Isramco Negev 2
                               Limited Partnership

                              Financial Statements
                             As at December 31, 2000

<PAGE>

                                             Isramco Negev 2 Limited Partnership

Financial Statements as at December 31, 2000
--------------------------------------------------------------------------------

Contents

                                                                            Page

Auditors' Report                                                             2

Balance Sheets                                                               4

Statements of Earnings                                                       5

Statement of Limited Partnership's Equity                                    6

Statements of Cash Flows                                                     7

Notes to the Financial Statements                                            9

<PAGE>

Auditors' Report to the Partners of
Isramco Negev 2 Limited Partnership

We have audited the accompanying balance sheets of Isramco Negev 2 Limited
Partnership (the Limited Partnership) as at December 31, 2000 and 1999 and the
related statements of earnings, Limited Partnership's equity and cash flows for
each of the years in the three year period ended December 31, 2000. These
financial statements are the responsibility of the Board of Directors and the
Management of the General Partner of the Limited Partnership. Our responsibility
is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance that the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by the Board of Directors and by the Management of the General
Partner of the Limited Partnership, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, based upon our audits, the financial statements referred to
above present fairly, in all material respects, the financial position of the
Limited Partnership as at December 31, 2000 and 1999 and the results of its
operations, the changes in the Limited Partnership's equity and its cash flows
for each of the years in the three year period ended December 31, 2000, in
conformity with accounting principles generally accepted (GAAP) in Israel.

Accounting principles generally accepted in Israel differ in certain significant
respects from accounting principles generally accepted in the United States.
Application of accounting principles generally accepted in the United States
would have affected the financial position of the Limited Partnership as at
December 31, 2000 and 1999 and the results of operations, the changes in the
Limited Partnership's equity and its cash flows for each of the years in the
three year period ended December 31, 2000, to the extent summarized in Note 15
to the financial statements.

<PAGE>

As discussed in Note 3B, the above mentioned financial statements are stated in
values adjusted for the changes in the general purchasing power of the Israeli
currency, in accordance with opinions of the Institute of Certified Public
Accountants in Israel.

Without qualifying our above opinion, we would call attention to that mentioned
in Note 11L of the financial statements regarding the uncertainty related to
possible effects of the implementation of the recommendations of the public
committee for income tax reforms, if implemented, which recommended, inter alia,
to cancel the tax benefits granted to investors in oil exploration and to that
mentioned in Note 11P of the financial statements regarding the uncertainty
related to the effect of the issues included, in the proposed Law for
Arrangements in the Economy (Legislative Amendments to Achieve Budgetary Goals
for Fiscal Year 2001) - 2000.

Somekh Chaikin
Certified Public Accountants (Isr.)

March 19, 2001

<PAGE>

                                             Isramco Negev 2 Limited Partnership

Balance Sheets as at December 31
--------------------------------------------------------------------------------

In terms of shekels of December 2000

<TABLE>
<CAPTION>
                                                                                                   2000               1999
                                                                                          -------------      -------------
                                                                                 Note     NIS thousands      NIS thousands
                                                                         ------------     -------------      -------------
<S>                                                                                 <C>         <C>               <C>
Current assets

Cash and cash equivalents                                                                       124,913            93,060
Marketable securities                                                               4           261,691           235,925
Bank deposits                                                                       5            30,773                --
Joint ventures for oil and gas exploration                                          6             8,743            *7,492
Other receivables                                                                   7                57               218
                                                                                          -------------      -------------
                                                                                                426,177           336,695
                                                                                          -------------      -------------
Investments

Bank deposits                                                                       5            41,370                --
Investment in oil and gas properties                                                8            17,516            *6,844
                                                                                          -------------      -------------
                                                                                                 58,886             6,844
                                                                                          -------------      -------------

                                                                                                485,063           343,539
                                                                                          =============      =============
Current liabilities

Other payables                                                                      9             1,815             2,568
Joint ventures for oil and gas exploration                                          6            10,332             8,470
                                                                                          -------------      -------------
                                                                                                 12,147            11,038
                                                                                          -------------      -------------
Contingent liabilities and commitments                                             11

Limited Partnership's equity                                                       10           472,916           332,501
                                                                                          -------------      -------------

                                                                                                485,063           343,539
                                                                                          =============      =============
</TABLE>

*     Reclassified

-------------------------------------      -------------------------------------
      Pinkstone Ltd. - Director                 Carmela Vilenski - Director
Isramco Oil and Gas - General Partner      Isramco Oil and Gas - General Partner

March 19, 2001

The notes are an integral part of the financial statements.


                                                                               4
<PAGE>

                                             Isramco Negev 2 Limited Partnership

Statements of Earnings for the year ended December 31
--------------------------------------------------------------------------------

In terms of shekels of December 2000

<TABLE>
<CAPTION>
                                                                                    2000              1999               1998
                                                                           -------------     -------------      -------------
                                                          Notes            NIS thousands     NIS thousands      NIS thousands
                                                      -------------        -------------     -------------      -------------
<S>                                                             <C>             <C>               <C>                 <C>
Income

Financing income, net                                             12A            10,139            32,003              8,654
Other income, net                                               6A(5)                --             3,550                 --
                                                                           -------------     -------------      -------------

                                                                                 10,139            35,553              8,654
                                                                           -------------     -------------      -------------
Expenses

Participation in oil and gas
 exploration, net                                                 12B            22,893            51,473             22,375
General and administrative
 expenses                                                         12C             2,341             2,479              2,410
                                                                           -------------     -------------      -------------
                                                                                 25,234            53,952             24,785
                                                                           -------------     -------------      -------------

Net loss                                                                        (15,095)          (18,399)           (16,131)
                                                                           =============     =============      =============

<CAPTION>
Loss per participation unit

                                                                                     NIS               NIS                NIS
                                                                           -------------     -------------      -------------
<S>                                                                <C>           <C>               <C>                <C>
Basic and diluted loss per
 participation unit                                                12D           (0.004)           (0.009)            (0.012)
                                                                           =============     =============      =============
</TABLE>

The notes are an integral part of the financial statements.


                                                                               5
<PAGE>

                                             Isramco Negev 2 Limited Partnership

Statement of Limited Partnership's Equity
--------------------------------------------------------------------------------

In terms of shekels of December 2000

<TABLE>
<CAPTION>
                                  Partnership's      Accumulated
                                         equity             loss            Total
                                  -------------    -------------    -------------
                                  NIS thousands    NIS thousands    NIS thousands
                                  -------------    -------------    -------------
<S>                                     <C>             <C>               <C>
Balance as at January 1, 1998           540,820         (285,745)         255,075

Net loss                                     --          (16,131)         (16,131)
                                       --------         --------         --------

Balance as at December 31, 1998         540,820         (301,876)         238,944

Issuance of participation units         103,704               --          103,704
Options exercised                         9,753               --            9,753
Capital issuance expenses                (1,501)              --           (1,501)
Net loss                                     --          (18,399)         (18,399)
                                       --------         --------         --------

Balance as at December 31, 1999         652,776         (320,275)         332,501

Options exercised                       156,238               --          156,238
Capital issuance expenses                  (728)              --             (728)
Net loss                                     --          (15,095)         (15,095)
                                       --------         --------         --------

Balance as at December 31, 2000         808,286         (335,370)         472,916
                                       ========         ========         ========
</TABLE>

The notes are an integral part of the financial statements.


                                                                               6
<PAGE>

                                             Isramco Negev 2 Limited Partnership

Statements of Cash Flows for the year ended December 31
--------------------------------------------------------------------------------

In terms of shekels of December 2000

<TABLE>
<CAPTION>
                                                              2000            1999             1998
                                                     -------------   -------------    -------------
                                                     NIS thousands   NIS thousands    NIS thousands
                                                     -------------   -------------    -------------
<S>                                                      <C>              <C>               <C>
Cash flows generated by operating activities:

Net loss                                                  (15,095)         (18,399)         (16,131)
Adjustment to reconcile net loss to net
 cash flows generated by operating activities (A)          19,446         *(4,119)            8,798
                                                         --------         --------         --------

Net cash provided by (used in) operating
 activities                                                 4,351          (22,518)          (7,333)
                                                         --------         --------         --------

Cash flows from investing activities:

Investment in oil and gas properties                      (22,121)        *(6,844)           (6,251)
Investment in bank deposits                               (70,342)              --               --
Purchase of marketable securities                        (249,809)        (237,778)         (34,880)
Proceeds from disposal of marketable securities           214,264          145,885          139,609
                                                         --------         --------         --------

Net cash (used in) provided by investing
 activities                                              (128,008)         (98,737)          98,478
                                                         --------         --------         --------

Cash flows from financing activities:

Issuance of participation units, net                           --          102,203               --
Proceeds from the exercise of options, net                155,510            9,753               --
                                                         --------         --------         --------

Net cash provided by financing activities                 155,510          111,956               --
                                                         --------         --------         --------

Increase (decrease) in cash and cash equivalents           31,853           (9,299)          91,145

Balance of cash and cash equivalents
 at the beginning of the year                              93,060          102,359           11,214
                                                         --------         --------         --------

Balance of cash and cash equivalents at the
 end of  the year                                         124,913           93,060          102,359
                                                         ========         ========         ========
</TABLE>

*     Reclassified

The notes are an integral part of the financial statements.


                                                                               7
<PAGE>

                                             Isramco Negev 2 Limited Partnership

Statements of Cash Flows for the year ended December 31 (cont'd)
--------------------------------------------------------------------------------

In terms of shekels of December 2000

<TABLE>
<CAPTION>
                                                                      2000              1999             1998
                                                             -------------     -------------    -------------
                                                             NIS thousands     NIS thousands    NIS thousands
                                                             -------------     -------------    -------------
<S>                                                                 <C>               <C>               <C>
A.  Adjustments to reconcile net loss to net
    cash flows generated by operating activities

Income and expenses not involving cash flows:

Loss (gain) on sale of marketable securities, net                    9,779           (12,353)           1,048
Interest and inflationary erosion of bank deposits                  (1,801)               --               --
Depreciation of oil and gas properties                              11,449                --            6,606

Changes in asset and liability items:

Decrease (increase) in other receivables                               161              (182)              82
Increase (decrease) in other payables                                 (753)            2,414             (270)
Change in joint ventures for oil and gas exploration, net              611           * 6,002            1,332
                                                                   -------           -------           ------

                                                                    19,446            (4,119)           8,798
                                                                   =======           =======           ======
</TABLE>

*     Reclassified

The notes are an integral part of the financial statements.


                                                                               8
<PAGE>

                                             Isramco Negev 2 Limited Partnership

Notes to the Financial Statements
--------------------------------------------------------------------------------

Note 1 - General

      A.    "Isramco - Negev 2", Limited Partnership (hereinafter - the "Limited
            Partnership" or the "Partnership") was set up under a limited
            partnership agreement signed on March 2-3, 1989 (and amended from
            time to time), between the general partner - Isramco Oil and Gas
            Ltd. (hereinafter - the "general partner") and the limited partner -
            Isramco Management (1988) Ltd. (hereinafter - the "limited partner",
            the "trustee"). The Limited Partnership was registered on March 3,
            1989 under the Partnership Ordinance (New Version), 1975. In
            accordance with Paragraph 61(a) of the Partnership Ordinance, the
            limited partnership agreement constitutes the Articles of
            Association of the Limited Partnership.

      B.    Under the limited partnership agreement, as amended from time to
            time, the general partner and the limited partner will bear the
            expenses and losses of the Limited Partnership and will be entitled
            to the income in accordance with the proportional share of the
            capital they invested in the capital of the Limited Partnership.
            (Amendment dated November 4, 1993).

      C.    The day to day management of the limited partnership is carried out
            by the general partner, whose business is oil and gas exploration.
            Management of the Partnership is carried out under the supervision
            of the Supervisor, Yigal Brightman & Co. and Mr. David Valiano, CPA
            (Isr.). The Supervisor was granted certain supervisory powers by the
            limited partnership agreement.

      D.    The limited partner - Isramco Management (1988) Ltd. - has various
            rights in the Limited Partnership. Under the trust agreement, the
            limited partner serves as trustee for these rights on behalf of the
            owners of the participation units.

      E.    The Limited Partnership was approved by the Income Tax Commissioner
            in respect of the Income Tax Regulations (Guidelines for Calculation
            of Tax in Respect of Holding and Selling Participation Units in Oil
            Exploration Partnerships), 1988.

            The Regulations are in effect until December 31, 2000 (see also Note
            11L).

      F.    On December 4, 1997, a general meeting of the Partnership was held
            at which time it was decided to change the Articles of Association
            of the Limited Partnership so as to enable the Partnership to pay
            the Supervisor his fee and expenses, as well as the expenses
            involved with handling the issue and the publication of the
            prospectus, including payments to the general partner and/or the
            Supervisor, all in accordance with the trust and partnership
            agreements, from the assets of the trust or from the assets of the
            Limited Partnership.

      G.    The financial statement items are presented in accordance with the
            principles stipulated in the Securities Regulations (Preparation of
            Annual Financial Statements), 1993, except for items presented in a
            format dictated by the nature of the business of the Limited
            Partnership.


                                                                               9
<PAGE>

                                             Isramco Negev 2 Limited Partnership

Notes to the Financial Statements
--------------------------------------------------------------------------------

Note 2 - The Objective of the Limited Partnership

      A.    The objective of the Limited Partnership is to participate in oil
            and gas exploration and production. For this purpose the Limited
            Partnership signed operating agreements (J.O.A.) with its partners
            in joint ventures.

      B.    As at the date of approval of the financial statements the Limited
            Partnership's rights in oil properties are as follows:

<TABLE>
<CAPTION>
                                                                                                         Date of
                                                                          Participation               expiration
                                                                                   rate                of rights
                                                                          -------------               ----------
                                                                                      %
                                                                          -------------
<S>                                                                             <C>            <C>
         "Med Yavne" lease (including "Or 1" drilling)                          32.4111            June 10, 2030
         "Med Ashdod" license                                                   34.0188            June 14, 2002
         "Yam Ashdod" carveout in "Med Ashdod"
           license (including "Nir 1" drilling)                                 19.1369            June 14, 2002
         "Marine North A" and "Marine North B" license                          79.0000        December 31, 2003
         "Marine Center" license                                                59.0000        December 31, 2003
         "Natanya" license (*)                                                  69.0000           April 30, 2003
         "Granit" license                                                       69.0000          January 1, 2003
         Preliminary permits with preferential right
          "Marine South" and "Marine South B"                                   59.0000             July 8, 2001
         Gal licenses (Tommy, Orly, Shira, Aya, Michal,
          Matan)                                                                 5.0000         December 5, 2003
</TABLE>

      *     Subsequent to balance sheet date the license was returned - see Note
            6(F).

Note 3 - Reporting Principles and Accounting Policies

      A.    Definitions

      1.    Related party - as defined in Opinion No. 29 of the Institute of
            Certified Public Accountants in Israel (hereinafter - the ICPAI).

      2.    Interested party - as defined in Paragraph 1 of the definition of an
            "interested party" in a company in Section 1 of the Securities Law.

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

      4.    Dollar - the U.S. dollar.


                                                                              10
<PAGE>

                                             Isramco Negev 2 Limited Partnership

Notes to the Financial Statements
--------------------------------------------------------------------------------

Note 3 - Reporting Principles and Accounting Policies (cont'd)

      B.    Financial statements in inflation adjusted values

      1.    General

      The financial statements are prepared on the basis of historical cost
      adjusted for changes in the general purchasing power of the NIS, as
      measured by the changes in the CPI.

      The Limited Partnership maintains its accounts on a current basis in
      historical NIS.

      The historical financial statements were adjusted to NIS of a stable
      purchasing power, in accordance with the principles prescribed in Opinions
      36 and 50 of the ICPAI.

      Condensed financial statements of the Limited Partnership in nominal
      historical values, which served as the basis for preparation of the
      Limited Partnership's adjusted financial statements, are included in Note
      16.

      The adjusted value of non monetary assets represents their historical cost
      as adjusted for changes in the general purchasing power of the Israeli
      currency and does not necessarily represent their market value or their
      value to the Limited Partnership.

      In the adjusted financial statements the term "cost" means "adjusted
      cost".

      All comparative data for prior periods (including amounts of monetary
      items) is also stated in term of shekels of December 2000.

      2.    Principles of adjustment

      a.    Balance sheet

      (1)   The Partnership's equity has been adjusted according to the changes
            in the CPI, between the index of the month in which the capital was
            invested and the month of the balance sheet date.

      (2)   Monetary items are stated in the adjusted balance sheet at their
            historical values.

      (3)   Investments in oil and gas properties which are in the drilling
            stages, and for which it has not yet been proven whether they will
            produce oil or gas and whether they contain commercial quantities,
            have been adjusted on the basis of the changes in the CPI, between
            the index of the month in which the investments were made by the
            Limited Partnership and the month of the balance sheet date.


                                                                              11
<PAGE>

                                             Isramco Negev 2 Limited Partnership

--------------------------------------------------------------------------------
Notes to the Financial Statements
--------------------------------------------------------------------------------

Note 3 - Reporting Principles and Accounting Policies (cont'd)

      B.    Financial statements in inflation adjusted values (cont'd)

      2.    Principles of adjustment (cont'd)

      b.    Statement of earnings

      Items of the statement of earnings are adjusted on the basis of the
      changes in the CPI as follows:

      (1)   Oil and gas exploration expenses are determined in accordance with
            the financial statements of the joint ventures.

      (2)   The other components of the statement of earnings, excluding the
            financing item, are adjusted on the basis of the changes in CPI from
            the index of the month of each transaction until the index of the
            month of the balance sheet date.

      (3)   The net financing item reflects financing income and expenses in
            real values (net of inflation) as well as the inflationary erosion
            over the year of monetary items.

      C.    Cash equivalents

      Cash equivalents are bank deposits and marketable government debt
      securities having an original maturity of three months or less.

      D.    Marketable securities

      Marketable securities are stated at their market value as at balance sheet
      date. Changes in the value of such securities are fully recognized on a
      current basis.


                                                                              12
<PAGE>

                                             Isramco Negev 2 Limited Partnership

--------------------------------------------------------------------------------
Notes to the Financial Statements
--------------------------------------------------------------------------------

Note 3 - Reporting Principles and Accounting Policies (cont'd)

      E.    Investments in oil and gas exploration

      The "successful efforts" method is the accounting method used by the
      Limited Partnership in recording the expenses of oil and gas exploration,
      as follows:

      (1)   Expenses of participation in geological and seismic tests and
            surveys are expensed immediately in the statement of earnings when
            incurred.

      (2)   Investments in oil and gas wells, which are in the drilling stages,
            and for which it has not yet been proven whether they will produce
            oil or gas, and whether they contain commercial quantities, are
            stated in the balance sheet at cost.

      (3)   Investments in oil and gas wells which were proven to be dry holes
            and were abandoned, or were determined as not containing commercial
            quantities, or for which no development plans were prepared for the
            near future, are written off in full to the statement of earnings.

      (4)   Investments in oil and gas explorations in progress, as part of
            joint ventures, are stated under "oil and gas properties" at a value
            based on the financial statements of the joint ventures.

      F.    Capitalization of credit costs

      The Limited Partnership capitalizes credit costs in accordance with
      Standard No. 3 - Capitalization of Credit Costs, published in July 1999 by
      the Israel Accounting Standards Board.

      G.    Loss per participation unit

      Loss per participation unit was computed in accordance with Opinion No. 55
      of the ICPAI, on the basis of the weight average of outstanding
      participation units.

      H.    Rates of exchange and linkage basis

      Assets and liabilities denominated in or linked to foreign currency are
      stated in the balance sheet according to the representative exchange rates
      published by Bank of Israel as at balance sheet date.

      Assets and liabilities linked to the CPI are stated in accordance with the
      specific linkage terms relating to each asset or liability.


                                                                              13
<PAGE>

                                             Isramco Negev 2 Limited Partnership

--------------------------------------------------------------------------------
Notes to the Financial Statements
--------------------------------------------------------------------------------

Note 3 - Reporting Principles and Accounting Policies (cont'd)

      H.    Rates of exchange and linkage basis (cont'd)

      Details of the CPI and dollar exchange rates:

<TABLE>
<CAPTION>
                                                     As at December 31                         Rate of change during the year
                                          ----------------------------         ----------------------------------------------
                                               2000               1999              2000              1999               1998
                                          ---------          ---------         ---------         ---------           --------
                                                                                       %                 %                  %
                                                                               ---------         ---------           --------
<S>                                           <C>                <C>              <C>               <C>                <C>
         CPI - in points                      106.6              106.6                 0              1.34              8.62
         Exchange rate of
          $1 (in NIS)                         4.041              4.153             (2.70)            (0.17)            17.65
</TABLE>

      I.    Use of estimates

      The preparation of financial statements in conformity with generally
      accepted accounting principles requires management to make estimates and
      assumptions that affect the reported amounts of assets and liabilities and
      disclosure of contingent assets and liabilities as at the date of the
      financial statements and the reported amounts of revenues and expenses
      during the reporting period. Actual results may differ from such
      estimates.


                                                                              14
<PAGE>

                                             Isramco Negev 2 Limited Partnership

--------------------------------------------------------------------------------
Notes to the Financial Statements
--------------------------------------------------------------------------------

Note 4 - Marketable Securities

<TABLE>
<CAPTION>
                                                         December 31      December 31
                                                                2000             1999
                                                       -------------    -------------
                                                       NIS thousands    NIS thousands
                                                       -------------    -------------
<S>                                                          <C>              <C>
      Shares and share options                                76,661           33,307
      Government debentures (1)                               94,490          163,965
      Convertible debentures                                  42,918           12,059
      Corporate debentures (2)                                38,788            6,846
      Certificates of participation in mutual funds            5,338           15,498
      Participation units                                      3,496            4,250
                                                             -------          -------

                                                             261,691          235,925
                                                             =======          =======

      Including marketable securities of related
       parties                                                 2,625            3,508
                                                             =======          =======

      (1) Linkage terms

         CPI linked                                           93,760          136,355
         Linked to foreign currency                               --              379
         Unlinked                                                730           27,231
                                                             -------          -------

                                                              94,490          163,965
                                                             =======          =======

      (2) Linkage terms

         CPI linked                                           31,433            5,222
         Linked to foreign currency                            7,355            1,624
                                                             -------          -------

                                                              38,788            6,846
                                                             =======          =======
</TABLE>


                                                                              15
<PAGE>

                                             Isramco Negev 2 Limited Partnership

--------------------------------------------------------------------------------
Notes to the Financial Statements
--------------------------------------------------------------------------------

Note 5 - Bank Deposits

      Bank deposits are linked to the CPI and bear interest at the rate of 7%
      p.a.

Note 6 - Joint Ventures for Oil and Gas Exploration

      Debit balances

                                              December 31    December 31
                                                     2000           1999
                                            -------------  -------------
                                            NIS thousands  NIS thousands
                                            -------------  -------------

      "Negev Med" Joint Venture                     2,346          2,626
      "Yam Ashdod Carveout" Joint Venture             112            114
      "Sderot" Joint Venjure                          937            901
      "David 2" Joint Venture                          10             10
      "Nisanit Drilling 1" Joint Venture               14             22
      "Yam West 2" Joint Venture                    3,532          1,290
      "Marine North" Joint Venture                    392            214
      "Or South" Joint Venture                        496             --
      "Granit" Joint Venture                          193             --
      "Marine South" Joint Venture                    520             --
      "Or 1" Joint Venture                            191        * 2,315
                                                   ------        -------

                                                    8,743          7,492
                                                   ======        =======

      *     Reclassified

      Credit balances

                                              December 31    December 31
                                                     2000           1999
                                            -------------  -------------
                                            NIS thousands  NIS thousands
                                            -------------  -------------

      Negev 2" Joint Venture                          387            410
      "Or South" Joint Venture                         --          8,060
      "Marine Center" Joint Venture                 9,716             --
      "Natanya" Joint Venture                         229             --
                                                   ------        -------

                                                   10,332          8,470
                                                   ======        =======


                                                                              16
<PAGE>

                                             Isramco Negev 2 Limited Partnership

--------------------------------------------------------------------------------
Notes to the Financial Statements
--------------------------------------------------------------------------------

Note 6 - Joint Ventures for Oil and Gas Exploration (cont'd)

      Additional information:

      General

      The balances presented in the balance sheet relating to joint ventures
      reflect the amount of the actual investment of the Limited Partnership in
      each venture, less its share in the losses of the same venture (or its
      share in the losses of the venture, less amounts invested in the venture).

      A.    The "Med Negev" off-shore licenses

      1.    General

      As of June 14, 2000, the Partnership had rights in five off-shore
      licenses: 240/Med Tel Aviv, 241/Med Hadera, 242/Med Ashdod in which the
      Yam Ashdod carveout is included, 243/Med Hasharon and 239/Med Yavne.

      On June 14, 2000, three licenses expired, the Med Tel Aviv license, the
      Med Hasharon license and the Med Hadera license, since no discoveries were
      made during the period in which the licenses were in effect. The Med
      Ashdod license was extended until June 14, 2002.

      In June 2000, as a result of the findings from the drilling conducted in
      the Med Yavne license, the Director of Oil Affairs (hereinafter - the
      Director) granted the partners a holding of 250 sq. km. in that license.
      The following terms, among others were stipulated for the holding:

      a.    The owner of the holding will act diligently in his efforts to
            develop the holding and extract gas therefrom.

      b.    The owner of the holding will process and solve a 3D survey that was
            executed and will incorporate it into the previous seismic survey
            carried out, will prepare prospects in the event any are found, and
            will present the findings to the Director by no later than May 1,
            2001.

      c.    He will drill at least one well to pliocene targets, to be begun no
            later than July 1, 2001.

      d.    At the end of 5 years, the owner of the holding will submit a plan
            for continuation of operations in the area of the holding.

      The holding is limited in its entire area to the underground area up until
      the roof of the messinian evaporites or to the base of the pliocene in the
      absence of the evaporates.


                                                                              17
<PAGE>

                                             Isramco Negev 2 Limited Partnership

--------------------------------------------------------------------------------
Notes to the Financial Statements
--------------------------------------------------------------------------------

Note 6 - Joint Ventures for Oil and Gas Exploration (cont'd)

      A.    The "Med Negev" off-shore licenses (cont'd)

      2.    The "Yam West 2" well in the "Med Yavne" license

      In August 1999, drilling was begun at the "Yam West 2" well. Drilling was
      planned to a depth of 3,200 meters (in water 770 meters deep). On
      September 30, 1999, the well reached a depth of 3,210 meters and on
      October 3, 1999, after analyzing the results of the electronic tests
      carried out at the well, the partners decided to abandon the well.

      The percentage of participation of the Partnership in the "Yam West 2"
      well is 85.9957%. The cost of the well totaled an amount of $ 9.6 million
      (the share of the Partnership in the cost of the well is NIS 35 million,
      with an amount of NIS 37 million being expensed in 1999. In 2000 this
      amount was reduced by NIS 2 million).

      3.    The "Or 1" well in the "Med Yavne" license

      At the beginning of October 1999, drilling was begun at the "Or 1" well,
      planned to reach a depth of 2,000 meters (in water 700 meters deep), with
      an overall budget of $ 8.5 million (including production tests). On
      October 21, 1999, when the well reached a final depth of 2,020 meters and
      on completion of the electronic tests (logs), the partners approved the
      recommendation of the operator to perform production tests at the well.

      On October 31, 1999, Isramco Inc., the operator of the "Or 1" well,
      announced that, as of the date of the announcement, the upper segment of
      the target layer was opened for testing. The results of the production
      test showed that the rate of production at the checked segment was 21
      million cubic feet a day.

      At a partners meeting on November 1, 1999, it was decided that, in view of
      the positive results of the production test made so far, there is no need
      to open another segment on the target layer. It was also concluded that
      the well was capable of producing gas at a quicker rate, once the well was
      completed for regular production, with the appropriate equipment and by
      opening additional segments on the target layer.

      On February 13, 2000, the operator announced that according to initial
      estimates, the quantity of gas in place at "Or 1" was 107 billion cubic
      feet.

      The Partnership's participation at "Or 1" is 32.4111%.

      The cost of the drilling totaled $ 5.2 million, of which the share of the
      Partnership that was recorded under the item "Investment in Oil and Gas
      Properties" was NIS 7.1 million (in 1999 - an amount of NIS 6.8 million).


                                                                              18
<PAGE>

                                             Isramco Negev 2 Limited Partnership

--------------------------------------------------------------------------------
Notes to the Financial Statements
--------------------------------------------------------------------------------

Note 6 - Joint Ventures for Oil and Gas Exploration (cont'd)

      A.    The "Med Negev" off-shore licenses (cont'd)

      4.    The "Or South" well in the "Med Yavne" license

      On November 8, 1999, drilling began at the "Or South" well, planned for a
      depth of 2,000 meters (in water 720 meters deep), with a budget of $ 8.5
      million (including production tests).

      On November 29, 1999, the well reached a depth of 2,090 meters, at which
      time electronic log tests were taken. At this stage, problems arose,
      causing the need to change the plan and to increase the budget for the
      well.

      In December 1999, the operator reported to the partners that the analysis
      performed on the electric logs taken at the well showed that there was a
      presence of gas in the well, but it was not economically feasible to
      extract gas from the well.

      The partners accepted the recommendation of the operator to not perform
      production tests and to abandon the well.

      The cost of drilling totaled $ 9 million (with the share of the
      Partnership being NIS 12.1 million, expensed during 1999).

      The Partnership participated in the "Or South" drilling at a rate of
      32.4111%.

      5.    Agreement with BG

      On October 20, 1999, an agreement was signed between Isramco Inc., in its
      name and in the name of related parties - Naphtha Israel Petroleum Company
      Ltd., Equittal Ltd., J.O.E.L. Jerusalem Oil Exploration Ltd., the Limited
      Partnership, I.N.O.C. Dead Sea Limited Partnership, and Naphtha
      Explorations Limited Partnership (hereinafter - the "Isramco Group"), and
      BG International Limited, a member of the British Gas Group (hereinafter -
      BG), which was approved by the general meeting of the Partnership, whereby
      the Isramco Group would transfer to BG rights in the off-shore licenses
      (including "Or 1") proportional to the percentages of the Isramco Group
      companies, such that BG would end up holding 50% of the off-shore
      licenses.

      The agreement was conditioned on the approval of the Director, which was
      obtained on November 2, 1999.


                                                                              19
<PAGE>

                                             Isramco Negev 2 Limited Partnership

--------------------------------------------------------------------------------
Notes to the Financial Statements
--------------------------------------------------------------------------------

Note 6 - Joint Ventures for Oil and Gas Exploration (cont'd)

      A.    The "Med Negev" off-shore licenses (cont'd)

      5.    Agreement with BG (cont'd)

      In accordance with the agreement, it was stipulated as follows:

      a.    The Isramco Group would transfer to BG rights in the off-shore
            licenses known as "Negev Med" (including the "Or 1" well)
            (hereinafter the "off-shore licenses") proportional to the
            percentages of each of the transferors, such that BG would end up
            holding 50% of these off-shore licenses, and that following the
            transfer, the Limited Partnership would continue to hold 34.0188%
            (instead of 70.9957% prior to the transfer) of all of the rights in
            the off-shore licenses, except for the "Med Yavne" license in which
            the Partnership would maintain a share of 32.4111% (instead of
            70.9957% prior to the transfer). In the existing carveouts in the
            license areas, i.e., the "Yam Ashdod" carveout in the "Med Ashdod"
            license and the ""Yam West 2" carveout in the "Med Yavne" license,
            various percentages would be transferred, as a function of the
            percentage participation of the Limited Partnership in these
            carveouts: in the "Yam Ashdod" carveout, the Limited Partnership
            will be left with a share of 19.13697% (instead of 53.0268% prior to
            the transfer), and in the "Yam West 2" carveout, the Limited
            Partnership will be left with a share of 39.2589% (instead of
            85.9957% prior to the transfer).

      b.    In addition to its bearing its entire share in the expenses of all
            of the exploration activities, including its proportional share in
            the expenses of the "Or 1" and "Or South" wells, BG paid the
            participants in the "Med Yavne" license an amount of $ 1,150
            thousand in return for the transfer of rights. The amount was paid
            as follows: half of the amount was paid upon the signing of the
            agreement for the transfer of rights and the second half was paid
            upon commencement of drilling at the "Or South" gas well. The share
            of the Limited Partnership in the above amounts together, less costs
            related to the transaction, amounted to NIS 3,550 thousand, which
            was included under "Other Income, net" in the statement of earnings
            for the year ended December 31, 1999.

      c.    Isramco Inc., which serves as the operator in the off-shore
            licenses, will cease serving as the operator of the "Med Yavne"
            license and will be replaced by BG on the earlier of January 1, 2001
            or 30 days after the "Or South" drilling is finished. Isramco Inc.
            will continue as operator in the other licenses until they expire,
            under the existing agreements between it and the other participants
            in the off-shore licenses, i.e., in return for a payment of 6% of
            the direct operating expenses, subject to a minimum monthly payment
            of $ 6,000 in respect of each of the off-shore licenses. Transfer of
            the role of operator took place on January 1, 2000.

      d.    In respect of its replacing Isramco Inc. as the operator in the
            off-shore licenses, BG paid Isramco Inc. an amount of $ 1,925
            thousand on signing the agreement for the transfer of rights, and
            within 15 days after the actual transfer of the operation in the Med
            Yavne license to BG, the latter paid Isramco Inc. an additional
            amount of $ 1,925 thousand.


                                                                              20
<PAGE>

                                             Isramco Negev 2 Limited Partnership

--------------------------------------------------------------------------------
Notes to the Financial Statements
--------------------------------------------------------------------------------

Note 6 - Joint Ventures for Oil and Gas Exploration (cont'd)

      A.    The "Med Negev" off-shore licenses (cont'd)

      5.    Agreement with BG (cont'd)

      e.    Isramco Inc. and BG will work together to formulate a work plan for
            the areas of the off-shore licenses in order to submit requests to
            obtain new oil licenses in the same geographic areas in which old
            licenses expire. Upon receipt of each new license of the first three
            licenses to be received, BG will pay Isramco Inc. an amount of $
            1,666 thousand, up to an aggregate amount of $ 5,000 thousand.

      f.    Regarding the areas of the "Med Yavne" license, subject to the
            agreement of all of the participants in this license, the provisions
            of the joint operating agreement applicable to the license will be
            changed so that BG be appointed as the operator in the areas of the
            Med Yavne license, in return for operator's fees in an amount equal
            to 2% of the operating expenses. In respect of development and
            production activities, BG will be entitled to operator's fees of
            1.5% of the direct expenses. Isramco Inc. will render administrative
            and technical consulting services to the operator at his request, in
            return for an amount of $ 10,000 per month plus VAT, that will be
            charged to the joint account of the venture.

      g.    BG and the parties to the agreement from the Isramco Group undertook
            to establish an area of mutual interest (hereinafter - "A.M.I.")
            that will apply to the area covered by the aforementioned off-shore
            licenses, for either a 3 year period commencing on the date of the
            signing of the aforementioned agreement or two years following the
            expiration of the licenses, whichever is later. The A.M.I.
            stipulates that in the event that during this period any of the
            parties is granted or buys from others, as defined in the agreement,
            a preliminary permit, license, holding or any other right for
            exploration, development or extraction of oil in the area of the
            A.M.I., then all of the other parties will have the right and the
            option to participate in every such purchase or grant.

      6.    The "Yam Ashdod Carveout" venture

      In September 1996, the partners of the "Med Ashdod" license signed an
      agreement to set up a carveout in the area of the license, in which oil
      and gas exploration activities would be carried out and which would
      include the area of the structure in which the "Yam 1" and "Yam 2" wells
      were drilled, and an additional structure that was included in the "Negev
      Ashkelon" license that was returned. The share of the Partnership in the
      "Yam Ashdod Carveout" is 19.1369%.

      In June 2000, drilling for gas was started at "Nir 1", with a budget of $
      10 million, including production tests.

      On June 23, 2000, the operator reported to the partners that the well
      reached a depth of 1,900 meters and that the electric logs conducted up to
      that depth showed positive results indicating the presence of a gas
      reservoir.


                                                                              21
<PAGE>

                                             Isramco Negev 2 Limited Partnership

--------------------------------------------------------------------------------
Notes to the Financial Statements
--------------------------------------------------------------------------------

Note 6 - Joint Ventures for Oil and Gas Exploration (cont'd)

      A.    The "Med Negev" off-shore licenses (cont'd)

      6.    The "Yam Ashdod Carveout" venture (cont'd)

      The operator recommended to the partners to conduct production tests and
      to drill another 500 meters in order to test for the possibility of
      finding another gas reservoir at even deeper layers.

      In July 2000, the partners approved the conducting of production tests and
      approved an updated budget of a total of $ 13.3 million (which includes
      drilling to a depth of 2,400 meters and production tests).

      On August 20, 2000, the drilling operator announced the results of the
      production tests which showed the following:

      a.    A gas column 300 meters wide was found. It included a number of
            segments of a sandy reservoir and segments of sand and clay which
            contain gas.

      b.    53 meters were opened for testing and they produced at rates of up
            to 15 million cubic feet a day. The limitations of the test and the
            thickness of the layers which were opened in this drilling did not
            permit production at a faster rate.

      c.    The results of the tests show that the well will be capable of
            producing at a faster rate of 30 million cubic feet a day, once
            appropriate work is carried out and once additional segments are
            opened at the target layer.

      At a meeting of the partners on October 10, 2000, the operator presented
      the following work plan to the partners:

      a.    Discovery and mapping of gas targets at a relatively shallow depth,
            based on a 3D seismic survey carried out in the southern section of
            the license.

      b.    Conducting of a 3D seismic survey covering the "Sea Structure" (in
            which the "Yam 2" well was drilled previously) located in the north
            and central areas of the license.

      The data from the abovementioned seismic surveys will serve to make a
      detailed map of the "Sea Structure" and an additional structure (the "Yam
      Nitzanim" structure) and to prepare prospects for deep drilling for oil.

      In addition, the operator presented a report from an American consulting
      firm that estimates the quantity of in place gas of the Nir 1 reservoir to
      be 274 billion cubic feet of gas.


                                                                              22
<PAGE>

                                             Isramco Negev 2 Limited Partnership

--------------------------------------------------------------------------------
Notes to the Financial Statements
--------------------------------------------------------------------------------

Note 6 - Joint Ventures for Oil and Gas Exploration (cont'd)

      A.    The "Med Negev" off-shore licenses (cont'd)

      6.    The "Yam Ashdod Carveout" venture (cont'd)

      On November 5, 2000, the Director announced that, at the request of the
      operator and in light of the discovery of natural gas at the "Nir 1" well,
      he extended the period of the Med Ashdod license for two years, until June
      14, 2002. The Director stipulated that during the extension period, the
      holder of the license must execute the following (among others):

      a.    Purchase or execution of a 3D seismic survey of an area of no less
            than 350 sq. km., by April 1, 2001.

      b.    Processing and deciphering the 3D survey and the incorporation of 2
            dimensional surveys, and submission of a summary report on the areas
            of the surveys by October 1, 2001.

      c.    Presentation of a program for locating and developing the discovery.
            The program should contain a drilling prospect for the period ending
            December 1, 2001.

      d.    Drilling to targets in the pliocene base, at least, to begin no
            later than May 1, 2002.

      e.    Six months before the commencement of drilling, the owner of the
            license will sign a contract with an off-shore drilling contractor
            to execute the drilling.

      On November 6, 2000, the partners approved the abovementioned work plan
      and a budget of $ 3.1 million, including purchase of a 3D seismic survey
      in a total area of 247 sq. km, that was carried out within the license
      area.

      As part of the aforementioned approved work plan, in November 2000, a 3D
      seismic survey was conducted in a total area of 190 sq. km., covering,
      among other things, the "Sea Structure" at which the "Yam 2" well was
      previously drilled. The data from the survey was sent for seismic
      processing to England.

      B.    The "Marine North A" and "Marine North B" licenses

      The "164/Marine North" preliminary off-shore permit with right of way
      covers an area of 575,000 dunams northeast of the "Med Hadera", "Med Tel
      Aviv" and "Med Hasharon" licenses, at shallow depths. The permit was
      granted on June 3, 1999 for a period of 18 months. In September 1999, the
      Partnership joined the "Marine North" preliminary permit, at a rate of 79%
      of the rights, with 1% of the rights being held by Isramco Inc., which
      serves as the operator of the permit, and 20% of the rights being held by
      Modi'in Energy Limited Partnership (a related party).

      During the period of the permit, the gathering and testing of all of the
      geophysical data from the area of the permit and its environs were
      completed. Seismic lines over an area of 200 sq. km. were reprocessed and
      two dimensional and 3D seismic surveys were conducted. The partners in the
      permit approved budget authorizations for a total amount of $ 1,391
      thousand for carrying out, processing and interpreting the aforementioned
      seismic surveys. The surveys were done as was the initial processing.


                                                                              23
<PAGE>

                                             Isramco Negev 2 Limited Partnership

--------------------------------------------------------------------------------
Notes to the Financial Statements
--------------------------------------------------------------------------------

Note 6 - Joint Ventures for Oil and Gas Exploration (cont'd)

      B.    The "Marine North A" and "Marine North B" licenses (cont'd)

      In view of the request of the operator, the Director decided to grant 2
      new licenses in the areas of the "311/Marine North A" and "312/Marine
      North B" preliminary permits, effective December 3, 2000 for a three year
      period. The work plan includes, among other things, the preparation of
      drilling prospects for both shallow gas objectives and deep oil
      objectives, and drilling in the area of each license.

      C.    "Marine Central" license

      The "168/Marine Central" preliminary permit with right of way covers an
      area of 194 thousand dunams (hereinafter - "Marine Central") and was
      granted to Isramco Inc. on September 21, 1999 for a period of 18 months.

      Isramco Inc. transferred rights in the preliminary permit to the limited
      partnerships in the following manner: the Partnership received 59%,
      Naphtha Explorations received 15%, I.N.O.C. Dead Sea 15%, and Modi'in
      Energy 10%. Isramco Inc., the oil exploration operator in the license, was
      left with 1%.

      The partners in the permit approved budget authorizations in amounts of $
      205 thousand and $ 776 thousand for conducting, processing and
      interpreting of a two dimensional seismic survey and a 3D seismic survey,
      respectively.

      The carrying out of the 3D seismic survey was completed at the beginning
      of May 2000. The data from this survey was processed and an initial
      interpretation was prepared. The results of the initial interpretation
      enabled the identification and detailed mapping of gas prospects.

      In view of the request of the operator, the Director granted, on December
      3, 2000, the "310/Marine Central" license in the area of the preliminary
      permit for a period of three years.

      The work plan in the license includes, among other things, preparation of
      a drilling prospect, both for shallow gas targets and deep oil targets, as
      well as drilling. On December 14, 2000, drilling was begun at the "Rome 1"
      well in the Marine Central License. The well was planned for a depth of
      1,500 meters (in water that is 47 meters deep). Drilling reached a depth
      of 1,483 meters. On December 31, 2000, after analyzing the results of the
      logs carried out at the well, the partners decided to abandon the well.

      D.    Grantit (295) license

      The Granit (295) license was granted on January 9, 2000 to I.N.O.C. Israel
      National Oil Company Ltd. (hereinafter - "I.N.O.C.). The license covers an
      area of 95,100 dunams on the coastal plain south of Ashdod until the
      border of the Gaza Strip. The work plan stipulated in the terms of the
      license includes, among other things, conducting a 3D seismic survey, to
      commence no later than January 1, 2001, and drilling to commence no later
      than February 1, 2002.


                                                                              24
<PAGE>

                                             Isramco Negev 2 Limited Partnership

--------------------------------------------------------------------------------
Notes to the Financial Statements
--------------------------------------------------------------------------------

Note 6 - Joint Ventures for Oil and Gas Exploration (cont'd)

      D.    Grantit (295) license (cont'd)

      I.N.O.C. transferred rights in the license to the limited partnerships in
      the following manner: the Partnership (69%), Naphtha Explorations (15%)
      and I.N.O.C. Dead Sea (15%). I.N.O.C., the oil exploration operator in the
      license, was left with 1%.

      In April 2000, an agreement was signed with the Geophysical Institute for
      a 3D seismic survey. The cost of carrying out and interpreting the survey
      totals an amount of $ 300 thousand. The survey was finished on May 16,
      2000 after which the data was processed and interpreted.

      E.    The "Marine South" and "Marine South B" preliminary permits with
            right of way

      In June 2000, the Director granted Isramco Inc. the "169/Marine South" and
      174/Marine South B" preliminary permits with right of way, covering areas
      of 142 thousand dunams and 40 thousand dunams, respectively.

      The permits were granted for the period ending July 8, 2001. The work plan
      stipulated in the terms of the permits includes, among other things, a
      seismic survey of 150 sq. km. in the "Marine South" permit and 50 sq. km.
      in the "Marine South B" permit.

      Isramco Inc., which serves as the operator of these preliminary permits,
      transferred rights in the permits as follows: the Partnership (59%),
      Naphtha Explorations (15%), I.N.O.C. Dead Sea (15%) and Modi'in Energy
      (10%). Isramco Inc. was left with 1%.

      In July 2000, the partners approved a budget authorization of $ 310
      thousand for conducting, processing and interpreting seismic surveys. In
      both the permits, surveys were conducted over a total length of 160 km.
      The survey data was processed and an initial interpretation was prepared.

      F.    Natanya license

      On May 1, 2000, I.N.O.C. was granted the "299/Natanya" license, covering
      an area of 380,100 dunams on the coastal plan, from Natanya in the north
      to Rishon Le-Zion in the south. The license is limited in the entire area
      to the underground area between the ground surface and the Judah Group
      base.

      On January 2, 2001, the general meeting of the holders of participation
      units in the Partnership approved an agreement with I.N.O.C. whereby
      I.N.O.C., the license operator, would transfer to the Partnership 69% of
      the rights in the Natanya license against the undertaking of the
      Partnership to bear its relative share of the expenses of exploration in
      the area of the license and in the area of any oil asset that replaces the
      license.

      On March 12, 2001, I.N.O.C. notified the Director that tests done in the
      area of the license showed that there is no justification for the 3D
      seismic survey that was planned for the area of the license. As a result,
      and in light of the terms of the license, the operator notified the
      Director that the Natanya license was being returned.


                                                                              25
<PAGE>

                                             Isramco Negev 2 Limited Partnership

--------------------------------------------------------------------------------
Notes to the Financial Statements
--------------------------------------------------------------------------------

Note 6 - Joint Ventures for Oil and Gas Exploration (cont'd)

      G.    The Gal licenses

      On December 14, 2000, an agreement was signed between the Partnership and
      the Naphtha Explorations and I.N.O.C. Dead Sea limited partnerships on the
      one hand, and BG on the other hand, whereby the partnerships would buy
      from BG a total of 10% of the rights in the Gal Licenses (see Notes 14C
      and 14D).

Note 7 - Other Receivables

<TABLE>
<CAPTION>
                                                         December 31        December 31
                                                                2000               1999
                                                       -------------      -------------
                                                       NIS thousands      NIS thousands
                                                       -------------      -------------
<S>                                                              <C>               <C>
         Acrued income                                            6                114
         Isramco Inc. - related party                            13                 85
         Other                                                   38                 19
                                                       -------------      -------------

                                                                 57                218
                                                       =============      =============
</TABLE>

Note 8 - Investment in Oil and Gas Properties

<TABLE>
<CAPTION>
                                                         December 31        December 31
                                                                2000               1999
                                                       -------------      -------------
                                                       NIS thousands      NIS thousands
                                                       -------------      -------------
<S>                                                          <C>                <C>
         Investment in "Or 1" drilling (1)                    7,183             *6,844
         Investment in "Nir 1" drilling (2)                  10,333                 --
                                                       -------------      -------------

                                                             17,516              6,844
                                                       =============      =============

         Including payments to related parties                2,093                739
                                                       =============      =============
</TABLE>

      (1)   See Note 6A3.

      (2)   See Note 6A6

      *     Reclassified


                                                                              26
<PAGE>

                                             Isramco Negev 2 Limited Partnership

--------------------------------------------------------------------------------
Notes to the Financial Statements
--------------------------------------------------------------------------------

Note 9 - Other Payables

<TABLE>
<CAPTION>
                                                               December 31        December 31
                                                                      2000               1999
                                                             -------------      -------------
                                                             NIS thousands      NIS thousands
                                                             -------------      -------------
<S>                                                                 <C>                <C>
         Accrued expenses                                           1,753              1,690
         "Or 1" Joint Venture                                          --                501
         Equital Ltd. - related party                                  --                 26
         Isramco Oil and Gas Ltd. - related party                      --                314
         Other                                                         62                 37
                                                             -------------      -------------

                                                                    1,815              2,568
                                                             =============      =============
</TABLE>

Note 10 - Limited Partnership's Equity

      A.    General partner - Isramco Oil and Gas Ltd.

      Until December 31, 2000, the general partner has invested the amount of
      NIS 366 thousand in the equity of the Limited Partnership. The general
      partner participates in the expenses and losses and is entitled to income
      in accordance with the proportional share of the general partner in the
      amounts invested in the equity of the Limited Partnership.

      As at December 31, 2000, the general partner's share in equity is 0.05%.
      This proportion decreases each time additional capital is invested in the
      Limited Partnership.

      B.    Limited partner - Isramco Management (1988) Ltd.

      Until December 31, 2000, the limited partner has invested NIS 807,920
      thousand in the equity of the Limited Partnership. The limited partner
      participates in the expenses and losses and is entitled to income in
      accordance with the proportional share of the limited partner in the
      amounts invested in the equity of the Limited Partnership.

      As at December 31, 2000, the limited partner's share in equity is 99.95%.
      This proportion increases each time additional capital is invested in the
      Limited Partnership.


                                                                              27
<PAGE>

                                             Isramco Negev 2 Limited Partnership

--------------------------------------------------------------------------------
Notes to the Financial Statements
--------------------------------------------------------------------------------

Note 10 - Limited Partnership's Equity (cont'd)

      C.    The equity of the Limited Partnership

      Composition:

<TABLE>
<CAPTION>
                                                                                Limited           General              Total
                                                                                partner           partner
                                                                          -------------     -------------      -------------
                                                                          NIS thousands     NIS thousands      NIS thousands
                                                                          -------------     -------------      -------------
<S>                                                                            <C>                   <C>            <C>
         Balance at the beginning of the year                                   652,410               366            652,776
         Capital issuance, net of issuing costs                                    (728)               --               (728)
         Options exercised                                                      156,238                --            156,238
                                                                          -------------     -------------      -------------

                                                                                807,920               366            808,286
                                                                          -------------     -------------      -------------

         Accumulated deficit, beginning of the year                            (320,063)             (212)          (320,275)
         Net loss for the year                                                  (15,087)               (8)           (15,095)
                                                                          -------------     -------------      -------------

         Accumulated deficit, end of the year                                  (335,150)             (220)          (335,370)
                                                                          -------------     -------------      -------------

         Balance as at the end of the year                                      472,770               146            472,916
                                                                          =============     =============      =============
</TABLE>

      D.    In a legal opinion received by the Limited Partnership, it was
            recommended that once the Partnership accumulates earnings, the
            limited partner and/or the Supervisor should petition the court with
            a request for instructions pertaining to the doubts raised in the
            legal opinion regarding the issue of what are considered to be
            distributable earnings and if and when the distribution of earnings
            by the Limited Partnership should be considered as a withdrawal by
            the limited partner of his investment, as defined in Paragraph 63(B)
            of the Partnership Ordinance.

      E.    As a result of the extraordinary decision taken at the general
            meeting of the holders of the participation units on March 21, 1999
            to merge existing participation units (between 10 and 100 units, as
            will be decided by the general partner immediately prior to the
            actual merger of the units) into one participation unit, the trustee
            was notified by the general partner that in accordance with the
            aforementioned decision, each 10 existing participation units would
            be merged into one new unit. Prior to the issuance of rights, as
            detailed in F below, the participation units were merged.


                                                                              28
<PAGE>

                                             Isramco Negev 2 Limited Partnership

--------------------------------------------------------------------------------
Notes to the Financial Statements
--------------------------------------------------------------------------------

Note 10 - Limited Partnership's Equity (cont'd)

      F.    Issuance of participation units and option warrants (Series 3)

            In June 1999, a prospectus was publicized for the issuance by way of
            rights of 1,908,955,846 participation units of a par value of NIS
            0.01 each, together with 1,090,831,912 option warrants (Series 3),
            exercisable into participation units on any trading day from the
            date of their being listed for trade until September 5, 1999. Each
            option warrant is exercisable into one participation unit at an
            exercise price of NIS 0.09 (unlinked). Option warrants (Series 3)
            not exercised by September 5, 1999 expire. The aforementioned
            securities were offered to the existing owners of participation
            units in 272,707,978 clusters at a price of NIS 0.378 per cluster,
            with each cluster containing 7 participation units and 4 option
            warrants (Series 3).

            Out of all of the securities that were offered in the prospectus
            (including the right to purchase 43,318,954 participation units,
            together with 24,753,688 option warrants (Series 3) that was offered
            to a controlling shareholder in the general partner and which was
            fully exercised), rights to purchase 1,888,016,429 participation
            units, together with 1,078,866,530 option warrants (Series 3) were
            exercised.

            The consideration received in return for the issuance of the rights,
            including the investment of the general partner and net of issuance
            costs, totaled an amount of NIS 103 million. As of September 5,
            1999, the last day for the exercise of the option warrants (Series
            3), 107,463,905 option warrants were exercised into participation
            units, at a total exercise cost of NIS 9,721 thousand. The rest of
            the option warrants that were not exercised expired.

      G.    Option warrants (Series 4)

      On November 22, 1999, a prospectus was publicized for the issuance by way
      of rights of 567,047,078 registered option warrants (Series 4),
      exercisable into participation units of the Partnership on any trading day
      from the date of their being listed for trade until February 29, 2000.
      Each option warrant is exercisable into one participation unit granting
      the right to participate in the rights of the trustee as the limited
      partner in the Limited Partnership, at an exercise price of NIS 0.10.
      Option warrants not exercised by February 29, 2000 expire and will not
      grant their owners any right whatsoever.

      As of February 29, 2000, 566,258,483 option warrants were exercised, at a
      total net exercise cost of NIS 57.2 million. The rest of the option
      warrants that were not exercised expired.


                                                                              29
<PAGE>

                                             Isramco Negev 2 Limited Partnership

--------------------------------------------------------------------------------
Notes to the Financial Statements
--------------------------------------------------------------------------------

Note 10 - Limited Partnership's Equity (cont'd)

      H.    Option warrants (Series 5)

      In May 2000, a prospectus was publicized for the issuance by way of rights
      of 1,417,223,398 registered option warrants (Series 5) (hereinafter -
      "option warrants (Series 5)"), exercisable into participation units of the
      Partnership on any trading day from the date of their being listed for
      trade until October 1, 2000. Each option warrant is exercisable into one
      participation unit, at an exercise price of NIS 0.07. Option warrants
      (Series 5) not exercised by October 1, 2000 expire. As of October 1, 2000,
      1,416,460,910 option warrants were exercised, at a total net exercise cost
      of NIS 99.1 million. The rest of the option warrants that were not
      exercised expired.

Note 11 - Contingent Liabilities and Commitments

      A.    In the event of a discovery of oil and/or gas and/or any other
            valuable material that will be extracted and realized from the "Med"
            licenses in which the Limited Partnership operates and in other
            licenses in which it will operate, the Limited Partnership undertook
            to pay royalties from the revenues generated from the first 10% of
            the area of the license/holding/permit as detailed below:

<TABLE>
<CAPTION>
                                                    On-shore licenses                              Off-shore licenses
                                        ------------------------------------------     -----------------------------------------
                                         Until the date of     Following the date       Until the date of    Following the date
                                         the return of the      of the return of        the return of the     of the return of
                                            investment           the investment             investment         the investment
                                        ------------------------------------------     -----------------------------------------
<S>                                             <C>                  <C>                      <C>                  <C>
        To Isramco Inc.                         5.36%                13.94%                   1.06%                13.83%
</TABLE>

      In addition, in the event of a discovery of oil and/or gas and/or any
      other valuable material that will be extracted and realized from the "Med"
      licenses, under the "Negev Med" preliminary permit from October 1991, the
      Limited Partnership undertook to pay royalties from the revenues generated
      from the first 10% of the area of the license/holding/permit as detailed
      below:

<TABLE>
<CAPTION>
                                                    On-shore licenses                              Off-shore licenses
                                        ------------------------------------------     -----------------------------------------
                                         Until the date of     Following the date       Until the date of    Following the date
                                         the return of the      of the return of        the return of the     of the return of
                                            investment           the investment             investment         the investment
                                        ------------------------------------------     -----------------------------------------
<S>                                            <C>                    <C>                     <C>                   <C>
        To J.O.E.L. Jerusalem
         Oil Exploration Ltd.                  2.88%                  7.48%                   0.51%                 6.58%
        To Equital Ltd.                        1.45%                  3.77%                   0.38%                 4.93%
</TABLE>


                                                                              30
<PAGE>

                                             Isramco Negev 2 Limited Partnership

--------------------------------------------------------------------------------
Notes to the Financial Statements
--------------------------------------------------------------------------------

Note 11 - Contingent Liabilities and Commitments

      Moreover, the Limited Partnership has to pay royalties to the State of
      Israel in accordance with the Oil Law, 1952.

      At the general meeting of holders of participation units, held on January
      20, 2000, it was decided to approve the liability of the Partnership to
      pay an overriding royalty to the general partner amounting to 5% of the
      Partnership's shares in oil and/or gas revenues (gross, before expenses
      and other royalties, including the royalty to the State under the Oil Law)
      generated from the areas of: "Marine Central", "Marine North A", "Marine
      North B" and "Granite", and preliminary permits: "Marine South" and
      "Marine South B", including any license or holding that replaces them
      and/or replaces any of them.

      Isramco Inc. is entitled to an overriding royalty of 2% from the share of
      each of the companies of the Isramco Group, including that of the
      Partnership, which will be extracted from the off-shore licenses and/or
      any oil right that replaces them, in addition to any royalty and/or other
      consideration which Isramco Inc. is entitled to at present.

      For information regarding the overriding royalty from the "Gal Licenses",
      see Note 14C.

      B.    In accordance with the amendment to the Limited Partnership
            agreement dated August 6, 1993, effective August 1993, it was
            stipulated that the Limited Partnership would pay the general
            partner the equivalent of $ 35,000 per month in return for placing
            at the disposal of the Limited Partnership the services of the
            employees of the general partner, when needed, and as ongoing rent
            and maintenance for part of the offices of Isramco Inc. in Israel,
            which also serve the Limited Partnership.

            At the general meeting of holders of participation units, held in
            February 1997, it was decided to approve an update of the payment to
            the general partner to the equivalent of $ 42,000 (plus V.A.T.),
            effective January 1997. At the same meeting, the general partner
            undertook to collect a monthly fee of only $ 40,000.

      C.    Under an agreement signed in March 1989 between the Limited
            Partnership and East Mediterranean Oil and Gas Ltd. (hereinafter -
            "the marketing agreement" and "E.M.O.G.", respectively), E.M.O.G.
            was granted the right to be appointed the exclusive marketing agent
            of the Limited Partnership in Israel and areas under its control for
            the wholesale marketing of crude oil extracted from the oil area of
            the Negev 2 Venture to which the Limited Partnership is entitled.
            Under an agreement signed in March 1992 between the Limited
            Partnership and other companies, some of which at the time were
            interested parties in the general partner (J.O.E.L. Jerusalem Oil
            Exploration Ltd. and Isramco Inc.), various oil rights were
            transferred to the Limited Partnership, including the Negev Med
            preliminary permit under which the off-shore licenses were later
            issued (hereinafter - the "agreement for the transfer of rights").
            The agreement for the transfer of rights stipulated that marketing
            of the crude oil to be produced from the oil rights that were
            transferred to the Limited Partnership from the aforementioned
            interested parties under the agreement for the transfer of rights
            would be done by E.M.O.G., in accordance with the marketing
            agreement.

            The duration of the agreement is fifteen years following the first
            commercial production. E.M.O.G. has the right to endorse its rights
            and obligations under the agreement.


                                                                              31
<PAGE>

                                             Isramco Negev 2 Limited Partnership

--------------------------------------------------------------------------------
Notes to the Financial Statements
--------------------------------------------------------------------------------

Note 11 - Contingent Liabilities and Commitments (cont'd)

      D.    The oil rights, in which the Limited Partnership has a share, are
            granted under the Oil Law for a fixed period of time and are
            conditioned on the fulfillment of obligations at times stipulated in
            the terms of the oil assets. In the event the conditions are not
            fulfilled, the oil rights can be cancelled. Extension of the
            duration of an oil asset is usually at the discretion of the
            authorities who, under the Oil Law, have the right to renew only
            part of it as well as to add additional conditions. In the event the
            conditions are not met, a permit can be cancelled or reduced. The
            ability to take advantage of oil assets under a permit is
            conditioned, among other things, on the ability and the desire of
            the Limited Partnership and the partners to finance the various
            activities involved in it, as well as the availability of the proper
            equipment and manpower in Israel. Lack of equipment or manpower can
            increase the costs of or totally prevent fulfillment of the
            conditions of the holding, license or permit, prevent or reduce the
            extension thereof, or result in the cancellation thereof.

      E.    Under the trust agreement, in the event of the termination of the
            trust, the cash received as a result of the sale of the trust
            assets, less the expenses of the sale and the termination of the
            trust, shall be divided among the owners of participation units and
            the owners of option warrants (should any exist), less the exercise
            price.

      F.    The Supervisor is entitled to receive from the Limited Partnership a
            fee of the NIS equivalent of $ 3,500 per month, as long as the trust
            agreement is still in effect. In addition, the Supervisor is
            entitled to be reimbursed by the Partnership for expenses legally
            incurred by him in fulfilling his duties and which were approved by
            the general partner. Regarding the expense amounts, see Note 12C.
            Until May 1997, the expenses of the Supervisor were paid by Isramco
            Management.

      G.    The Limited Partnership undertook to indemnify the general partner
            and all of his workers and/or executives in respect of any loss,
            expense, or damage that they or their agents incur or are demanded
            to pay, directly or indirectly, for any act of commission or
            omission for which, in accordance with the provisions of the Limited
            Partnership agreement, they are not liable.

      H.    The off-shore drillings in which the Partnership may partake, are
            subject to the conditions and restrictions stipulated or to be
            stipulated by the security forces. These conditions and restrictions
            may result in changes or delays in schedules and, may result in
            unforeseen increased costs and possible incompliance with the terms
            of the licenses.


                                                                              32
<PAGE>

                                             Isramco Negev 2 Limited Partnership

--------------------------------------------------------------------------------
Notes to the Financial Statements
--------------------------------------------------------------------------------

Note 11 - Contingent Liabilities and Commitments (cont'd)

      I.    Under an agreement from February 1997, the Limited Partnership
            purchased all of the rights of Equittal Ltd., a related party, in
            the Shikma carveout of the Ashdod Holding (10%) from a depth of 1500
            meters and below.

            The Partnership undertook to pay Equittal Ltd., in the event that
            commercial quantities are discovered in the well, an amount of $
            84.5 thousand and royalties of 6% before and after return of the
            investment.

      J.    Under grant agreements between the State of Israel and various
            entities which, in the past, had rights in the "Negev 2" venture and
            in the oil assets of that venture, those entities were awarded
            investment grants which financed part of their participation in the
            venture. Under the aforementioned grant agreements, the State was
            entitled to the return of the grants and to royalties on the sale of
            oil and/or gas, in the event of a discovery at the oil assets (the
            return was on condition that it would not exceed 30% of the share of
            the partner who was obligated to return the grant, in the net
            revenues from the well face, and the royalties were 6.5% of the
            share of the partner in the oil to be extracted from the area of the
            oil right). In 1991, the entities that had received the grants,
            ceased their participation in the "Negev 2" venture, as part of the
            "Sole Risk" agreements signed with regard thereto. The grants
            granted by the State of Israel amounted to $ 7 million. There is no
            certainty that the Israeli Ministry of Energy and Infrastructure
            will not try and dispute the "Sole Risk" agreements and the
            activities taken on the basis thereof. It is possible that, in such
            an event, it will be claimed that the obligation of the entities
            that received the grants to repay the grants and the royalties was
            transferred to the Limited Partnership along with part of the oil
            assets it received as part of the execution of the "Sole Risk"
            proceedings, as above.

      K.    The expenses of the "Yam West 1" well do not include three bills
            that were submitted by the owner of the drilling platform, The Ben
            Line Steamer Ltd. (hereinafter - "Ben Line"), in a total amount of $
            1.3 million, in respect of damages caused to certain parts of the
            drilling platform (to the B.O.P. and the raising system) which Ben
            Line claims must be borne by the operator. The three bills are for
            the cost of repairs, transportation and loss of revenue. The
            operator rejected Ben Line's claim since, according to the
            agreements, the operator is not liable for the aforementioned
            liability and, therefore, no provision was made in respect of these
            three bills.


                                                                              33
<PAGE>

                                             Isramco Negev 2 Limited Partnership

--------------------------------------------------------------------------------
Notes to the Financial Statements
--------------------------------------------------------------------------------

Note 11 - Contingent Liabilities and Commitments (cont'd)

      L.    On May 4, 2000, the recommendations of the public committee for
            income tax reforms were published. It was recommended, among other
            things, that a capital gains tax be levied on gains in real terms on
            securities traded on the stock market by individual residents of
            Israel, at the taxpayer's marginal tax rate, but not exceeding 25%.
            It was also recommended to cancel the tax benefits granted to
            investors in oil exploration. At present, neither the general
            partner nor the trustee can estimate if, when and in what form the
            recommendations of the committee will be implemented, including the
            proposed transitory provisions. Therefore, they cannot estimate what
            effects the possible ramifications of the implementation of the
            recommendations will have on the tax resulting from the purchase,
            holding and sale of the participation units and the option warrants
            issued by the trustee and that will be issued by him in the future,
            in the event the recommendations are implemented.

            On July 26, 2000, the Government published the proposed Law for the
            Amendment of the Tax Laws, 2000, which adopts some of the
            recommendations of the public committee. The proposed law does not
            include the cancellation of the tax benefits granted to investors in
            oil exploration. Nevertheless, the general partner cannot estimate
            if, when and in what format the recommendations regarding the
            cancellation of benefits granted to investors in oil exploration
            will be implemented in future legislation.

      M.    In February 2000, the proposed law, The Natural Gas Economy, 2000,
            was proposed (hereinafter - the "proposed law") on behalf of the
            Government. The objective of the proposed law is to create the
            proper conditions for the development of the natural gas industry in
            Israel and to maintain competition therein, taking into
            consideration the policy of the Government in the areas of economics
            and energy, to organize the activities of the natural gas economy
            through the private sector, to create the conditions for rendering
            of high quality, reliable and timely natural gas services to
            consumers, and to ensure safety in the natural gas economy.

            The proposed law worded as it was, was rejected by the Knesset in
            its first reading on August 1, 2000 (see also paragraphs O and P
            below.

      N.    On June 7, 2000, the Director of Oil Affairs, in accordance with the
            authority granted to him by the Oil Law, announced the closure of
            oil exploration and production in all sea beds in which the depth of
            the water above them permits the utilization of natural resources,
            and in which there are no oil rights or preliminary permits with
            right of way in effect.


                                                                              34
<PAGE>

                                             Isramco Negev 2 Limited Partnership

--------------------------------------------------------------------------------
Notes to the Financial Statements
--------------------------------------------------------------------------------

Note 11 - Contingent Liabilities and Commitments (cont'd)

      O.    On August 10, 2000, the Ministry of Finance published its economic
            policy for 2001 in which it was decided to recommend amending the
            Oil Law, in order to increase competition, to organize the oil
            rights, and to separate the arrangements for oil from the
            arrangements for natural gas, among other things, regarding the
            following:

            1.    Allotment of new rights will be executed also by way of
                  tender, in accordance with guidelines to be stipulated by the
                  Minister of Infrastructure in coordination with the Minister
                  of Finance.

            2.    Strengthening certain restrictions on the holding of large
                  areas by one oil rights holder which causes over-concentration
                  in the natural gas segment in Israel.

            3.    Setting a tax or an additional royalty of between 10% - 50% of
                  the revenues from the sale of oil, to be levied on oil
                  producers in accordance with guidelines to be stipulated by
                  the Minister of Finance.

            4.    Cancellation of special land rights for purposes of laying
                  pipes and exclusive water rights of oil rights holders.

            5.    Cancellation of the exemption from payment of customs duties,
                  import tax, purchase tax, and excise tax, and cancellation of
                  discounts on certain levies, with the goal of equating the
                  taxes and levies to those paid by ordinary industrial
                  companies.

            In the explanations to the recommendations, it was noted that due to
            the discovery of gas off the coast of Ashkelon, problems arose
            regarding the implementation of the Oil Law, especially in view of
            the proposed Law for the Natural Gas Economy. Therefore, the Oil Law
            should be reconsidered in light of the new reality. It was also
            noted that in the Oil Law, oil was defined, among other things, also
            as natural gas and, in view of the different conditions in
            exploration and the expected profit from each of the products, it is
            necessary to separate the arrangements applicable to each one.

            As of the date of the signing of the financial statements, it is not
            possible to know which of the recommendations will be submitted by
            the aforementioned inter-ministerial committee, how the economic
            policy to be formulated in these matters will be reflected in
            legislation, and how changes in legislation, if any, will affect the
            existing and future exploratory activities of the Limited
            Partnership.


                                                                              35
<PAGE>

                                             Isramco Negev 2 Limited Partnership

--------------------------------------------------------------------------------
Notes to the Financial Statements
--------------------------------------------------------------------------------

Note 11 - Contingent Liabilities and Commitments (cont'd)

      P.    On October 30, 2000, the proposed Law for Arrangements in the
            Economy (Legislative Amendments to Achieve Budgetary Goals for
            Fiscal Year 2001), 2000 was published on behalf of the Government
            (hereinafter - the "proposed law"). The proposed law included
            chapters entitled "Natural Gas' and "Oil". The goals of the "Oil"
            chapter, according to the proposed law, are to create the conditions
            needed for the development of the natural gas industry and to
            increase competition therein, taking into consideration the
            government's policy in the areas of the economy and energy, and to
            create the conditions for rendering high quality, reliable and
            timely natural gas services.

            It was proposed to stipulate that operation of a transportation
            system and the establishment and operation of a distribution network
            require a license - a transport license or a distribution license,
            whichever appropriate, from the Minister of National Infrastructures
            (hereinafter - the "Minister"), and on his terms. The proposed law
            defines "transport" as the transfer of natural gas at pressures
            higher than 16 bars through pipelines, and "distribution" as the
            transfer of natural gas at pressures of 16 bars or less through
            pipelines. It was proposed that the Minister is entitled to
            stipulate, in the regulations or in the license, provisions and
            conditions to ensure the objectives of the chapter pertaining to
            natural gas. In addition, the Minister and the Minister of Finance,
            after consulting the Natural Gas Authority, have the right to change
            the terms of the license during the period in which it is in effect,
            if it becomes clear that the matter is needed to achieve the goals
            of the chapter on natural gas, taking into consideration
            technological changes and market and environmental conditions. It
            was also proposed that the Minister, with the consent of the
            Minister of Finance, should have the right to stipulate in the
            license the requirement to pay royalties or license fees and the
            manner in which they should be computed and paid.

            It was proposed that the transport license should be granted by a
            tender to be issued by the Government. However, the Minister will
            have the right to grant the transport license without a tender to a
            supplier of natural gas (defined as one who is engaged in Israel or
            abroad in the extraction of natural gas and the sale of such gas for
            consumption in Israel), for purposes of building pipelines for the
            transport of natural gas which he extracted to an installation for
            the processing of the natural gas, or for the purpose of connecting
            to a transport system. The transport license will stipulate its
            duration, and the Minister will have the right to stipulate a period
            of exclusivity, on condition that neither the duration of the
            license nor the period of exclusivity exceeds 30 years.

            It was proposed to stipulate restrictions on the government and
            others from the energy field as owners of transport and distribution
            licenses, as detailed in the explanations of the law, so as to lead
            the natural gas economy in the direction of private financing and
            operation, to prevent a conflict of interest between being engaged
            in natural gas and in other businesses, and to ensure equal service
            to all.


                                                                              36
<PAGE>

                                             Isramco Negev 2 Limited Partnership

--------------------------------------------------------------------------------
Notes to the Financial Statements
--------------------------------------------------------------------------------

Note 11 - Contingent Liabilities and Commitments (cont'd)

            Under the proposed law, a natural gas authority would be established
            to approve rates determined by the owners of the licenses and to set
            criteria for the level, nature and quality of services that a
            license holder should provide to his customers. The Minister would
            appoint a Director of Natural Gas Affairs who would be responsible,
            among other things, to supervise the fulfillment of obligations by
            the license owners, to settle disputes between license owners and to
            handle customer complaints. In addition, it was proposed in the
            chapter on natural gas to amend the Oil Law and to stipulate that
            the provisions of the Oil Law, as far as they relate to natural gas,
            will be subordinated to the "natural gas" chapter in the proposed
            Arrangements Law.

            The chapter on oil in the proposed law includes amendments to the
            Oil Law, including - limiting the area of a preliminary permit to
            2,500 dunams off-shore and 1,000 dunams on-shore, a stipulation that
            no single person should be granted the right of way to more than two
            preliminary permits (the proposed definition of a "single person" is
            an individual person, or a person and a member of his family or an
            entity related to him), a new provision regarding guidelines to be
            set out by the Minister, with the consent of the Finance Minister,
            for the granting of a preliminary permit or oil right by way of
            tender, the prohibition on the owner of a holding to build an oil
            pipe, including a pipe for transporting or collecting oil and its
            products, without the approval of the Director (which will be
            granted only if there is no other way to transport or collect the
            oil) and subject to any law, cancellation of the rights of an oil
            rights owner to demand that the Government buy land for him under
            the Land Ordinance (Purchase for Public Needs), 1943, or to demand
            from the Minister that the land or any right in the land be leased
            to him, cancellation of certain exemptions from customs duties,
            import and other taxes, purchase tax and the right to recoup excise
            tax and the right of export, currently granted under the Oil Law,
            and finally, the addition of a clause to the Oil Law permitting the
            Finance Minister to regulate levies and fees on the rights owners
            under the Oil Law and to stipulate special provisions for the rights
            owners regarding taxation, including the rates and method of
            calculation thereof.

      Q.    On November 22, 2000, an agreement was signed between BG, MEE (in
            which Clal Industries, the Petrochemical Industries and Dor
            Chemicals are partners) and the Partnership, Naphtha Explorations
            Limited Partnership, I.N.O.C.-Dead Sea Limited Partnership, Naphtha
            Israel Petroleum Company Ltd., J.O.E.L. Jerusalem Oil Exploration
            Ltd., Equittal Ltd., and Isramco Inc., for cooperation among the
            aforementioned parties in the joint supply of natural gas to the
            Israel Electric Company from sources inside and out of Israel (Gaza
            and Egypt), in accordance with the submission of a proposal to the
            Israel Electric Company regarding the supply of 2.5 billion cubic
            meters of gas per annum, for a period of between 10 - 20 years.

            On March 13, 2001, the Israel Electric Company notified BG that, at
            present, it would not continue negotiating with BG and its
            aforementioned partners for the purchase of gas since the quantities
            of gas from Israeli sources, held by BG and its partners, are
            insufficient for the needs of the Israel Electric Company.


                                                                              37
<PAGE>

                                             Isramco Negev 2 Limited Partnership

--------------------------------------------------------------------------------
Notes to the Financial Statements
--------------------------------------------------------------------------------

Note 12 - Supplementary Data for Statement of Earnings

      A.    Financing income, net

<TABLE>
<CAPTION>
                                                                                                          For the year ended
                                                                          --------------------------------------------------
                                                                            December 31       December 31        December 31
                                                                                   2000              1999               1998
                                                                          -------------     -------------      -------------
                                                                          NIS thousands     NIS thousands      NIS thousands
                                                                          -------------     -------------      -------------
<S>                                                                              <C>               <C>                <C>
         Gain (loss) from marketable securities, net                             (9,779)           12,353             (1,048)
         Financing income (expenses), net                                        11,232            11,295               (289)
         Dividend and interest received                                          11,741             9,044              9,910
         Commissions and other                                                   (3,055)           (1,389)                81
                                                                          -------------     -------------      -------------

                                                                                 10,139            32,003              8,654
                                                                          =============     =============      =============
</TABLE>

      B.    Expenses (income) from oil and gas exploration, net

<TABLE>
<CAPTION>
                                                                                                          For the year ended
                                                                          --------------------------------------------------
                                                                            December 31       December 31        December 31
                                                                                   2000              1999               1998
                                                                          -------------     -------------      -------------
                                                                          NIS thousands     NIS thousands      NIS thousands
                                                                          -------------     -------------      -------------
<S>                                                                              <C>               <C>                <C>
         "Nisanit 1" venture                                                          9               (13)              (110)
         "Sderot" venture                                                          (797)             (132)            20,219
         "Yam Ashdod" carveout venture in
          "Med Ashdod" license                                                    1,581               270                612
         "Negev 2" venture                                                           --               (10)                90
         "Negev Med" venture                                                        339             1,790              1,096
         "David 2" drilling                                                          --                51                468
         "Yam West 2" drilling                                                   (2,242)           36,861                 --
         "Marine North" license                                                   3,662               523                 --
         "Or South" drilling                                                         --            12,133                 --
         "Marine Center" license and "Rome 1" drilling                           13,308                --                 --
         "Granit" license                                                           928                --                 --
         "Natanya" license                                                          229                --                 --
         Preliminary permit "Marine South"                                          234                --                 --
         "Med Yavne" license                                                      4,615                --                 --
         "Gal licenses" venture                                                   1,027                --                 --
                                                                          -------------     -------------      -------------

                                                                                 22,893            51,473             22,375
                                                                          =============     =============      =============

         Including payments to related parties                                    4,496             7,858              2,661
                                                                          =============     =============      =============
</TABLE>


                                                                              38
<PAGE>

                                             Isramco Negev 2 Limited Partnership

--------------------------------------------------------------------------------
Notes to the Financial Statements
--------------------------------------------------------------------------------

Note 12 - Supplementary Data for Statement of Earnings (cont'd)

      C.    General and administrative expenses

<TABLE>
<CAPTION>
                                                                                                          For the year ended
                                                                          --------------------------------------------------
                                                                            December 31       December 31        December 31
                                                                                   2000              1999               1998
                                                                          -------------     -------------      -------------
                                                                          NIS thousands     NIS thousands      NIS thousands
                                                                          -------------     -------------      -------------
<S>                                                                               <C>               <C>                <C>
         Reimbursement of management fees and rent to
          Isramco Oil and Gas Ltd. - related party                                1,953             2,009              1,983
         Professional services                                                       74                92                 92
         Taxes and fees                                                             111               116                167
         Fees to the limited partner and the Supervisor -
          a related party                                                           171               176                158
         Other                                                                       32                86                 10
                                                                          -------------     -------------      -------------

                                                                                  2,341             2,479              2,410
                                                                          =============     =============      =============
</TABLE>

      D.    Loss per participation unit

<TABLE>
<CAPTION>
                                                                                                          For the year ended
                                                                            ------------------------------------------------
                                                                            December 31       December 31        December 31
                                                                                   2000              1999               1998
                                                                            -----------       -----------        -----------
<S>                                                                           <C>               <C>                <C>
         The number of participation units used in
          computing the basic and diluted loss per
          participation unit (in thousands)                                   4,250,908         2,010,813          1,389,354

         The loss used in computing the basic and
          diluted loss per participation unit (in NIS thousands)                (15,087)          (18,266)           (16,120)
</TABLE>

Note 13 - Related and Interested Parties

      A.    Balances and transactions with related and interested parties are
            included in the notes to the financial statements under the relevant
            items.

      B.    See Note 11 regarding additional commitments.


                                                                              39
<PAGE>

                                             Isramco Negev 2 Limited Partnership

--------------------------------------------------------------------------------
Notes to the Financial Statements
--------------------------------------------------------------------------------

Note 14 - Subsequent Events

      A.    For more information regarding subsequent events related to the
            "Negev Med" Joint Venture, see Note 6A.

      B.    For more information regarding subsequent events related to the
            "Natanya" License, see Note 6F.

      C.    On January 2, 2001, the general meeting of the Partnership ratified
            the following resolutions:

      1.    The general partner will enter into an agreement on behalf of the
            Partnership, together with the I.N.O.C. Dead Sea Limited Partnership
            (hereinafter - the "I.N.O.C Partnership") and the Naphtha
            Explorations Limited Partnership (hereinafter - the "Naphtha
            Partnership"), managed by entities affiliated with the general
            partner, on the one hand, and BG on the other hand, whereby the
            Partnership, the I.N.O.C. Partnership and the Naphtha Partnership
            will purchase a total of 10% of the rights (hereinafter - the
            "purchased rights") in six licenses received in the areas of the
            A/165 - Gal, B/166 - Gal, and C/167 - Gal preliminary permits with
            right of way (the Michal, Matan, Tommy, Orly, Shira and Aya
            licenses) ( (hereinafter - the "Gal Licenses"). The rights to be
            purchased by the Partnership in the Gal licenses will be at a rate
            of 5%; however, in the event that the I.N.O.C. Partnership and/or
            the Naphtha Partnership do not approve their share in the purchase,
            in whole or in part, the Partnership will purchase rights at a total
            rate of up to 10%. In return for the purchased rights, an amount of
            $ 500 thousand will be paid in respect of the 3D seismic survey that
            was executed in the Gal C preliminary permit, and the proportional
            share (10%) of the other expenses in respect of activities carried
            out in the aforementioned preliminary permits and that will be
            carried out in the Gal licenses, during the period from January 1,
            2000 until the date of the transfer of the rights, as defined in the
            agreement. (The aforementioned expenses total an amount of $ 1,385
            thousand as of September 30, 2000, i.e., the proportional share in
            respect of the purchased rights totals an amount of $ 138,500.) The
            share of the Partnership in these amounts will be in accordance with
            its share in the purchased rights.

      2.    An agreement with I.N.O.C. Israel National Oil Company Ltd.
            (hereinafter - "I.N.O.C.") (a company controlled by a controlling
            interest in the general partner), whereby I.N.O.C. will transfer to
            the Partnership 69% of the rights in the Natanya/299 on-shore
            license, against the commitment of the Partnership to bear its
            proportional share of the expenses incurred and that will be
            incurred up to the date of the transfer of the rights in the area of
            the license (which total expenses amount to NS 250 thousand) and in
            expenses that will be incurred in the future in the area of the
            license and in the area of any other asset to come in its stead.

      3.    The general partner can sign in the name of the Partnership on any
            document needed to obtain the rights to the Gal licenses and the
            Natanya license, and subject to their being obtained, to sign an
            agreement to join the operating agreements applicable to the Gal
            licenses and the Natanya license, and as shall be amended by the
            parties to these agreements.


                                                                              40
<PAGE>

                                             Isramco Negev 2 Limited Partnership

--------------------------------------------------------------------------------
Notes to the Financial Statements
--------------------------------------------------------------------------------

Note 14 - Subsequent Events (cont'd)

      4.    The undertaking of the Partnership to pay an overriding royalty of
            5% to the general partner, out of the share of the Partnership in
            the oil and/or gas revenues (gross, before expenses and other
            payments, including royalties to the State of Israel under the Oil
            Law, 1952) to be generated from the areas of the transferred oil
            asset, i.e., the Gal licenses and the Natanya license, including any
            oil asset that comes in their stead and/or instead of any of them.

      5.    A change in the designation of the money of the Partnership and to
            stipulate that the existing funds of the Partnership are earmarked
            also for investment in the Gal licenses or any of them and/or the
            Natanya license and/or any oil asset that comes in their stead, at
            times and in amounts that will be determined by the general partner.

      D.    Alon Israel Fuel Company Ltd. offered to purchase from the
            Partnership and from the Naphtha Exploration and I.N.O.C. Dead Sea
            Limited Partnerships the rights to participate in a total of 5% of
            the six off-shore licenses (Michal, Matan, Tommy, Orly, Shira and
            Aya), known as the Gal licenses in return for an amount of $ 1,065
            thousand, plus V.A.T., an overriding royalty of 11.5% plus V.A.T.,
            and the payment of the exploration expenses in respect of the
            aforementioned rights for the period commencing September 30, 2000
            and thereafter.

            The general partner requested from the limited partner to call a
            general meeting of the owners of the participation units in the
            Partnership, with an agenda of discussing the offers and taking
            decisions regarding the sale of the rights of the Partnership in the
            Gal Licenses, including the percentage of the rights to be sold, if
            such sale is approved, and approving the overriding royalty of 6.5%
            to the general partner, so that the Partnership would be left with
            an overriding royalty of 5%.

            The general meeting of the Partnership met on February 27, 2001 and
            did not approve the aforementioned sale of rights.


                                                                              41
<PAGE>

                                             Isramco Negev 2 Limited Partnership

--------------------------------------------------------------------------------
Notes to the Financial Statements
--------------------------------------------------------------------------------

Note 15 - Differences between Israeli GAAP and U.S. GAAP

      A.    General

      The Limited Partnership's financial statements are prepared in accordance
      with generally accepted accounting principles in Israel ("Israeli GAAP"),
      which differ in certain respects from generally accepted accounting
      principles in the United States ("U.S. GAAP"). Differences which have a
      significant effect on the net assets, income or the Limited Partnership's
      equity are set out below.

      1.    Effect of inflation

            The Limited Partnership includes the effect of price level changes
            in the accompanying financial statements. , as required under
            Israeli GAAP and discussed in Note 3 to these financial statements.

            U.S. GAAP does not provide for recognition of the effects of such
            price level changes. However, the U.S. Securities and Exchange
            Commission permits the recognition of the effects of price level
            changes and, therefore, such effects are not included in the
            reconciliation of net income or stockholders' equity presented
            herein.

      2.    Marketable securities

      The Limited Partnership owns 12% of the participation units of a related
      limited partnership engaged in oil and gas exploration. Under Israeli GAAP
      these participation units, which designated for sale in the short term,
      are recorded at market value as of the balance sheet date with unrealized
      gains losses included in the statements of earnings. Under US GAAP the
      participation units are recorded using the equity method in accordance
      with AICPA Statement of Position 78-9.

      The effect of reversing the unrealized gain or loss on these participation
      units for Israeli GAAP and application of the equity of accounting for
      U.S. GAAP purposes are presented as separate adjustments below.


                                                                              42
<PAGE>

                                             Isramco Negev 2 Limited Partnership

--------------------------------------------------------------------------------
Notes to the Financial Statements
--------------------------------------------------------------------------------

Note 15 - Differences between Israeli GAAP and U.S. GAAP (cont'd)

      B.    The effect of the material differences between Israeli and U.S. GAAP
            of the aforementioned items on the financial statements is as
            follows:

      1.    On the statements of earnings:

<TABLE>
<CAPTION>
                                                                                   Year ended December 31
                                                                       --------------------------------------------------
                                                                                2000              1999               1998
                                                                       -------------     -------------      -------------
                                                                       NIS thousands     NIS thousands      NIS thousands
                                                                       -------------     -------------      -------------
<S>                                                                          <C>               <C>                <C>
                  Net loss under Israeli GAAP                                (15,095)          (18,399)           (16,131)
                                                                       -------------     -------------      -------------

                  Adjustment (Note 15 A.2)
                  Revaluation of marketable securities                           882            (1,565)              (203)
                  Partnership equity in earnings (loss) of
                   a partnership                                                (105)              416                345
                                                                       -------------     -------------      -------------

                                                                                 777            (1,149)               142
                                                                       -------------     -------------      -------------

                  Net loss under U.S. GAAP                                   (14,318)          (19,548)           (15,989)
                                                                       =============     =============      =============

<CAPTION>
                                                                                    Year ended December 31
                                                                       --------------------------------------------------
                                                                                2000              1999               1998
                                                                       -------------     -------------      -------------
<S>                                                                        <C>               <C>                <C>
                  Loss per participation unit basic and
                   diluted (under U.S. GAAP)

                  Net loss                                                   (14,318)          (19,548)           (15,989)
                                                                       =============     =============      =============

                  The general partner share in the net loss                        7                12                 10
                                                                       =============     =============      =============

                  Net loss attributable to participation unit
                   holder (NIS thousands)                                    (14,311)          (19,536)           (15,979)
                                                                       =============     =============      =============

                  Basic and diluted net loss per
                   participation unit (NIS thousands)                         (0.005)           (0.009)            (0.015)
                                                                       =============     =============      =============

                  Weighted average number of participation
                   units used in calculation of basic and
                   diluted loss per unit (NIS thousands)                   3,017,694         2,178,359          1,039,064
                                                                       =============     =============      =============
</TABLE>


                                                                              43
<PAGE>

                                             Isramco Negev 2 Limited Partnership

--------------------------------------------------------------------------------
Notes to the Financial Statements
--------------------------------------------------------------------------------

Note 15 - Differences between Israeli GAAP and U.S. GAAP (cont'd)

      B.    The effect of the material differences between Israeli and U.S. GAAP
            of the aforementioned items on the financial statements is as
            follows: (cont'd)

      2.    On balance sheet items:

<TABLE>
<CAPTION>
                                                                             December 31
                                    --------------------------------------------------------------------------------------------
                                                        2000                                            1999
                                    --------------------------------------------   ---------------------------------------------
                                      As reported     Adjustment          As per     As reported      Adjustment          As per
                                                                       U.S. GAAP                                       U.S. GAAP
                                    -------------  -------------   -------------   -------------   -------------   -------------
                                    NIS thousands  NIS thousands   NIS thousands   NIS thousands   NIS thousands   NIS thousands
                                    -------------  -------------   -------------   -------------   -------------   -------------
<S>                                      <C>               <C>          <C>             <C>                <C>          <C>
         Assets
         Marketable securities (1)        261,691            594         262,285         235,925           1,476         237,401
         Investment in affiliate (2)           --          2,794           2,794              --           2,899           2,899
                                    -------------  -------------   -------------   -------------   -------------   -------------

                                          261,691          3,388         265,079         235,925           4,375         240,300
                                    =============  =============   =============   =============   =============   =============

         Equity
         Accumulated loss (1) (2)        (335,370)           169        (335,201)       (320,275)           (608)       (320,883)
                                    =============  =============   =============   =============   =============   =============

                                         (336,370)           169        (335,201)       (320,275)           (608)       (320,883)
                                    =============  =============   =============   =============   =============   =============
</TABLE>

      (1)   Change in value of investment securities to market value.
      (2)   Partnership equity in earnings (loss) of a partnership.


                                                                              44
<PAGE>

                                             Isramco Negev 2 Limited Partnership

--------------------------------------------------------------------------------
Notes to the Financial Statements
--------------------------------------------------------------------------------

Note 15 - Differences between Israeli GAAP and U.S. GAAP (cont'd)

      B.    The effect of the material differences between Israeli and U.S. GAAP
            of the aforementioned items on the financial statements is as
            follows: (cont'd)

      3.    On the statement of cash flows:

<TABLE>
<CAPTION>
                                                                                       Year ended December 31
                                                                           --------------------------------------------------
                                                                                    2000               1999              1998
                                                                           -------------      -------------     -------------
                                                                           NIS thousands      NIS thousands     NIS thousands
                                                                           -------------      -------------     -------------
<S>                                                                            <C>                <C>                <C>
                  Net cash inflow (outflow) generated by
                   operating activities - Israeli GAAP                            4,351            (22,518)            (7,333)

                  Adjustments
                  Net (loss) earnings                                               777             (1,149)               142
                  Gain (loss) from marketable securities, net                      (882)             1,565                203
                  Proceeds from disposal of (investment in)
                   marketable securities, net                                   (35,545)           (91,109)           104,729
                  Partnership equity in loss (earnings) of
                   a Partnership                                                    105               (416)              (345)
                                                                           -------------      -------------     -------------
                  Net cash inflow (outflow) generated by
                   operating activities - U.S. GAAP                             (31,194)          (113,627)            97,396
                                                                           =============      =============     =============
                  Net cash outflow generated by
                   investing activities - Israeli GAAP                         (128,008)           (98,737)           (98,478)

                  Adjustments
                  Investment in investee company                                     --               (784)                --
                  Investment in marketable securities                           249,809            237,778             34,880
                  Proceeds from disposal of marketable
                   securities                                                  (214,264)          (145,885)          (139,609)
                                                                           -------------      -------------     -------------
                  Net cash outflow generated by
                   investing activities - U.S. GAAP                             (92,463)            (7,628)            (6,251)
                                                                           =============      =============     =============
</TABLE>


                                                                              45
<PAGE>

                                             Isramco Negev 2 Limited Partnership

--------------------------------------------------------------------------------
Notes to the Financial Statements
--------------------------------------------------------------------------------

Note 16 - Financial Statements of the Partnership in Nominal Historical Values

      A.    Balance sheet

<TABLE>
<CAPTION>
                                                                                              December 31        December 31
                                                                                                     2000               1999
                                                                                            -------------      -------------
                                                                                            NIS thousands      NIS thousands
                                                                                            -------------      -------------
<S>                                                                                               <C>                <C>
         Current assets

         Cash and cash equivalents                                                                124,913             93,060
         Marketable securities                                                                    261,691            235,925
         Bank deposits                                                                             30,773                 --
         Joint ventures for oil and gas exploration                                                 8,743             *7,492
         Other receivables                                                                             57                218
                                                                                            -------------      -------------

                                                                                                  426,177            336,695
                                                                                            -------------      -------------
         Investments

         Bank deposits                                                                             41,370                 --
         Investment in oil and gas properties                                                      17,495             *6,840
                                                                                            -------------      -------------

                                                                                                   58,865              6,840
                                                                                            -------------      -------------

                                                                                                  485,042            343,535
                                                                                            =============      =============
         Current liabilities

         Joint ventures for oil and gas exploration                                                10,332              8,470
         Other payables                                                                             1,815              2,568
                                                                                            -------------      -------------

                                                                                                   12,147             11,038
                                                                                            -------------      -------------

         Limited Partnership's equity                                                             472,895            332,497
                                                                                            -------------      -------------

                                                                                                  485,042            343,535
                                                                                            =============      =============
</TABLE>

      *     Reclassified


                                                                              46
<PAGE>

                                             Isramco Negev 2 Limited Partnership

--------------------------------------------------------------------------------
Notes to the Financial Statements
--------------------------------------------------------------------------------

Note 16 - Financial Statements of the Partnership in Nominal Historical Values
(cont'd)

      B.    Statement of earnings

<TABLE>
<CAPTION>
                                                                                                          For the year ended
                                                                          --------------------------------------------------
                                                                            December 31       December 31        December 31
                                                                                   2000              1999               1998
                                                                          -------------     -------------      -------------
                                                                          NIS thousands     NIS thousands      NIS thousands
                                                                          -------------     -------------      -------------
<S>                                                                             <C>               <C>                  <C>
         Income

         Financing income, net                                                   10,613            36,724             26,606
         Other income, net                                                           --             3,555                 --
                                                                          -------------     -------------      -------------

                                                                                 10,613            40,279             26,606
                                                                          -------------     -------------      -------------

         Expenses

         Participation in oil and gas exploration, net                           22,899            51,283             20,272
         General and administrative expenses                                      2,334             2,450              2,273
                                                                          -------------     -------------      -------------

                                                                                 25,233            53,733             22,545
                                                                          -------------     -------------      -------------

         Net earnings (loss) for the year                                       (14,620)          (13,454)             4,061
                                                                          =============     =============      =============
</TABLE>


                                                                              47
<PAGE>

                                             Isramco Negev 2 Limited Partnership

--------------------------------------------------------------------------------
Notes to the Financial Statements
--------------------------------------------------------------------------------

Note 16 - Financial Statements of the Partnership in Nominal Historical Values
(cont'd)

      C.    Statement of Partnership's equity

<TABLE>
<CAPTION>
                                                                          Partnership's       Accumulated
                                                                                capital              loss              Total
                                                                          -------------     -------------      -------------
                                                                          NIS thousands     NIS thousands      NIS thousands
                                                                          -------------     -------------      -------------
<S>                                                                             <C>               <C>                <C>
         Balance as at January 1, 1998                                          322,087           (90,372)           231,715

         Net earnings for the year                                                   --             4,061              4,061
                                                                          -------------     -------------      -------------

         Balance as at December 31, 1998                                        322,087           (86,311)           235,776

         Issuance of participation units, net of issuance
          expenses                                                              100,472                --            100,472
         Options exercised                                                        9,703                --              9,703
         Net loss for the year                                                       --           (13,454)           (13,454)
                                                                          -------------     -------------      -------------

         Balance as at December 31, 1999                                        432,262           (99,765)           332,497

         Options exercised, net of issuance expenses                            155,018                --            155,018
         Net loss for the year                                                       --           (14,620)           (14,620)
                                                                          -------------     -------------      -------------

         Balance as at December 31, 2000                                        587,280          (114,385)           472,895
                                                                          =============     =============      =============
</TABLE>

      D.    Limited Partnership's capital

<TABLE>
<CAPTION>
                                                                                Limited           General
                                                                                partner           partner              Total
                                                                          -------------     -------------      -------------
                                                                          NIS thousands     NIS thousands      NIS thousands
                                                                          -------------     -------------      -------------
<S>                                                                            <C>                   <C>            <C>
         Balance of capital at the beginning of the year                        432,123               139            432,262
         Options exercised, net                                                 155,018                --            155,018
                                                                          -------------     -------------      -------------

         Balance of capital at the end of the year                              587,141               139            587,280
                                                                          -------------     -------------      -------------

         Accumulated loss at the beginning of the year                          (99,634)             (131)           (99,765)
         Net loss for the year                                                  (14,613)               (7)           (14,620)
                                                                          -------------     -------------      -------------

         Accumulated loss at the end of the year                               (114,247)             (138)          (114,385)
                                                                          -------------     -------------      -------------

         Partnership's capital at the end of the year                           472,894                 1            472,895
                                                                          =============     =============      =============
</TABLE>


                                                                              48