs to sell.

During 2004, the Company reported impairment charge of $50,000 relating to its
proved properties. During 2003 the company recorded impairment charge of
$248,000 relating to its proved properties and $81,000 related to the retirement
obligation assets.

Unproved oil and gas properties that are individually significant are
periodically assessed for impairment value, and a loss is recognized to the
extent, if any, that the cost of the property has been impaired. During 2004 and
2003, the Company recorded an impairment of $218,000 and $288,000 respectively
relating to its unproved properties.

There were no such impairments recognized in 2002.

[13] Income Taxes

The Company accounts for income taxes using the asset and liability method as
prescribed by SFAS No. 109, Accounting for Income Taxes. Deferred tax assets and
liabilities are determined based on differences between the financial reporting
and tax bases of assets and liabilities, and are measured using the enacted tax
rates and laws that will be in effect when the differences are expected to
reverse. The measurement of deferred tax assets is reduced, if necessary, by a
valuation allowance for any tax benefits which, are not expected to be realized.
The effect on deferred tax assets and liabilities of a change in tax rates is
recognized in the period that such tax rate changes are enacted.

[14] Oil and Gas Revenues

The Company records oil and gas revenues following the entitlement method of
accounting for production, in which any excess amount received above the
Company's share is treated as a liability. If less than the Company's share is
received, the underproduction is recorded as an asset. The Company's imbalance
position was not significant in terms of volumes or values at December 2004 and
2003.

[15] Environmental

The Company is subject to extensive federal, state, local and foreign
environmental laws and regulations. These laws, which are constantly changing,
regulate the discharge of materials into the environment and may require the
Company to remove or mitigate the environmental effects of the disposal or
release of petroleum or chemical substances at various sites. Liabilities for
expenditures of no capital nature are recorded when environmental assessment
and/or remediation is probable, and the costs can be reasonably estimated. No
significant amounts for environmental liabilities are recorded at December 31,
2004 and 2003.

[16] Stock-Based Compensation

SFAS No. 123, "Accounting for Stock-Based Compensation," encourages, but does
not require, companies to record compensation cost for stock-based employee
compensation plans at fair value. In December 2002, the FASB issued SFAS No.
148, to provide alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based employee compensation. The
statement also amends the disclosure requirements of SFAS No. 123 to require
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based compensation and the effect of the method
used on reported results.

The Company has chosen to continue to account for stock-based compensation
issued to employees using the intrinsic value method prescribed in Accounting
Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations. Accordingly, compensation cost for
stock options is measured as the excess, if any, of the quoted market price of
the Company's stock at the date of the grant over the amount an employee must
pay to acquire the stock.

The fair value of options is calculated using the Black-Scholes option-pricing
model. Had the Company adopted the fair value method of accounting for stock
based compensation, compensation expense would have been higher, and net loss
and net loss attributable to common shareholders would have increased for the
periods presented. No change in cash flows would occur. The effects of applying
SFAS No. 123 in this pro forma disclosure are not indicative of future amounts.


                                       F-9

<PAGE>
<TABLE>
<CAPTION>
                                                                    Year Ended December 31,
                                                                        (in thousands)
                                                             ------------------------------------
                                                                2004         2003         2002
                                                             ----------   ----------   ----------
<S>                                                                 <C>       <C>          <C>
Net income (loss) reported..................................     $  (20)      $2,256       $1,717
  Deduct:
    Total stock based employee compensation expense
      determined under fair value based method for all
      awards, net of related income tax..................            --           --           --
Pro forma net (loss)........................................        (20)       2,256        1,717
Net Loss Per Share..........................................
  Basic-as reported.........................................     $(0.00)      $  .85       $  .65
  Basic-pro forma...........................................      (0.00)         .85          .65
  Diluted-as reported.......................................      (0.00)         .85          .65
  Diluted-pro forma.........................................      (0.00)         .85         .65
</TABLE>

[17] Accounting Changes

Effective January 1, 2003, the Company adopted SFAS No. 143 "Accounting for
Asset Retirement Obligations" and recognized a loss of $264,000 that is included
as a cumulative effect of change in accounting principle. Effective January 1,
2002, the Company applied the provisions of Statement SFAS No.142 "Goodwill and
Other Intangible Assets". In 2002, the Company performed the transitional
impairment evaluation as provided in the said standard. Accordingly, the Company
recognized for the year ended December 31, 2003 a gain in the amount of
$3,516,000 from a negative goodwill that is included as a cumulative effect of a
change in accounting principle.

[18] Reclassifications

Certain amounts in prior financial statements have been realassed to conform to
the 2004 financial statements presentation.

[19] New Pronouncements

In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, and subsequently revised the Interpretation in
December 2003 (FIN 46R). This Interpretation of Accounting Research Bulletin No.
51, Consolidated Financial Statements, addresses consolidation by business
enterprises of variable interest entities, which have certain characteristics.
As revised, FIN 46R is now generally effective for financial statements for
interim or annual periods ending on or after March 15, 2004. We have no
identified any variable interest entities. In the event a variable interest
entity is identified, we do not expect the requirements of FIN 46R to have a
material impact on our consolidated financial statements

In May 2003, the FSAB issued SFAS No. 150, "Accounting for Certain Instruments
with Characteristics of Both Liabilities and Equity," ("SFAS 150") which
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. SFAS
150 requires that an issuer classify a financial instrument that is within its
scope, which may have previously been reported as equity, as a liability (or an
asset in some circumstances), This statement is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003 for public companies. The adoption of SFAS No 150 did not have a material
impact on our consolidated financial statements.

In April 2003, the Financial Accounting Standards Board issued SFAS No. 149,
"Amendment of Statement 133 on Derivative Instruments and Hedging Activities."
The statement amends and clarifies accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts, and hedging activities. This statement is designed to improve
financial reporting such that contracts with comparable characteristics are
accounted for similarly. The statement, which is generally effective for
contracts entered into or modified after June 30, 2003, is not anticipated to
have a significant effect on the Company's financial position or results of
operations.

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity." This statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. This
statement is effective for financial instruments entered into or modified after


                                      F-10

<PAGE>

May 31, 2003, and is otherwise effective at the beginning of the first interim
period beginning after June 15, 2003. The Company currently has no such
financial instruments outstanding or under consideration and therefore adoption
of this standard currently has no financial reporting implications.

In December 2004, the FASB issued SFAS No. 123R, "Accounting for Stock-Based
Compensation." SFAS No. 123R establishes standards for the accounting for
transactions in which an entity exchanges its equity instruments for goods or
services. This Statement focuses primarily on accounting for transactions in
which an entity obtains employee services in share-based payment transactions.
SFAS No. 123R requires that the fair value of such equity instruments be
recognized as expense in the historical financial statements as services are
performed. Prior to SFAS No. 123R, only certain pro forma disclosures of fair
value were required. SFAS No. 123R shall be effective for small business issuers
as of the beginning of the first interim or annual reporting period that begins
after December 15, 2005. The adoption of this new accounting pronouncement is
not expected to have a material impact on the financial statements of the
Company during the calendar year 2006.

(NOTE B) - Transactions with Affiliates and Related Parties

The Company acts as operator for joint venture with related parties in Israel
engaged in the exploration of oil and gas for which it receives operating fees
equal to the larger of 6% of the actual direct costs or minimum monthly fees of
$6,000.

Operator fees earned and related operator expenses are as follows:

                                            YEAR ENDED DECEMBER 31,
                          ----------------------------------------------------
                                 2004              2003              2002
                           $ IN THOUSANDS    $ IN THOUSANDS    $ IN THOUSANDS
                          ----------------  ----------------  ----------------

Operator fees:
Nir 2                      $           --    $          559    $           --
Med Ashdod Lease                       --                56                55
GAL C                                  72                --                27
Marine North                           --                --                23
Marine Center                          --                66                72
Marine South                           65                72                72
                          ----------------  ----------------  ----------------

                           $          137    $          753    $          249
                          ================  ================  ================

Operator expenses          $          807    $          795    $          791
                          ================  ================  ================

        In August 1997 the Company entered into a Consulting Agreement with
Romulas Investment Ltd. (which Agreement has been assigned to Remarkable
Holdings Ltd.), a company which is wholly owned and controlled by Daniel Avner,
the Vice President of the Company. Pursuant to this Agreement, the Company
agreed to pay the Consultant the sum of $7,500 per month plus expenses. In
February 1999, the Consulting Agreement was amended to increase the monthly
compensation payable thereunder to $15,000 and pursuant to the amendment, the
reimbursement of expenses was disallowed. The Consulting Agreement was extended
until July 2004. On December 9, 2003, following the resignations of Daniel Avner
from his position as Vice President, the Consulting Agreement was terminated.

        On December 9, 2003, the company entered into a Consulting Agreement
with Doron Avraham, the new Vice President of the Company. Pursuant to this
Agreement the Company agreed to pay the Consultant the sum of $15,000 per month,
in addition to reimbursement all business expenses. The Consulting Agreement is
currently in effect through November 2007.

        The Company paid Naphtha 226,000, $197,000 and $192,000 for the year
ended December 31, 2004, 2003 and 2002, respectively for of rent, office,
secretarial and computer services. A subsidiary of the Company is the general
partner of Isramco-Negev 2 Limited Partnership from which it received management
fees and expense reimbursements of $480,000 for each of the years ended December
31, 2004, 2003 and 2002.

        In May of 1996 the Company entered into a Consulting Agreement with
Goodrich Global L.T.D. B.V.I., a company owned and controlled by Haim Tsuff, the
Chairman of the Board of Directors and Chief Executive Officer of the
Corporation. Pursuant to this Consulting Agreement, the Company pays $144,000
per annum in installments of $12,000 per month, in addition to reimbursing all
reasonable business expenses incurred during the term in connection with the
performance of services on behalf of the Company. In April 1997 the consulting
compensation was increase to $240,000 per annum in installment of $20,000 per
month. The Consulting Agreement is currently in effect through May 31, 2006. In
the event that the Company terminates the services provided by Mr. Tsuff, he
will be entitled to receive a lump sum severance payment equal to the balance of
the unpaid consulting fee due for the remaining


                                      F-11

<PAGE>

term of the agreement.

        In November of 1999 the Company entered into a Consulting Agreement with
Worldtech Inc., a Mauritus company of which Jackob Maimon, the President of the
Company, is a director. Pursuant to this Consulting Agreement, which is
currently in effect through May 31, 2006, the Company agreed to pay the sum of
$240,000 per annum in installments of $20,000 per month, in addition to
reimbursing all reasonable business expenses incurred during the term in
connection with the performance of services on behalf of the Company. In the
event that the Company terminates the services provided by Mr. Maimon, he shall
be entitled to receive a lump sum severance payment equal to the balance of the
unpaid consulting fee due for the remaining term of the agreement.

        In December 2003 the Company awarded bonuses of $125,000 to its Chief
Executive Officer and Chairman of the board of directors and $125,000 to its
President.

        In December 2004 the Company awarded bonuses of $150,000 to its Chief
Executive Officer and Chairman of the board of directors.

        In December 2004, the Company leased real estate to I.O.C. Israel Oil
Company pursuant to a two year lease at a monthly rental of $7,000.

        On January 1, 2001 the Company retained the services of I.O.C. Israel
Oil Company LTD in connection with the operation of Jay Petroleum LLC and Jay
Management Company LLC (wholly owned subsidiaries of the Company). The Company
paid I.O.C. $120,000 for each of the years 2002, 2003 and 2004 and has agreed to
pay this amount during 2005.

(NOTE C) - Investments in Affiliate

        A wholly owned subsidiary of the Company is the General Partner in the
Isramco Negev 2 Limited Partnership. The daily management of the Limited
Partnership vests with the General Partner, however, matters involving the
rights of the Limited Partnership unit holders are subject to supervision of the
Supervisor, appointed to supervise the Limited Partnership activities, and in
some instances the approval of the Limited Partnership unit holders. The
Company's General Partner's interest in the Limited Partnership is 0.05% which
is accounted for by the equity method of accounting due to its ability to
exercise significant influence.

        At December 31, 2004 and 2003, the Company owned 282,817,359 units
(6.65% of the issued Partnership units) of the Isramco Negev 2 Limited
Partnership with a cost of $4,050,000. This investment is also accounted for
under the equity method of accounting.

        Summarized financial information of Isramco Negev 2 Limited Partnership
is as follows (amounts in thousands) (unaudited):

                                                        AS OF DECEMBER 31,
                                                   ----------------------------
Balance Sheet                                          2004            2003
                                                   ------------    ------------


Current Assets                                         $128,016        $114,900
Other Assets                                              2,908           1,700
                                                   ------------    ------------

Total Assets                                            130,924        $116,500
                                                   ============    ============

Current Liabilities                                         129        $    100
Equity                                                  130,795        $116,940
                                                   ------------    ------------

Total liabilities and equity                           $130,924        $117,040
                                                   ============    ============


                                              Year Ended December 31,
                                   --------------------------------------------
Statement of Operations                2004            2003            2002
                                   ------------    ------------    ------------

Income                                 $ 13,080        $ 19,700        $  1,000
Expenses                               $   (807)       $ (8,500)         (3,000)
                                   ------------    ------------    ------------

Net income (loss)                      $ 12,273        $ 11,200        $ (2,000)
                                   ============    ============    ============

        At December 31, 2004 and 2003 the Company also owned 7,877,248 units
(24.97% of the issued Partnership units) of the


                                      F-12

<PAGE>

        I.N.O.C Dead Sea Limited Partnership with a cost of $1,270,000 This
investment is also accounted for under the equity method of accounting.

Summarized financial information of I.N.O.C. Dead Sea Limited Partnership is as
follows (amount in thousand - unaudited):

                                                        AS OF DECEMBER 31,
                                                   ----------------------------
Balance Sheet                                          2004            2003
                                                   ------------    ------------


Current Assets                                         $ 13,752        $ 11,330
Other Assets                                                  -               -
                                                   ------------    ------------

Total Assets                                           $ 13,752        $ 11,330
                                                   ============    ============

Current Liabilities                                    $     71        $     60
Equity                                                 $ 13,681        $ 11,270
                                                   ------------    ------------

Total liabilities and equity                           $ 13,752        $ 11,330
                                                   ============    ============


                                              Year Ended December 31,
                                   --------------------------------------------
Statement of Operations                2004            2003            2002
                                   ------------    ------------    ------------
Income                                 $  2,488        $  2,070        $    680
Expenses                               $   (300)       $ (1,400)         (1,900)
                                   ------------    ------------    ------------

Net income (loss)                      $  2,188        $    670        $ (1,220)
                                   ============    ============    ============

(NOTE D) - Marketable Securities

        At December 31, 2004 and 2003, the Company had net unrealized gains
(losses) on marketable securities of $148,000, $283,000.

Trading securities, which are primarily traded on the Tel-Aviv Stock Exchange,
consists of the following:

<TABLE>
<CAPTION>
                                                   DECEMBER 31, 2004                          DECEMBER 31, 2003
                                                   -----------------                          -----------------

                                             COST            MARKET VALUE               COST            MARKET VALUE
                                             ----            ------------               ----            ------------
<S>                                          <C>                <C>                      <C>             <C>
Debentures and Convertible Debentures        $ 2,222,000      $ 3,164,000               $2,423,000       $ 3,170,000
Equity securities                              2,433,000        1,931,000                1,201,000           735,000
Investment Trust Funds                           185,000          189,000                  157,000           159,000

                                             $ 4,837,000      $ 5,284,000               $3,781,000       $ 4,064,000
                                             -----------      -----------               ----------       -----------
</TABLE>

        Available-for-sale securities, which are primarily traded on the
Tel-Aviv Stock Exchange and on OTC, consist of the following

<TABLE>
<CAPTION>
                                                   DECEMBER 31, 2004                          DECEMBER 31, 2003
                                                   -----------------                          -----------------

                                             COST            MARKET VALUE               COST            MARKET VALUE
                                             ----            ------------               ----            ------------
<S>                                          <C>                <C>                      <C>             <C>
                                             $ 4,955,000      $ 6,225,000               $8,068,000       $ 8,572,000
                                             ---------        ---------                 ----------       -----------
</TABLE>

        Sales of marketable securities resulted in realized gains (losses) of
$(32,000), $95,000 and $3,000 for the years ended December 31, 2004, 2003 and
2002 respectively.

(NOTE E) - Other assets - Investment in a high-tech company.

        The Company sold 203,000 shares of high tech Company, Eyblaster for
$609,000 recognizing a gain of $549,000 in December 2003.


                                      F-13

<PAGE>

(NOTE F) - Oil and Gas Properties and Equipment

ANNUAL RATES OF DEPRECIATION ARE AS FOLLOWS:
Office equipment and furniture                                  7%--20%
Motor vehicles                                                 15%--30%

                                                        2004            2003
                                                        ----            ----

Transportation equipment                             142,000         142,000
Office equipment                                     100,000         133,000
                                                     -------         -------
                                                     242,000         275,000
                                                     -------         -------
Less accumulated depreciation                       (170,000)       (189,000)
Equipment, net                                        72,000          86,000
                                                     -------         -------

A summary of property and equipment is as follows:

                                                        2004            2003
                                                        ----            ----
Unproved properties                                1,369,000         321,000
Proved Oil and gas properties                      6,054,007       6,660,000
Retirement obligation assets                         226,000         449,000
Transportation equipment                             142,000         142,000
Office equipment                                     100,000         133,000
                                                     -------         -------
                                                   7,918,000       7,705,000
  Less accumulated depletion, depreciation,
amortization and provision for impairment         (4,728,000)     (4,441,000)
                                                   ---------       ---------
                                                   3,190,000       3,264,000
                                                   =========       =========

(NOTE G) Debt

The Company's debt consists of the following as of December 31, 2004:

<TABLE>
<CAPTION>
<S>                                                                      <C>
Line of credit from bank, interest of 3.35%                              $     676,000
Bank loan, repayable in 19 equal quarterly installments
(of principal and interest) over the period beginning June
20, 2005, interest rate of LIBOR + 1% per annum, due December 20, 2009       5,002,000
Bank loan, due on March 29, 2005, interest of 3.35%                            600,000
                                                                         -------------
Total debt                                                                   6,278,000
Less: current portion                                                         (733,000)
                                                                         -------------
Long term debt                                                           $   5,545,000
                                                                         =============
</TABLE>

(NOTE H) EPS Computation

        SFAS No. 128, "Earnings Per Share", requires a reconciliation of the
numerator (income) and denominator (shares) of the basic EPS computation to the
numerator and denominator of the diluted EPS computation. The company's
reconciliation is as follows:

<TABLE>
<CAPTION>
                                                                  FOR THE YEAR ENDED DECEMBER 31,
                                                                  -------------------------------
                                                 2004                           2003                            2002
                                                 ----                           ----                            ----
                                        INCOME          SHARES        INCOME          SHARES          INCOME          SHARES
                                        ------          ------        ------          ------          ------          ------
<S>                                   <C>             <C>           <C>              <C>            <C>              <C>
Earnings per common share-basic       $ (20,000)      2,639,853     $2,256,000       2,639,853      $1,717,000       2,639,853
Effect of dilutive securities:
Stock options                                --              --             --              --              --              --
Earnings per common share-Diluted     $ (20,000)      2,639,853     $2,256,000       2,639,853      $1,717,000       2,639,853
</TABLE>

(NOTE I) Stock Options

        The 1993 stock option plan (the 1993 Plan) was approved at the Annual
General Meeting of Shareholders held on


                                      F-14

<PAGE>,

August 13, 1993. At December 31, 2004, 50,000 shares of common stock are
reserved under the 1993 Plan. Options granted under the 1993 Plan might be
either incentive stock options under the Internal Revenue Code or options which
do not qualify as incentive stock options. Options are granted for a period of
up to ten years from the grant date. The exercise price for an incentive stock
option may not be less than 100% of the fair market value of the Company's
common stock on the date of grant. The options granted under this plan were
fully vested at grant date. The administrator may set the exercise price for a
nonqualified stock option.

Summary of the status of the Company's stock options is presented below:

                                                      WEIGHTED-AVERAGE
                                                      ----------------
1993 Plan:                                      OPTIONS         EXERCISE PRICE
                                                -------         --------------

Outstanding at December 31, 2002                 29,750             $21.00
Granted                                              --                 --
Expired                                         (24,250)                --
Outstanding at December 31, 2003                  5,500              10.45
Granted                                              --                 --
Expired                                          (2,500)             16.92
Outstanding at December 31, 2004                  3,000             $ 5.06

        As of December 31, 2004, 3,000 options were outstanding and extensible
of a price of $5.06 and a weighted average remaining contractual life of 0.5
years.

        During 1995 the Company granted 3,000 options to a director under the
1993 Plan exercisable through July 2005 at an exercise price of $5.06 per share.

        On March 24, 2000, Haim Tsuff, the Chairman of the Board of Director and
Chief Executive officer of the Company and Jacob Maimon, the President of the
Company were each granted five year options to purchase up to 69,995 shares of
the Company's common stock at an exercise price of $4.28.

No stock options were granted during 2004, 2003 and 2002
Shares of common stock reserved for future issuance are:

   Options granted under the 1993 Plan                            3,000
   Options available for grant under the 1993 Plan               20,250
   Options granted to directors during 2000                     139,990
                                                                -------
   Total                                                        160,240

        Pursuant to requirements of SFAS No. 123, the weighted average fair
market value of options granted during 2000 was $3.57 per share. The weighted
average closing bid prices for the Company's stock at the date the options were
granted during 2000 was $5.13 per share. The fair market value pursuant SFAS No.
123 of each option granted is estimated on the date of grant using the
Black-Scholes options-pricing model. The model assumes expected volatility of
76%, risk-free interest rate of 6.51% for grants during 2000, an expected life
of 5 years and no dividend yield. Actual value realized, if any, is dependant on
the future performance of the Company's common stock and overall stock market
conditions. There is no assurance the value realized by an optionee will be at
or near the value estimated by the Black-Scholes model.

(NOTE J) -- Income Taxes

Income (loss) before income taxes from U.S. and foreign results of operations is
as follows:

                                          YEAR ENDED DECEMBER 31,
                                          -----------------------
                                    2004            2003            2002
                                    ----            ----            ----
U.S.                            $ 1,107,000     $ 1,022,000      $  (203,000)
Foreign                         $   462,000     $ 2,426,000      $(1,710,000)
                                -----------     -----------      ------------
  Total                         $ 1,569,000     $ 3,448,000      $(1,913,000)
                                ===========     ===========      ============


                                      F-15

<PAGE>

        Total income tax expense (benefit) for each of the years ended December
31, 2004, 2003 and 2002 were allocated as follows:

<TABLE>
<CAPTION>
                                                        2004               2003              2002
                                                        ----               ----              ----
<S>                                                  <C>               <C>              <C>
Income taxes (benefit)                               $1,589,000        $ 1,188,000      $  (114,000)
Shareholders' equity for unrealized holding
  gains (losses) on marketable securities               176,000        $    80,000          (43,000)
                                                     ----------        -----------      -----------
Total                                                 1,765,000        $ 1,268,000      $  (157,000)
                                                     ==========        ===========      ===========
</TABLE>

Income tax expense (benefit) attributable to income from continuing operations
consist of:

                                       YEAR ENDED DECEMBER 31,
                                       -----------------------
                             2004               2003             2002
                             ----               ----             ----

Current:
       State              $   15,000        $    17,000      $     6,000
       Federal                17,000          1,171,000         (315,000)
       Foreign                    --                 --               --
Deferred federal           1,557,000                 --          195,000
                          ----------        -----------      -----------
Total                     $1,589,000        $ 1,188,000      $  (114,000)
                          ==========        ===========      ===========

The deferred tax assets (liabilities) as of December 31, 2004 and 2003 are as
follows:

<TABLE>
<CAPTION>
                                                                                       AS OF DECEMBER 31,
                                                                                2004                      2003
                                                                                ----                      ----
<S>                                                                         <C>                      <C>
Net unrealized depreciation (appreciation) of marketable securities          $ (589,000)              $   130,000
Basis differences in property and equipment                                    (210,000)                  356,000
Losses carry forward                                                             96,000                        --
Other timing differences                                                     (2,286,000)               (1,655,000)
                                                                            ------------              ------------
Total                                                                       ($2,989,000)               (1,169,000)
                                                                            ============
Valuation allowance                                                                  --                        --
                                                                            ------------              ------------
                                                                            ($2,989,000)              $(1,169,000)
</TABLE>

        Reconciliation between the actual income tax expense and income taxes
computed by applying the U.S. Federal income tax rate to income before income
taxes is as follows:

<TABLE>
<CAPTION>
                                                               YEAR ENDED DECEMBER 31,
                                                        2004            2003            2002
                                                        ----            ----            ----
<S>                                                    <C>             <C>             <C>
Computed at U.S. statutory rates                       (35.0%)         (35.0%)         (35.0)%
State income taxes, net of federal benefit              (1.0%)           0.5%           (3.1)%
Adjustment to valuation allowance                          --              --           18.9%
Other                                                   (65.3%)          1.05%          13.2%
                                                       (101.3%)        (34.45%)         (6.0)%
</TABLE>

(NOTE K) -- Concentrations of Credit Risk

        Financial instruments, which potentially expose the Company to
concentrations of credit risk, consist primarily of trade accounts receivable.
The Company's customer base includes several of the major United States oil and
gas operating and production companies. Although the Company is directly
affected by the well-being of the oil and gas production industry, management
does not believe a significant credit risk exists at December 31, 2004.

        The Company maintains deposits in banks, which may exceed the amount of
federal deposit insurance available. Management periodically assesses the
financial condition of the institutions and believes that any possible deposit
loss is minimal.

        A significant portion of the Company's cash and cash equivalents is
invested in marketable securities. Substantially, all marketable securities
owned by the Company are held by banks in Israel and Switzerland.

(NOTE L) -- Luxury Cruise Liner

        In March 2004, the Company purchased a luxury cruise liner for aggregate
consideration of $8,050,000. The vessel, a Bahamas flagged ship, contains 270
passenger cabins spread out over nine decks.

        In March 2004, the Company has secured commercial bank loans for
approximately $7.5 million of the purchase price,


                                      F-16

<PAGE>

secured by a lien on the vessel, marketable securities and a Company guarantee.
As at December 31, 2004, approximately $5 million in principal of the bank loans
remain outstanding, The loan bears interest in the rate of LIBOR+1% per annum.

        Title to the vessel in is Magic 1 Cruise Line Corp., a wholly owned
subsidiary of the Company ("Magic").As of December 31, 2004 the company expended
$1 million approximately in respect of the maintenance, repairs renovation, and
upkeep of the vessel. In the Company's estimation, an additional investment of
up to $0.4 million will be required for additional repairs and maintenance.

        The Company leased the vessel to an Israeli based tour operator for the
period from July 1, 2004 through October 17, 2004 at a daily rate of $21,500.
The Company granted to the tour operator a discount in the amount of $310,000 in
respect of the said rental period.

(NOTE M) -- Commitments and Contingencies

COMMITMENTS:

        The Company leases corporate office facilities under a 3-year operating
lease expiring October 2006 at a monthly rental of $2,400 with escalation
to2,500$ on November 2005. The company is also responsible for its pro rate
share of the operating expenses that exceed a certain threshold. The Company
shares office space with Jay Petroleum, L.L.C. and Jay Management L.L.C.,
affiliates, under an informal sublease agreement.

        At December 31, 2004, future minimum lease payments under non-cancelable
operating leases are approximately $55,000. Future annual minimum lease payments
are follows:

                                                 Year Ending
                                                December 31,

                        2005                       29,000
                        2006                       26,000
                                                   ------
                                                   55,000

CONTINGENCIES:

        The Company is involved in various other legal proceedings arising in
the normal course of business. In the opinion of management, the Company's
ultimate liability, if any, in these pending actions would not have a material
adverse effect on the financial position, operating results or liquidity of the
Company.

(NOTE N) - Geographical Segment Information

        The company's operations for 2004 involve two industry segments - the
exploration, development production and transportation of oil and natural gas
and holding and leasing its cruise line vessel. Prior to 2004 the Company
operated in a single operating segment - oil and gas activities. Its current oil
and gas activities are concentrated in the United States and Israel. Operating
outside the United States subjects the company to inherent risks such as a loss
of revenues, property and equipment from such hazards as exploration,
nationalization, war and other political risks, risks of increase of takes and
governmental royalties, renegotiation of contracts with government entities and
change in laws and policies. governing operations of foreign-based companies.

        The Company's oil and gas business is subject to operating risks
associated with the exploration, and production of oil and gas, including
blowouts, pollution and acts of nature that could result in damage to oil and
gas wells, production facilities of formations. In additions, oil and gas prices
have fluctuated substantially in recent years as a result of events, which were
outside of the Company's control. The company does not directly operate the
cruise line vessel. The company leases the vessel to third party cruise line
operators. This segment of the company's business is subject to many risks all
of which cannot be presently anticipated, including losses resulting from
unexpected repairs and maintenance and competition.


                                      F-17

<PAGE>
<TABLE>
<CAPTION>
                                                                  GEOGRAPHIC SEGMENTS
                                                                    (IN THOUSANDS)
                                                                    --------------

                                     UNITED                    TOTAL                       CONSOLIDATED
                                     STATES      ISRAEL     OIL AND GAS        VESSEL         TOTAL
                                     ------      ------     -----------        ------         -----
               2004
<S>                                 <C>          <C>         <C>              <C>            <C>
Sales and other operating revenue   $  3,368     $  730      $  4.098         $  2,034       $  6,117
Costs and operating expenses          (2,309)      (800)       (3.109)          (2,364)        (5,525)
                                    --------     ------      --------         --------       --------
Operating profit (loss)                1,059       (100)          989             (331)           628
Interest income                                                                                   729
Interest expenses                                                                                (168)
General corporate expenses                                                                     (1,717)
Gain on marketable securities and
Net income in investee                                                                          1,605
Change estimate                                                                                  (369)
Other income                                                                                      123
Income taxes                                                                                   (1,589)
Net loss                                                                                          (20)
Identifiable assets at December     $  3,135     $   59      $  3,194         $  8,590       $ 11,784
31, 2004
Cash and corporate assets                                                                      29,574
Total assets at December 31, 2004                                                              41,358


                                                GEOGRAPHIC SEGMENTS
                                                   (IN THOUSANDS)
                                                   --------------

                                     UNITED                              CONSOLIDATED
                                     STATES      ISRAEL       VESSEL         TOTAL
                                     ------      ------       ------         -----
               2003
Sales and other operating revenue   $  3,582     $1,549            --       $ 5,131
Costs and operating expenses          (1,960)      (820)         (150)       (2,930)
                                    --------     ------      --------       -------
Operating profit (loss)             $  1,622     $  729      $   (150)      $ 2,201

Interest income and other                                                       760
corporate revenues
Net gain in investee and gain on                                              1,098
marketable
securities
General corporate expenses                                                   (2,012)
Interest expense                                                                (52)
Capital gain                                                                    549
Other income                                                                    475
Accretion expenses                                                              (43)
Income taxes                                                                 (1,188)
Net income before cumulative effect                                           2,256
Identifiable assets at December     $  2,987     $   81            --       $ 3,068
31, 2003
Net property and equipment
Cash and corporate assets                                                    29,627
Total assets at December 31, 2003                                            32,614
</TABLE>

                                      F-18

<PAGE>
<TABLE>
<CAPTION>
                                                                                    GEOGRAPHIC SEGMENTS
                                                                                       (IN THOUSANDS)
                                                                                       --------------
                                                                                                                    CONSOLIDATED
                                                           UNITED STATES           ISRAEL             CONGO            TOTAL
                                                           -------------           ------             -----            -----
                     2002
<S>                                                        <C>                 <C>                 <C>              <C>
Sales and other operating revenue                          $       2,563       $      1,022        $         --     $     3,585
Costs and operating expenses                                      (2,321)              (817)               (886)         (4,024)
                                                           -------------       ------------        ------------     -----------
Operating profit (loss)                                              242                205                (886)           (439)

Interest income and other corporate revenues                                                                                787
loss on marketable securities and net loss in investee                                                                     (629)
General corporate expenses                                                                                               (1,422)
Interest expense                                                                                                           (210)
Income taxes                                                                                                                114
Net loss before cumulative effect                                                                                        (1,717)
Identifiable assets at December 31, 2002                   $       3,178       $       177         $        150     $     3,505
Cash and corporate assets                                                                                                25,162
Total assets at December 31, 2002                                                                                        28,667
</TABLE>

(NOTE O) - Asset Retirement Obligations

        We recognize the fair value of a liability for an asset retirement
obligation in the period in which it is incurred. The associated asset
retirement costs are capitalized as part of the carrying amount of the asset.
The fair value of a liability for an asset retirement obligation is the amount
which that liability could be settled in a current transaction between willing
parties. The Company uses the expected cash flow approach for calculating asset
retirement obligations. The liability is discounted using the credit-adjusted
risk-free interest rate in effect when the liability is initially recognized.
The changes in the liability for an asset retirement obligation due to the
passage of time are measured by applying an interest method of allocation to the
amount of the liability at the beginning of the period. This amount is
recognized as an increase in the carrying amount of the liability and as
accretion expense classified as an operating item in the statement of
operations.

Effective January 1, 2003, the Company adopted SFAS No. 143, "Accounting for
Asset Retirement Obligations." SFAS No. 143 requires entities to record a
liability for asset retirement obligations at fair value in the period in which
it is incurred and a corresponding increase in the carrying amount of the
related long-lived asset. As of January 1, 2003, the Company recorded asset
retirement costs of $458,581 and asset retirement obligations of $650,240.

The cumulative effect of change in accounting principle was $263,955 after taxes
of $39,158.

        The reconciliation of the beginning and ending asset retirement
obligations for the years ended December 31, 2004 and 2003 is as follows (in
thousands):

                                                                 2004      2003
                                                                 ----      ----
Asset retirement obligations, as of  beginning of the year       $766      $ --
Liabilities upon adoption of SFAS No. 143 on January 1, 2003       --       650
Liabilities incurred                                                8        73
Liabilities settled                                                --        --
Accretion expense                                                  18        43
Revisions in estimated cash flows                                (478)       --
                                                                ----------------
Asset retirement obligations, as of end of year                  $314      $766
                                                                ================

(NOTE P) - Subsequent Event


                                      F-19

<PAGE>

Lease of Cruise Vessel. In March 2005, a wholly owned subsidiary of the Company
("Magic") entered into a lease agreement (the "Bareboat Lease") with a European
based tour operator (the "Operator") pursuant to which Magic will lease the
cruise liner Mirage 1 (the "Vessel") to the Operator for the period from April
14, 2005 through October 31, 2005 at a daily rate of $8,000. Under the Bareboat
Lease, the Operator will operate the Vessel and will solely bear all outlays
associated with the operation, maintenance and upkeep of the Vessel.
Contemporaneous with its entry into the Bareboat Lease the Operator entered into
an agreement (the "Marketing Agreement") with a subsidiary of one of the leading
transportation companies in Israel ("the "Marketing Party") pursuant to which
the Operator granted to the Marketing Party the exclusive marketing of the tours
on the Vessel. , and under which the Operator is entitled to minimum payments.
From the Marketing Party.

In connection with the Bareboat Lease, on March 9, 2005, the Company furnished a
limited guarantee (the "Guarantee") to and in favor of the Marketing Party,
pursuant to which the Company undertook to indemnify it in an amount not
exceeding $1 million in respect of any loss or damage incurred by the Marketing
Party arising out of the breach by the Operator of its obligations under the
Marketing Agreement . To induce the Company to issue the Guarantee, the Operator
granted to the Company a security interest on all amounts due to it under the
Marketing Agreement and agreed to provide the Company with a bank guarantee in
the amount of $600,000 (which will secure Chesny's obligations under the
Bareboat Charter as well).

ISSUANCE OF COMMON STOCK. In March 2005, the Company issued 38,819 shares of the
Common Stock to each of Haim Tsuff, Chairman of the Company, and Jackob Maimon,
President of the Company. The shares were issued upon the exercise of options to
purchase 69,995 shares Common Stock at an exercise price of $4.28 per share
granted to each of Mr. Tsuff and Mr. Maimon on March 25, 2000. The options were
exercised pursuant to "cashless" exercise provisions under which the number of
shares of Common Stock issued upon exercise was reduced by the number of shares,
valued at the closing price of the Common Stock on the Nasdaq Small Cap Market
on the trading day immediately prior to exercise, equal to the aggregate
exercise price of the option. The shares were issued in a transaction not
involving a public offering and were issued without registration under Section 5
of the Securities Act of 1933, as amended (the "Act"), in reliance upon the
exemption from registration afforded by Section 4(2) of the Act and Regulation D
promulgated thereunder.


                                      F-20

<PAGE>

                      SUPPLEMENTARY OIL AND GAS INFORMATION

For the years ended December 31, 2004, 2003 and 2002 (unaudited)

        The following supplemental information regarding the oil and gas
activities of the Company is presented pursuant to the disclosure requirements
promulgated by the Securities and Exchange Commission and SFAS No. 69,
"Disclosures About Oil and Gas Producing Activities." Capitalized costs relating
to oil and gas activities and costs incurred in oil and gas property
acquisition, exploration and development activities for each year are shown
below.


CAPITALIZED COST OF OIL AND GAS PRODUCING ACTIVITIES (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                   2004                          2003                               2002
                                               ------------                  ------------                       ------------
                                       UNITED STATES                 UNITED STATES        CONGO         UNITED STATES        CONGO
                                      ---------------               ---------------      -------       ---------------      -------
<S>                                   <C>                           <C>                  <C>           <C>                  <C>
Unproved properties not being
amortized                                 $   --                        $   --             $150            $  194            $ 150
Proved property being amortized            7,427                         6,352               --             5,504               --
Accumulated depreciation, depletion
amortization and impairment               (4,316)                       (3,338)            (150)           (2,526)              --
                                          -------                       -------            -----           -------           -----
Net capitalized costs                     $3,111                        $3,014               --            $3,172            $ 150
                                          =======                       =======            =====           =======           =====
</TABLE>

COSTS INCURRED IN OIL AND GAS PROPERTY ACQUISITION, EXPLORATION, AND DEVELOPMENT
ACTIVITIES (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                   2004                          2003                               2002
                                               ------------                  ------------                       ------------
                                       UNITED STATES                 UNITED STATES        CONGO         UNITED STATES        CONGO
                                      ---------------               ---------------      -------       ---------------      -------
<S>                                   <C>                           <C>                  <C>           <C>                  <C>
Property acquisition costs--proved
and unproved properties                   $   --                        $  260             $ --            $   --            $  --
Exploration costs                             --                            22               54               833              887
Development costs                          1,098                           393               --               500               --

(Israel exploration costs in 2004-$0; 2003-$88;
2002-$27)
</TABLE>


                                      F-21

<PAGE>

    RESULTS OF OPERATIONS FOR OIL AND GAS PRODUCING ACTIVITIES (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                   2004                          2003                              2002
                                               ------------                  ------------                       ------------
                                       UNITED STATES                 UNITED STATES        CONGO         UNITED STATES        CONGO
                                      ---------------               ---------------      -------       ---------------      -------
<S>                                   <C>                           <C>                  <C>           <C>                  <C>
Oil and gas sales                         $3,173                         $3,439              $--            $2,423              $--
Lease operating expense and               (1,149)                          (872)              --              (844)              --
severance taxes
Depreciation, depletion,
amortization and provision for
impairment                                (1,181)                        (1,088)            (150)             (589)              --
Exploration costs                             --                            (22)             (54)             (833)            (809)
                                          -------                        -------          -------           -------          -------
Income (Loss) before tax provision           843                          1,457             (204)              155             (809)
Provision for income taxes                                                   --               71                                283
                                          -------                        -------          -------           -------          -------
Results of operations                       $843                         $1,457            $(133)             $155             $526
                                          =======                        =======          =======           =======          =======
</TABLE>

OIL AND GAS RESERVES

        Oil and gas proved reserves cannot be measured exactly. The engineers
interpreting the available data, as well as price and other economic factor base
reserve estimates on many factors related to reservoir performance, which
require evaluation. The reliability of these estimates at any point in time
depends on both the quality and quantity of the technical and economic data, the
production performance of the reservoirs as well as extensive engineering
judgment. Consequently, reserve estimates are subject to revision, as additional
data become available during the producing life of a reservoir. When a
commercial reservoir is discovered, proven reserves are initially determined
based on limited data from the first well or wells. Subsequent data may better
define the extent of the reservoir and additional production performance, well
tests and engineering studies will likely improve the reliability of the reserve
estimate. The evolution of technology may also result in the application of
improved recovery techniques such as supplemental or enhanced recovery projects,
or both, which have the potential to increase reserves beyond those envisioned
during the early years of a reservoir's producing life.

        The following table represents the Company's net interest in estimated
quantities of proved developed and undeveloped reserves of crude oil,
condensate, natural gas liquids and natural gas and changes in such quantities
at December 31, 2004, 2003 and 2002, and for the years then ended. Net proved
reserves are the estimated quantities of crude oil and natural gas which
geological and engineering data demonstrate with reasonable certainty to be
recoverable in future years from known reservoirs under existing economic and
operating conditions. Proved developed reserves are proved reserve volumes that
can be expected to be recovered through existing wells with existing equipment
and operating methods. Proved undeveloped reserves are proved reserve volumes
that are expected to be recovered from new wells on undrilled acreage or from
existing wells where a significant expenditure is required for recompilation.
All of the Company's proved reserves are in the United States. The Company's oil
and gas reserves are priced at $40.58 per barrel and $5.30 per Mcf,
respectively, at December 31, 2004.


                                      F-22

<PAGE>

                                        OIL BBLS           GAS MCF
                                        --------          ---------
December 31, 2001                        190,310          5,212,269

Revisions of previous estimates           (7,525)          (572,723)
Acquisition of minerals in place              --                 --
Sales of minerals in place                    --                 --
Net discoveries and extensions                --                 --
Production                               (20,852)          (720,072)
                                        --------          ---------
December 31, 2002                        161,933          3,919,474

Revisions of previous estimates           55,261           (317,234)
Acquisition of minerals in place              --                 --
Sales of minerals in place                    --                 --
Production                               (19,294)          (599,000)

December 31, 2003                        197,900          3,003,240
Revisions of previous estimates          (40,031)          (522,246)
Acquisition of minerals in place
Sales of minerals in place                    --                 --
Production                               (17,789)          (469,558)
December 31, 2004                        140,080          2,011,440
                                        ========          =========

The Company's proved developed reserves are as follows:

<TABLE>
<CAPTION>
                                                 DEVELOPED                             UNDEVELOPED
                                        OIL BBLS            GAS MCF            OIL BBLS           GAS MCF
                                        --------           ---------           --------          ---------
<S>                                      <C>               <C>                   <C>               <C>
December 31, 2004                        140,080           2,011,440             32,880            334,100
December 31, 2003                        197,900           3,003,240                 --            516,440
December 31, 2002                        161,933           3,919,474                 --            138,050
</TABLE>

Interest in proved reserves of unconsolidated affiliates

                                        OIL BBLS           GAS MCF
                                        --------          ---------
December 31, 2004                          --             1,979,000
December 31, 2003                          --             1,979,000
December 31, 2002                          --             1,979,000


STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOW

        The standardized measure of discounted future net cash flows relating to
the Company's proved oil and gas reserves is calculated and presented in
accordance with Statement of Financial Accounting Standards No. 69. Accordingly,
future cash inflows were determined by applying year-end oil and gas prices to
the Company's estimated share of the future production from proved oil and gas
reserves.

        Future production and development costs were computed by applying
year-end costs to future years. Applying year-end statutory tax rates to the
estimated net future cash flows derived future income taxes. A prescribed 10%
discount factor was applied to the future net cash flows.

        In the Company's opinion, this standardized measure is not a
representative measure of fair market value. The standardized measure is
intended only to assist financial statement users in making comparisons among
companies.


                                                       F-23

<PAGE>
<TABLE>
<CAPTION>
                                                                             2004           2003           2002
                                                                         ------------   ------------   ------------
<S>                                                                       <C>            <C>            <C>
Future cash inflows                                                       $16,308,760    $21,705,930    $20,637,745
Future development costs                                                      (73,800)      (160,780)      (189,877)
Future production costs                                                    (6,691,180)    (7,472,950)    (6,131,777)
                                                                         ------------   ------------   ------------
Future net cash flows                                                       9,548,750     14,091,190     14,862,770
Future income tax expenses                                                 (3,246,575)    (4,791,004)    (4,904,714)
Annual 10% discount rate                                                     (300,190)    (4,650,009)    (4,082,803)
                                                                         ------------   ------------   ------------
Standardized measure discounted future net cash flows                    $  6,001,810   $  4,650,177   $  5,875,253
                                                                         ============   ============   ============
</TABLE>

CHANGES IN STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS

        The principal sources of change in the standardized measure of
discounted future net cash flows for the years ended December 31, 2004, 2003 and
2002 were as follows:

<TABLE>
<CAPTION>
                                                                             2004            2003          2002
<S>                                                                       <C>             <C>          <C>
Beginning of the year                                                     $4,650,177      $5,875,253   $ 4,377,001
Sales and transfers of oil and gas produced, net of production
  costs                                                                                                         --
Sales of reserves in place                                                                       --             --
Net changes in prices and production costs                                               (1,341,179)     1,498,252
Net changes in income taxes                                                                (113,710)            --
Changes in estimated future development costs, net of current                                               48,303
development costs
Acquisition of minerals in place                                                                                --
Revision of previous estimates                                                                                  --
Changes in production rate and other                                                                            --
Accretion of discount                                                     ----------     ----------     ----------
End of year                                                                6,001,810      4,650,177      5,875,253
                                                                          ==========     ==========     ==========
</TABLE>

COMPLETE
Selected Quarterly Financial Data (amounts in thousands, except per share data)
(Unaudited):

<TABLE>
<CAPTION>
                                                                                 QUARTER ENDED
                                                                                 -------------

                                                      MARCH 31     JUNE 30       SEPTEMBER 30       DECEMBER 31         TOTAL
                                                          2004        2004               2004              2004          2004
                                                          ----        ----               ----              ----          ----
<S>                                                    <C>         <C>                <C>              <C>            <C>
Total Revenues                                         $ 1,893     $ 1,526            $ 3,122          $  2,038      $  8,579
Net Income (loss) before taxes                         $   915     $   273            $   588          $   (207)     $  1,569
Cumulative effect of an accounting change              $    --     $    --            $    --          $     --      $     --
Net Income (loss)                                      $   845     $    --            $  (595)         $   (270)     $    (20)

Earnings (loss) per Common Share
-Basic and Diluted                                     $  0.32     $  0.00            $ (0.23)         $  (0.09)     $  (0.00)
</TABLE>

                                                       F-24

<PAGE>
<TABLE>
<CAPTION>
                                                                                 QUARTER ENDED
                                                                                 -------------

                                                      MARCH 31     JUNE 30       SEPTEMBER 30       DECEMBER 31         TOTAL
                                                          2003        2003               2003              2003          2003
                                                          ----        ----               ----              ----          ----
<S>                                                    <C>         <C>                <C>              <C>            <C>
Total Revenues                                         $ 1,974     $ 2,942            $ 1,928          $  2,041       $ 8,885
Net Income (loss) before taxes                         $   852     $ 1,906            $   826          $   (124)      $ 3,708
Cumulative effect of an accounting change              $ (264)     $    --            $    --          $     --       $  (264)
Net Income                                             $   588     $ 1,906            $   808          $ (1,046)      $ 2,256

Earnings (loss) per Common Share
-Basic and Diluted                                     $  0.22     $  0.72            $  0.31          $  (0.40)      $  0.85


                                                                                 QUARTER ENDED
                                                                                 -------------

                                                      MARCH 31     JUNE 30       SEPTEMBER 30       DECEMBER 31         TOTAL
                                                          2002        2002               2002              2002          2002
                                                          ----        ----               ----              ----          ----
Total Revenues                                         $ 1,076     $ 1,130            $ 1,047           $ 1,228       $ 4,372
Net Income (loss) before taxes                         $  (160)    $(1.833)           $   (60)          $  (141)      $(1,913)
Cumulative effect of an accounting change              $ 3,516     $    --            $    --           $    --       $    --

Net Income                                             $ 3,516     $(1,370)           $   (60)          $  (209)      $ 1,717

Earnings (loss) per Common Share
-Basic and Diluted                                     $  1.27     $ (0.52)           $ (0.02)          $ (0.09)      $  0.65
</TABLE>


                                                       F-25