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


                                   FORM 10-KSB
            Annual Report for the Fiscal year ended December 31, 1998



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


Delaware                              0-12500                13-3145265
(State or Other Jurisdiction      Commission File            IRS Employer
of Incorporation)                      Number)               Identification No.)


              1770 St. James Place, Suite 607, Houston, Texas 77056
                    (Address of Principal Executive Offices)


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

[Mark One]

[X]  Annual report under Section 13 or 15(d) of the  Securities  Exchange Act of
     1934 For the fiscal year ended December 31, 1998 [Fee Required]

[ ]  Transition report under Section 13 or 15(d) of the Securities  Exchange Act
     of 1934 [No Fee Required]

         Securities registered under Section 12(b) of the Exchange Act:

Title of each Class:                   Name of each exchange on which registered
          None                                             None

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

                          Common Stock, par value $0.01
                           Class A Redeemable Warrants
                           Class B Redeemable Warrants
                                (Title of Class)



                                      -1-

<PAGE>

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

Check if there is no disclosure of delinquent  filers in response to Item 405 of
Regulation S-B contained in this Form, and no disclosure  will be contained,  to
the  best  of  registrant's   knowledge,  in  definitive  proxy  or  information
statements  incorporated  by  reference  in Part III of this Form  10-KSB or any
amendment to this Form 10-KSB. [X]

Issuer's revenues for the Fiscal year ended December 31, 1998: $4,502,000.

The aggregate  market value of the  Registrant's  Common Stock at March 31, 1999
held by persons deemed to be non-affiliates was approximately $2,804,000.

As of March 30, 1999, the Registrant had outstanding  2,639,809* shares of $0.01
par value Common Stock.

     * The Company  declared a one-for-ten  reverse stock split during 1998. The
effect of the reverse stock split has been  reflected in all share and per share
amounts in the accompanying consolidated financial statements.


                                      -2-

<PAGE>

Item 1.  Business and Properties

History

     Since its formation in 1982, Isramco, Inc. ("Isramco" or the "Company") has
been active in the exploration of oil and gas in Israel.  From 1982 to 1985, the
Company,  with  certain  affiliated  entities and other  participants,  expended
approximately  $8.5  million for oil and gas  exploration  in Israel and drilled
four  wells  onshore  Israel.  The  Company's  share of these  expenditures  was
approximately  $2.8  million.  Although oil was  discovered at the Gurim 4 and 5
wells, only approximately 9,000 Barrels have been produced and none of the wells
sustained commercial production.

     The Company, with related and unrelated parties, formed the Negev 1 Venture
in 1985 to continue oil and gas exploration  activities in Israel. These parties
included J.O.E.L.-Jerusalem Oil Exploration Ltd. ("JOEL"), Southern Shipping and
Energy (U.K.) ("SSE (U.K.)"), Equital Ltd. (an affiliated company formerly known
as Pass-port Ltd. ("Pass-port")),  East Mediterranean Oil and Gas Ltd. ("EMOG"),
Delek - The Israel Fuel Corporation Ltd.  ("Delek"),  Delek Oil Exploration Ltd.
("DOEX"), Naphtha Israel Petroleum Corporation Ltd. ("Naphtha"), HEI Oil and Gas
Ltd., a California  limited  partnership,  Donesco  Venture Fund One,  Mazal Oil
Inc., and L.P.S. Israel Oil Inc. ("HEI").

     The  participants  in the  Negev 1  Venture  expended  approximately  $19.2
million for oil and gas exploration  activities,  including seismic exploration,
and  drilled two wells,  both of which were dry holes.  The  Company's  share of
these expenditures was approximately  $576,000.  The Negev 1 Venture received no
revenues from its activities and its operations were terminated in 1988.

     Following  the  expiration  of the  Negev 1  Venture  in 1988,  the Negev 2
Venture was formed by the same  participants and held two licenses - Negev Nirim
and Negev  Ashquelon.  Within the  framework of the Negev 2 Joint  Venture,  two
offshore  wells ("Yam 1" and "Yam 2") were  drilled  and seismic and  geological
studies, both onshore and offshore,  were conducted at a cost of $44.55 million.
As of 1991, the activities  with the Negev Nirim License were carried out within
the  Bessor  Carveout  Area and as of 1993,  the  activities  within  the  Negev
Ashquelon  License were carried out within the Yam Carveout Area under Sole Risk
Agreements.  In February  1995,  the Negev Nirim License  (including  the Bessor
Carveout)  was  relinquished  and in June  1996,  the  Negev  Ashquelon  License
(including the Yam Carveout) was relinquished by the Venture  participants.  The
Company,  as the Operator,  is in the process of winding down the affairs of the
Negev 2 Joint Venture.

     In 1991  the  Negev 2  Venture  participants  (excluding  HEI)  received  a
Preliminary  Permit with  Priority  Rights to receive  Petroleum  licenses  (the
"Negev Med Venture"). Upon the expiration of the Preliminary Permit in 1993, the
Negev 2  Venture  participants  were  granted  five (5)  licenses:  Med Tel Aviv
License, Med Yavne License, Med Ashdod License, Med Hadera License, Med Hasharon
License (the "Med  Licenses") with a duration which has been extended until June
14, 2000.  The  participants  in the Negev Med Venture


                                      -3-
<PAGE>

have  delineated  the Yam Ashdod  Carveout Area (the "Yam Ashdod  Carveout Area)
within the Med Ashdod  License,  and this area  includes  all of the areas which
were transferred from the Negev Asquelon  License.  See "Summary  Description of
the Ventures,  the Petroleum  Assets,  Related Work  Obligations and Exploration
Efforts in Israel".

     On January 24, 1994 the  participants  in the Med Tel Aviv License  spudded
the Yam  Yafo 1 well in the  Yam  Yafo  Structure  approximately  20  kilometers
northwest  of the Tel  Aviv  coast.  There  was no  economic  justification  for
producing  oil and gas from this well.  The total cost of drilling  the Yam Yafo
well including tests, was approximately $38 million of which the Company's share
was $382,000.

     On November 15, 1994 the  participants in the Med Yavne License spudded the
Yam West 1 well (the well is located  approximately  32 kilometers  northwest of
Ashdod in a water depth of 2,130 feet) which was declared a dry hole.  The total
cost of the well was  approximately $23 million of which the Company's share was
approximately $231,000.

     In 1996 the  Ministry of Energy  awarded to the  Company and other  venture
participants  an onshore  drilling  license  called  Shederot/265.  In 1998, the
participants  in the  Shederot/265  license  drilled  the  Gevim 1 well  located
approximately  2 kilometers  south of  Shederot) to a depth of 15,157 feet.  The
well was declared a dry hole. The total cost of the well was approximately  $6.6
million of which the Company's  share was  approximately  $66,000.  In December,
1998, the Company relinquished the Shederot license.

     In 1997 the Company expanded its activities  outside of Israel by acquiring
membership  interests in Jay Petroleum LLC which owns certain working  interests
in  oil  and  gas  wells  in  the  United  States  and by  acquiring  rights  in
exploitation and exploration concessions in the Congo, Africa.

The Operator

     The Company is the Operator of the Negev Med Venture which consists of five
offshore licenses,  the Yam Ashdod Carveout Venture (Yam Ashdod Carveout is part
of Med Ashdod  license) and the Shederot  Venture which  consists of one onshore
license.  As the  Operator,  the Company is  responsible  for  directing the oil
exploration and drilling activities of each Venture through its Branch Office in
Petach Tikva, Israel. With five (5) full-time employees, outside consultants and
subcontractors,  the Company  carries out the  operations of each Venture within
the framework of approved work programs and budgets and pursuant to the terms of
a Joint Operating Agreement.

     The Operator  charges each Venture  participant  for all costs  incurred in
connection  with the  exploration  and  drilling  activities  conducted  by each
Venture and is entitled to receive a fee for its  administrative  overhead equal
to 6% of all direct charges or minimum  monthly  compensation of $6,000 per each
License.  During the year ended  December 31, 1998, the Company was paid fees of
$288,000  in  connection  with the  Negev Med  Venture  and fees of  $72,000  in
connection  with  the Yam  Ashdod  Carveout  Venture  and  fees of  $360,000  in
connection with Shederot License. See "Material Agreements". The minimum monthly

                                      -4-

<PAGE>

Operator's fee is currently $30,000 per month.


General Partner for the Negev 2 Limited Partnership

     In 1989 the Company formed in Israel the Negev 2 Limited  Partnership  (the
"Limited  Partnership") to acquire from the Company a substantial portion of its
working interest in the Negev 2 Venture. In exchange for working interests,  the
Limited  Partnership  paid to the  Company  $700,000  and granted to the Company
certain overriding  royalties.  In 1992, the Company  transferred to the Limited
Partnership  additional  rights  in the  Negev  Ashquelon  License,  the  Bessor
Carveout,  and the Negev Med  Permit  with  Priority  Rights  (now the Negev Med
Licenses) in exchange for additional  overriding  royalties and reimbursement of
expenses.  The Company created Isramco Oil and Gas Ltd. ("IOG"),  a wholly-owned
subsidiary to act as the General Partner for the Limited  Partnership and formed
Isramco Management (1988) Ltd., a wholly-owned  subsidiary to act as the nominee
holder of Limited Partnership units held by public investors in Israel. Pursuant
to the Limited Partnership  Agreement and the Trust Agreement,  a Supervisor was
appointed on behalf of the Limited Partnership unit holders, with sole authority
to appoint the sole director for Isramco Management (1988) Ltd. and to supervise
its activities on behalf of and for the benefit of the Limited  Partnership unit
holders.  The daily management of the Limited Partnership vests with the General
Partner,  however,  matters involving the rights of the Limited Partnership unit
holders, such as capital generation or participation in new liscense agreements,
are subject to the  supervision of the  Supervisor and in certain  instances the
approval of the Limited  Partnership unit holders.  The firm of Igal Brightman &
Co.,  Accountants  and Mr.  David  Valiano,  Accountant  has been  appointed  as
Supervisors.

     The  Company  during  1992  and  1993,  in  order  to  assist  the  Limited
Partnership in the financing of its oil and gas exploration activities, acted as
offeror of Limited  Partnership  units to the public in Israel and  assisted the
Limited Partnership in raising approximately $123 million from public in Israel.
On March 1, 1999 the Limited Partnership had available approximately $56 million
to finance its share of work  obligations  under the Licenses with regard to the
Petroleum  Assets.  The Limited  Partnership  is the  largest  holder of Working
Interests  in the Negev Med Venture  and the Yam Ashdod  Carveout  Venture.  See
"Table of Petroleum Assets (Working Interests) Oil and Gas Ventures".

     The Company holds overriding  royalties in certain Petroleum Assets through
the Limited  Partnership and currently  receives a management fee of $40,000 per
month from the  Limited  Partnership  for  office  space,  management  and other
services.  It has been  significant to the Company that the Limited  Partnership
(in part through the efforts of the Company and others),  has been able to raise
monies from the public in Israel to fund the Limited  Partnership's share of the
work programs for the Petroleum  Assets in connection  with the  continuation of
oil and gas  exploration  activities  in Israel and to preserve the existence of
the  Company's  overriding  royalties.  As of December 31, 1998 the Company held
1.4% of the issued  Limited  Partnership  units and a subsidiary of the Company,
acting as General Partner for the Limited  Partnership  held a 0.01% interest in
the Limited Partnership.



                                      -5-
<PAGE>

Acquisition of Assets

Jay Petroleum, LLC. & Jay Management, LLC.

     In February 1997, the Company acquired from NIR Resources Inc.  ("NIR"),  a
wholly owned subsidiary of Naphtha Israel  Petroleum Corp. Ltd.  ("Naphtha") and
Stonewall  Resources  LLC  ("Stonewall"),  a  non-affiliated  entity,  ownership
interests in Jay Petroleum LLC ("Jay"), a Texas limited liability  company.  Jay
owns both operated and  non-operated  varying  working  interests in oil and gas
wells in the United States.

     The Company paid to NIR $677,500 for its 50%  Membership  Interest  (before
recovery of contributions) in Jay, which interest for profit allocation purposes
reduces to 37.5% after  recovery of capital  contribution.  The Company  paid to
Stonewall   $363,750  for  its  25%  Membership   Interest  before  recovery  of
contributions in Jay, which interest for profit  allocation  purposes reduces to
18.75% after recovery of capital  contributions.  Certain Officers and directors
of the Company are associates of officers and directors of Naphtha.

     In February 1997,  following the Company's  acquisition,  Jay acquired from
Snyder Oil Corporation of Fort Worth,  Texas,  various operated and non-operated
interests  in oil and gas wells in  Louisiana,  Texas and  Wyoming for a cost of
$3.1 million  excluding  acquisition costs and purchase price  adjustments.  The
acquisition was financed primarily with bank financing obtained by Jay through a
$10 million  Revolving  Credit  Facility with  Comerica  Bank - Texas,  Houston,
Texas.  The Company is neither a borrower  nor  guarantor  under this  Revolving
Credit Facility.

     In  connection  with this  acquisition  of  interests  in Jay,  the Company
received a Fair Market  Value  Letter from the firm of Albrecht  and  Associates
Inc., independent petroleum engineers, with regard to the oil and gas properties
held by Jay.  The Fair  Market  Value  Letter  was  based in part  upon  reserve
evaluation  and net  income  projections  prepared  by  Riseden  Services  Inc.,
independent  petroleum  engineers.  A copy of the Fair Market Value Letter dated
January 27, 1997 and the Riseden  Report dated  January 16, 1997 have been filed
as Exhibits with Form 8-K filed by the Company for the month of February 1997.

     In March 1998, the Company purchased the remaining 17.1% ownership interest
in Jay Petroleum held by Jay Resources  Corporation  and Jay Natural  Resources,
Inc. as a result of  arbitration.  The  transfer of ownership  was  effective on
December 31, 1997. See Item 3 Legal Procedures.



                                      -6-
<PAGE>


     During  1998,  the  Company  sold  100%  working  interest  in 30 wells for
$415,200 and 81.3% working interest in one well for $1,000,000.

     Jay  has  a  Management   Agreement   with  Jay   Management   Company  LLC
("Management"),  a Texas limited  liability  company,  to manage  certain of the
producing oil and gas interests owned or to be acquired by Jay.  Pursuant to the
Management Agreement, Jay was obligated to pay to Management a management fee of
$12,500 per month through  February 1998. Due to the sharp decline in oil prices
and the resulting effect on the cash flow of the Company, the obligation for the
payment of this fee was  waived  with the  mutual  consent of the  parties as of
March 1, 1998. Management also receives payments as operator pursuant to various
operating agreements for approximately 40 contract wells, which it operates.

     In March 1998 the Company acquired an additional 30% interest in Management
from Jay Natural  Resources,  Inc. as a result of  arbitration.  The transfer of
ownership was effective on December 31, 1997. At December 31, 1998,  the Company
purchased the remaining 35% in  Management  held by N.I.R.  Resources,  Inc. See
Item 3, Legal Proceeding.

     The acquisition of the interests in Jay and Management for consideration of
$255,000 and $60,000 in March 1998 and December  1998,  respectively,  were made
out of working  capital funds  available to the Company.  The audited  financial
statements  of both Jay and  Management  have been  consolidated  as part of the
Company's financial statements.

     Independent  estimates  of the  reserves  held by Jay  Petroleum  LLC as of
December  31, 1998 are  approximately  103,000  net barrels of proved  developed
producing oil reserves;  2,600 net MMCFs of proved developed  producing  natural
gas  reserves;  784 net  MMCFs of  proved  developed  behind  pipe  natural  gas
reserves; 898 net MMCFs of proved undeveloped natural gas reserves;  and, 49,000
net barrels of proved developed behind pipe oil reserves.

     For  information  related to future cash inflows,  future  development  and
production costs, future income tax expenses,  future net cash flows,  discount,
and  standardized  measure of discounted net cash flows relating to Jay, see the
Supplementary  Oil and Gas  information  immediately  following the notes to the
Financial Statements.

CONGO

     On September 4, 1997 the Company  acquired from Equital Ltd. (an Affiliated
company  formerly  known  as  Pass-port  Ltd.) a 50 %  participation  in a joint
venture that holds the following  two permits  offshore of the Congo (the "Joint
Venture"):  (1) the Marine III Exploration permit which has a term of four years
with an extension right of three years; and, (2) the Tilapia Exploitation permit
to develop the Tilapia  Field,  which has a term of ten years with an  extension
right of five years. The purchase price was $2.55 million for the Tilapia permit
and $150,000 for the Marine III permit for an aggregate  purchase  price of $2.7
million.

     The  Company's  participation  in the Joint  Venture  is  subject  to an 8%
carried  interest  payable to Equital Ltd. after payout of its rights  regarding
the production  sharing  contract on the Tilapia Permit.  "Payout" in this Joint
Venture means all of the  investments  made by


                                      -7-
<PAGE>

the Company in the Tilapia  permit  (excluding  the  Purchase  Price paid by the
Company to Equital Ltd.).  The Company  received a fair market  valuation of the
two permits  from Forrest A. Garb &  Associates,  Inc.,  petroleum  consultants,
Dallas,  Texas.  The  valuation in the Tilapia  permit made by Forrest A. Garb &
Associates, Inc. reflects a significant discount in value based upon technology,
economics  and  political  uncertainties  for the  proposed  work  program,  but
significantly exceeds the Company's purchase price.

     The Joint  Venture  holds 100% of the rights under the  production  sharing
contract  for the  Tilapia  permit  and 50% of the  rights  with  regard  to the
production  sharing contract in the Marine III permit.  The other participant in
the Joint Venture is Naphtha Israel Petroleum Corp. Ltd. See Security  Ownership
of Certain  Beneficial  Owners.  Work programs for the  operator,  Naphtha Congo
Ltd., a wholly owned subsidiary of Naphtha Israel Petroleum Corp. Ltd., prepared
the two permits.

     Oil was discovered  within the area of the Tilapia  Exploitation  Permit in
the Tilapia  Marine I exploration  well drilled by the previous  operator of the
permit, to a total depth of 5,018 Feet. The well tested 2,040 Barrels of oil per
day from a 31-foot  thick  sandstone  reservoir,  at a depth of 3,874 Feet.  The
discovery  well is  located  9.5  nautical  miles  north of the  Point  Indienne
productive oil field and less than one mile from the share line.

     The Marine III Exploration  Permit covers an area of approximately  236,000
acres and is located in shallow water, 0-80 Feet deep, along the coast. No wells
have yet been drilled on this permit.  The area of the two permits is covered by
a dense grid of two dimensional seismic lines.

     The  Joint  Venture's  rights in the  production  sharing  contract  on the
Tilapia Exploration Permit is subject to a 12.5% carried interest and payment of
$350,000 after payout of the Joint Venture's investment costs.

     As a result of the civil  instability  that  existed in 1997 in the Congo a
new  government  has taken  control  of this  country.  Due to these  events the
operator (Naphtha Congo) has temporarily  ceased its activities in the Congo. In
February 1998 the operator presented to the new Petroleum Minister its work plan
for Tilapia and Marine III. The economic and political and civil  instability in
the Congo and the change of government could cause significant  difficulties for
the operator in connection with the execution of a work program and the possible
development of both the Marine III permit and the Tilapia  permit.  A Management
Committee meeting between Naphtha Congo and the Congolese  Ministry of Petroleum
scheduled for July,  1998,  was  postponed.  On August 26, 1998, the Minister of
Petroleum of the Congo informed the Company that according to a decree signed by
the President,  Prime  Minister,  Minister of Petroleum and Minister of Finance,
the  permits  will  become  effective  from  the date of the  publishing  of the
production sharing contracts as a law, and that the Management Committee meeting
can  only be  held  after  the  completion  of the  formality  of this  process.
Therefore,  until the publishing of the law, the Company cannot proceed with the
work program.



                                      -8-
<PAGE>


OIL AND GAS VENTURES AND PETROLEUM ASSETS

LOCATED IN UNITED STATES AND CONGO

     See "Supplementary Oil and Gas Information"  immediately following Notes to
the audited Financial Statements.

OIL AND GAS VENTURES AND PETROLEUM ASSETS LOCATED IN ISRAEL

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

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

<TABLE>
<CAPTION>
                                             Med Tel Aviv License
                                             Med Ashdod License            Yam Ashdod
                                             Med Hadera License            Carveout             Med Yavne         Shederot
Name of Participant                          Med Hasharon License          Venture (2)          License           License
-------------------                          --------------------          -----------          -------           -------
<S>                                               <C>                       <C>                 <C>               <C>
The Company (4)                                      1.0043                    1.0043              1.0043           1.0043

Affiliates
----------
Isramco Negev 2,
Isramco Negev 2, Limited Partnership (5)            70.9957                   53.0268             70.9957          77.9957
I.O.C. Limited Partnership (6)                      14.0000                   14.0000               -----          14.0000
Naphtha                                              5.0000                   5.10145              5.0000           4.0000
Naphtha Explorations Limited Partnership             5.0000                   5.10145              5.0000            -----
JOEL (6)                                            -------                   -------              8.0000            -----
Equital (6)                                         -------                   -------              6.0000            -----

Non-affiliated entities
-----------------------
Delek Drilling Limited Partnership                   4.0000                   21.7660              4.0000           3.0000

Total                                              100.0000                  100.0000            100.0000         100.0000

Area (acres)                                        400,000                    84,220             100,000           90,000

Expiration Date                                   6/14/2000                 6/14/2000           6/14/2000         12/31/98
</TABLE>


                                      -9-
<PAGE>



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

(2)  Under the Grant Agreement with the Government of Israel, the Government may
     claim that the Company is contingently obligated to repay to the Government
     the Grant  monies in the amount of $110,000  and to pay a 6. 5 % Overriding
     Royalty on all production from the area.

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

(4)  The Company and its  subsidiaries  also hold the  Overriding  Royalties and
     1.4% of the Limited Partnership Units.

(5)  On November 11, 1997, Delek Drilling Limited Partnership  transferred 5% of
     its rights in the Shederot License to Isramco-Negev 2 Limited Partnership.

(6)  In November 1997, J.O.E.L.  and Equital sold to I.O.C.  Limited Partnership
     its  working  interests  in the  Shederot  Venture,  the Negev Med  Venture
     (excluding  Med Yavne) and the Yam Ashdod  Carveout  Venture.  In  December
     1998, the Company relinquished the Shederot license.

Overriding Royalties held by the Company

     The Company holds the following Overriding Royalties:

                          TABLE OF OVERRDDING ROYALTIES

<TABLE>
<CAPTION>
                                                    On the First 10% of the Limited Partnership
                                                     Share of the following Petroleum Licenses
        From The Limited Partnership              Before Payout                      After Payout
        ----------------------------              -------------                      ------------
<S>                                                   <C>                               <C>
Med Tel Aviv License                                  1.06%                             13.83%
Med Yavne License                                     1.06%                             13.83%
Med Ashdod License                                    1.06%                             13.83%
Med Hadera License                                    1.06%                             13.83%
Med Hasharon License                                  1.06%                             13.83%
Yam Ashdod Carveout                                   1.06%                             13.83%
Shederot License                                      5.00%                             13.00%
</TABLE>


<TABLE>
<CAPTION>
        From JOEL                                                   From JOEL
        ---------                                                   ---------
                                                              On 8% of JOEL's Interes 
                                                              ------------------------
                                                  Before Payout                      After Payout
                                                  -------------                      ------------
<S>                                                   <C>                               <C>
Yam Ashdod Carveout                                   2.5%                              12.5%
</TABLE>



                                      -10-

<PAGE>

<TABLE>
<CAPTION>
From Delek Oil Exploration Ltd.                                                 
          (DOEX) (1)(2)                             On 6% of DOEX's Interest
          -------------                             ------------------------
                                                 Before Payout      After Payout
                                                 -------------      ------------

<S>                                                  <C>              <C>                  
Yam Ashdod Carveout                                   2.5%             12.5% Ashdod Carveout
               2.5%                                  
</TABLE>

  From Delek (1)                                                             
  --------------                                                             
                                                  On 2% of DOEX's Interest From
                                                  -----------------------------
                                                 Before Payout      After Payout
                                                 -------------      ------------

Yam Ashdod Carveout                                   2.5%             12.5%

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

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




                                      -11-

<PAGE>


Summary  Description  of  the  Ventures,  the  Petroleum  Assets,  Related  Work
Obligations and Exploration Efforts in Israel

Negev Med Venture and Yam Ashdod Carveout Venture
-------------------------------------------------

     When the Negev Med  Venture  was formed in October of 1991,  the  Petroleum
Commissioner  granted to the participants the Negev Med Preliminary  Permit with
priority rights.  The Negev Med Preliminary Permit expired on April 28, 1993 and
the  participants  requested and received five new drilling  licenses (the Negev
Med Licenses). The Negev Med Licenses comprise the Med Tel Aviv License, the Med
Yavne  License,  the Med  Hadera  License,  the Med Ashdod  License  and the Med
Hasharon License. The duration of the licenses relating to the Negev Med Venture
has been extended until June 14, 2000.

     In June of 1996, upon the  relinquishment  of the Negev Ashquelon  License,
the  boundaries  of the Med Ashdod  License were modified to include the area of
the  structure  on which  the Yam 1 and Yam 2 wells  were  drilled,  as well as,
another  additional  structure  which  was part of the area of the  relinquished
Negev  Ashquelon  License.  The  participants  in the  Negev  Med  License  have
delineated  the Yam Ashdod  Carveout Area within the Med Ashdod License and this
Carveout Area includes all of the areas,  which were  transferred from the Negev
Ashquelon License.  Each participant's share in this new Carveout is the same as
it was in the Yam  Carveout  Venture  (which  was  part of the  Negev  Ashquelon
License).  The  activities  of the Yam Ashdod  Carveout  Venture,  including the
accounts and expenses of the Carveout, are reported separately. No operating fee
is charged under the Joint  Operating  Agreement  with respect to the Med Ashdod
License Area outside of the Yam Ashdod Carveout. The Licenses for the Yam Ashdod
Carveout Venture continue through June 14, 2000.

     Certain of the areas within the offshore licenses granted to the Company in
connection  with the Negev Ned Venture and the Yam Ashdod  Carveout  Venture are
subject to various  drilling  restrictions  imposed by the  Israeli  Ministry of
Defense, which restrictions significantly impede the Company's drilling efforts.
During the course of 1998,  various meeting were held with the Israeli  Ministry
of Defense and the  Petroleum  Commissioner  in an attempt to find an acceptable
solution  to the  restrictive  conditions  of the  licenses  so as to enable the
Company to carry out  prospective  drilling within the license areas. In view of
the  restrictive  conditions of the  licenses,  the Company  requested  from the
Petroleum Commissioner that the period from June 1996 through November,  1998 be
excluded  from the duration of the period,  so that the period of the license is
effectively extended beyond June 2000. The Company's request has been rejected.

     In  light  of the  continuing  delays  caused  by  these  restrictions,  in
November,  1998, the Company requested from the Petroleum  Commissioner that the
work program  previously  approved by the  Commissioner be revised such that the
drilling of the first and second wells be postponed to, respectively,  September
1999 and January 2000. Previously, in November, 1997, the Petroleum Commissioner
specified the following terms: (i) the performance of a



                                      -12-
<PAGE>

seismic  survey of at least 186 miles to be conducted no later than  February 1,
1998,  intended to assist in the  upgrading  of the  prospects in the Med Ashdod
license and (ii) the drilling of three wells to a depth of at least 3,000 meters
(approximately  9,800  feet)  deep,  with the  drilling on the first to begin no
later than  January 1, 1999;  the drilling on the second to begin before June 1,
1999;  and the  drilling  on the third to begin no later than  December 1, 1999.
Deepening of any existing well is considered be a drilling of a new well.

     In its  application  filed in November,  1998, the Company  advised that it
would explore the following options:

          (a) Offshore drilling of Yam 3 prospect or deepening of Yam 2, subject
     to the approval of the Israeli Ministry of Defense,  or drilling of the Yam
     Nitzanim prospect; and

          (b) Drilling in Med Ashdod or Med Yavne (the "Sharon  South"  prospect
     or the "Yam West 2" prospect).

     In December,  1998, the Petroleum  Commissioner advised the Company that in
response to its  request,  the work  program  has been  revised to allow for the
drilling of 2 wells,  each to a total depth of at least 3,000  meters,  with the
drilling  on the  first  well to begin no later  than  October  1,  1999 and the
drilling on the second no later than February 1, 2000.  Any deepening of the Yam
2 well would be deemed to be a new drilling.  In order to conform to the planned
schedule, the Company must:

          (i) Prepare a first draft of the  engineering  plans and public tender
     documentation,  including  a drilling  contract,  and submit  proposals  to
     drilling  contractors  for the first well by  February  1, 1999 and for the
     second well by June 1, 1999;

          (ii) Maintain  on-going  relations with the drilling  contractors  and
     receive their  responses by March 15, 1999 for the first well and by August
     15, 1999 for the second well;

          (iii) Sign a contract  for the first well with a  contractor  by April
     15, 1999 and for the second well by October 31, 1999.

     Following  further contact and  correspondence  between the Company and the
Ministry  of  Defense,  the  Company  proposed  a number of  potential  offshore
drilling  sites  during 1999.  Additionally,  the Company  requested  that it be
permitted to undertake drilling activity in areas,  which, in the Company's best
estimate,  are outside of the zones whereby the restrictions  apply. The Company
advised that it intends to  concentrate on two drilling  sites-Nitzanim  (in the
Med Ashdod  Carveout) and Yam West (within the Med Yavne  license).  On December
23, 1998, the Ministry of Defense  responded by permitting  drilling activity on
five sites within the license areas wherein the Ministry of Defense restrictions
do not apply-Nitzanim prospect,  Sharon South prospect and an additional site on
the southern side of "Yam West 2" prospect. The Ministry of Defense permits also
provided  that the  Company  is  required  to obtain a  drilling  permit  and to
coordinate all drilling activities with the Ministry of Defense.



                                      -13-
<PAGE>

     As of the  date  hereof,  no  solution  to the  conditions  imposed  by the
Ministry of Defense  respecting  the drilling in Med Ashdod (Yam 2 and 3) and in
part of the Med Yavne license (which is subject to the  restrictions  imposed by
the  Ministry of Defense)  has been found.  No  assurance  can be given that the
Company's  requests in this matter will be granted and that the conditions  will
be changed. Under these circumstances, the prevailing conditions may prevent any
further drilling in these areas.

     In  December  1998,  the  Company  reported  that it has reached an initial
understanding with the Ministry of Defense to carry out drilling in a section of
the area of the offshore  licenses.  As a result of this initial  understanding,
the Company presented to the partners the following proposal:

          (i) The drilling of the  Nitzanim  prospect to a depth of 5,400 meters
     at a water  depth of 70 meters.  The  prospect is located in the Med Ashdod
     Carveout,  approximately 18 kilometers southwest of the Yam-2 well, drilled
     in  1991.  Oil was  discovered  in the  Yam-2  well,  but due to  technical
     problems, the test of the well was not completed.

          (ii) The  drilling of the Yam West  prospect  located in the Med Yavne
     license to a depth of 3,500  meters at a water  depth of 350 meters The Yam
     West  prospect  is  located   approximately  38  kilometers   northwest  of
     Ashquelon.

     The total estimated cost of the two wells is $45 million.  The participants
have not yet approved  the  proposed  work  program.  All  drilling  activity is
subject  to  the  Ministry  of  Defense  authorizations,   the  availability  of
appropriate offshore drilling units, execution of drilling contractor agreements
and authorization for expenditure (AFE) for the above wells by the participants.

     In  order to start  preparation  for the  drilling  of the two  wells;  the
participants have been requested to approve an AFE of $250,000.

     The  Company  is  continuing  in its  efforts to obtain  approval  from the
Ministry of Defense to permit drilling  activities  within the restricted areas,
including  areas of the Yam-2 and the proposed  Yam-3 wells.  Additionally,  the
Company is undertaking  efforts to farm-out part of the partners'  interest to a
non-Israeli oil company.  The  participation of a non-Israeli oil company and/or
reaching an agreement  with the Ministry of Defense may, in the Company's  view,
cause changes in the drilling plans.

     On March 1, 1999,  the Company  published a request for  quotations for the
semisubmersible to drill the Yam West 2 well.

Yam Ashdod Carveout
-------------------

     Standard  processing  of the  seismic  data  acquired at the end of 1997 in
connection with the Yam Ashdod Carveout has been completed.  Interpretation  was
completed.  The results  indicate the  existence  of drillable  prospects in the
southern  part of the Carveout (Yam  Nitzanim  well).  The Company has evaluated
different drilling companies concerning their


                                      -14-
<PAGE>

availability  to supply an offshore  drilling unit (Jack-Up) in order to explore
the  possibility  of  drilling  the Yam 3 well,  subject to he  approval  of the
Ministry of Defense,  or the Yam Nitzanim well during the 1999.  The Company has
received positive responses from several drilling companies that are willing and
capable to drill the above wells.

     In light of the fact that the Company has not reached an understanding with
the Ministry of Defense  respecting  drilling on Yam 3, the Company notified the
participants  of its  intention  to include the  drilling  of Nitzanim  which is
located  within the Yam Ashdod  Carveout in its work plans for 1999. The Company
intends to  publish a request  for  quotations  to drill the Yam  Nitzanim  West
prospect with a Jack-Up.

     On January 6, 1999,  Delek Drilling Ltd. advised the Company that it intend
to reduce its  participation in the Nitzanim drilling from a level of 22% to 3%.
To date, no agreement has been reached by the  participants as to the allocation
of the working  interests  foregone by Delek.  Accordingly,  no  agreement as to
drilling in Nitzanim can be signed until such agreement  among the  participants
is reached.

     During the period  from  inception  to December  31, 1998 the  participants
authorized  expenditure  (AFE) in the  various  licenses  and paid  advances  as
detailed below (in thousands):

<TABLE>
<CAPTION>
                                                                         Isramco's share
                                                                 -------------------------------
License                Authorization for      Advances           Authorization for      Advances
-------                  Expenditure            paid               Expenditure            paid  
                         -----------            ----               -----------            ----  
<S>                        <C>                 <C>                    <C>                 <C> 
Med Tel Aviv               $39,390             $39,122                $396                $393
Med Yavne                  $25,206             $24,885                $253                $250
Med Hasharon               $ 1,615             $ 1,530                $ 16                $ 15
Med Hadera                 $ 1,150             $ 1,007                $ 12                $ 10
Med Ashdod                 $   762             $   762                $  8                $  8
                           -------             -------                ----                ----
                                                                                         
Total                      $68,123             $67,306                $685                $586
                           =======             =======                ====                ====
</TABLE>

Shederot License
----------------

     On January 1, 1996 the Petroleum Commissioner awarded the Company and other
participants an onshore drilling license called Shederot/265 covering an area of
88,750 acres. On March 18, 1996 the Petroleum Commissioner agreed to enlarge the
Shederot  License Area to 98,800 acres and added an additional  condition to the
terms of the license  according to which the participants must commence drilling
of a second  well to the same  depth as the first not later  than  December  31,
1998.



                                      -15-
<PAGE>

     In January 1998 the  participants in the Shederot license drilled the Gevim
well to a total  depth of 15,157  feet.  The well was  declared a dry hole.  The
total cost of the well was  approximately  $6.6 million,  of which the Company's
share was $66,000. The Company relinquished the license in December 1998.

Accounting  Treatment  of Oil  and Gas  Properties  on the  Company's  Financial
Statements

     The Company uses the "successful  efforts" method of accounting whereby all
costs of acquiring acreage,  costs of drilling successful  exploration wells and
development costs are capitalized.  Producing and  non-producing  properties are
evaluated periodically,  and if conditions warrant (i.e., should a well prove to
be dry and abandoned,  or not of commercial value or no development  activity is
contemplated  in the near  future),  the related  costs are written off.  Annual
lease rentals and exploration  costs,  including  geologic and geophysical costs
and exploratory dry hole costs, are charged to expense as incurred.

                               MATERIAL AGREEMENTS

     The Negev 2 Joint Venture Agreement (the "Joint Venture Agreement") and the
Negev 2 Joint  Operating  Agreement  (the  "JOA"),  as amended were entered into
between the participants of the Negev 2 Venture to explore,  develop and produce
petroleum and/or gas in certain areas onshore and offshore in Israel.  The Joint
Venture  Agreement is governed by and construed in  accordance  with the laws of
the State of Israel, and the place of jurisdiction is the courts of the State of
Israel.  Subject to the  provisions of the Joint Venture  Agreement and the JOA,
each party participates in all the costs,  expenses and obligations  incurred in
relation to a contract  area in the same  proportion as its rights and interests
in  such  contract  area.  Under  the  JOA,  the  Operator  carries  out all the
operations  contemplated  in the JOA, in the framework of approved Work Programs
and within the limitations of approved budgets  (AFE's).  Subject to the general
supervision of the Operating  Committee,  the Operator  controls and manages all
operations conducted pursuant to the JOA. The Operator may be removed for cause,
by notice in writing given by two or more of the other parties  representing  at
least 65% of the total  interests  in a  contract  area.  The  Company  with its
affiliates  hold more  than 65% of the total  interest  in each  contract  area,
however,  the Company only holds a 1.0043% interest in each Venture and does not
control  the  affiliated  parties  which are  public  companies.  See  "Table of
Petroleum Assets and Oil and Gas Ventures.

     Under the JOA, the Operator bills the  participants in each Venture for all
costs incurred in the Operator's head office, field office, on site or elsewhere
in connection  with a contract area,  including,  without  limitation,  rentals,
labor, consultants, materials,  transportation,  contract services, taxes, legal
and audit expenses,  premiums for insurance,  losses of joint property,  repairs
for  damages  not  covered  by  insurance  and  reasonable  personal  and travel
expenses.

     The services and related costs incurred by the Operator in connection  with
a contract


                                      -16-
<PAGE>

area  (provided  they are not  charged  as a direct  charge),  are  covered by a
monthly  overhead charge equal to 6% of all gross direct  charges.  An Operating
Committee on an annual basis may verify that the monthly  overhead charge of the
Operator equitably compensates the Operator for actual costs incurred.  Based on
the results of this annual cost  analysis,  the  percentage  chargeable  for the
benefit of the Operator can be adjusted, upward or downward as determined by the
participants in a contract area.

     The  holders of the Negev Med  Licenses  have also  entered  into a Deed of
Arbitrator  dated  November  10, 1993 to the effect  that the parties  agreed to
submit to a single arbitrator the following question:

          Is it justified,  by custom,  industry  practice,  history of previous
          agreements  between the parties,  or  otherwise,  that in the majority
          required  under the JOA  applicable  to the  Licenses  constituting  a
          "determining  vote"  there  should be  included a party which is not a
          member of the "Isramco Group" (namely a party other than Isramco-Negev
          2 Limited  Partnership,  J.O.E.L.  - Jerusalem Oil  Exploration  Ltd.,
          Pass-port Ltd. or Isramco, Inc.).

     The person to be  appointed  as  arbitrator  was to be  selected  by mutual
agreement  of the  parties  within  thirty  (30) days from  November  10,  1993,
however, if they failed to do so, an arbitrator will be appointed at the request
of either party by Mr. Avigdor Bartel.  The parties have not selected a mutually
agreed upon arbitrator.

Consulting Agreement with Haim Tsuff

     In May of  1996  the  Company  entered  into a  Consulting  Agreement  with
Goodrich Global L.T.D. B.V.I., a company owned and controlled by Haim Tsuff, the
Chairman  of  the  Board  of  Directors  and  Chief  Executive  Officer  of  the
Corporation.  Pursuant to this Consulting  Agreement which had a term of two (2)
years,  the Company agreed to pay the sum of $144,000 per annum in  installments
of $12,000  per month,  in  addition  to  reimbursing  all  reasonable  business
expenses incurred during the term in connection with the performance of services
on  behalf  of the  Company.  In April  1997  the  consulting  compensation  was
increased  to $240,000  per annum and in December  1997 the term was extended to
May 31, 2001. The Consulting Agreement as amended,  provides that the term shall
be automatically extended for an additional term of three (3) years,  commencing
June 1, 2001,  unless the  Company  has given  notice at least  ninety (90) days
prior to June 1, 2001 that it does not intend that the term be renewed.

Consulting Agreement with Daniel Avner

     In August of 1997 the Company entered into a one year Consulting  Agreement
with Romulas  Investment Ltd.  (which  Agreement has been assigned to Remarkable
Holdings Ltd.), a company owned and controlled by Daniel Avner, the President of
the  Company,  pursuant to which the Company has agreed to pay the sum of $7,500
per month plus expenses.  The Company  ratified the extension of the term of the
Consulting  Agreement through July 31, 2000 and,  effective February 1999 agreed
to  increase  the  monthly  compensation  paid  thereunder  to  $15,000,   while
disallowing  the  reimbursement  of  expenses.  The  Company  has also agreed to
provide a company car and company furnished


                                      -17-

<PAGE>


apartment, if available.

                                    EMPLOYEES

During  calendar  year  ending  December  31,  1998,  the  Company  had five (5)
employees  at its Branch  Office in Israel and 3 employees,  including  contract
personnel, at the offices in Houston, Texas.

                         Reverse Stock SplitStock Split

     The Company  declared a one-for-ten  reverse  stock split in May 1998.  The
action was taken in order to comply with the modified  listing  requirements  of
the Nasdaq Stock Market (Nasdaq) for the Nasdaq SmallCap  market.  The effect of
this reverse stock split has been  reflected in all shares and per share amounts
in the  accompanying  financial  statements.  The Company declared a one-for-ten
reverse stock split during 1998. The effect of this reverse stock split has been
reflected  in all shares and per share  amounts  in the  accompanying  financial
statements and financial summary in this Form 10-KSB.

Item 2. OFFICES 2. OFFICES

Israel

     The Company leases office space from Naphtha at 8 Granit St., Petach Tikva.
In 1998 the Company  paid Naphtha  $67,000 for rental  space,  office  services,
secretarial  services  and  computer  services.  The Company  believes  that the
payment  for the  above  services  are  reasonable  compared  to  other  similar
locations.

United States

     The Company maintains its executive offices in Houston,  Texas. The Company
has a lease for office  premises  (approximately  2,146 square feet) at 1770 St.
James Place,  Suite 607,  Houston,  Texas 77056 expiring  September 2000, with a
monthly rental of $2,718.

     The Company leases a corporate  apartment in the City of Houston on a month
to month basis,  at a monthly rental charge of $1,110 per month.  This apartment
is for use by the Company's officers, directors and employees in connection with
their activities relating to the business of the Company.

Item 3. Legal Proceedings

     Effective  October 27, 1997 Mr.  Reuven Hollo was removed by the Company as
Manager  of Jay  Petroleum  LLC and Jay  Management  Company  LLC.  The  Company
commenced a law suit against  Reuven Hollo which  proceeding  was stayed pending
resolution  of  an  arbitration   proceeding  by  Reuven  Hollo,  Jay  Resources
Corporation,  Jay Natural  Resources  Inc., Jay Petroleum LLC and Jay Management
Company LLC, as Claimants against the Company, NIR Resources Inc., Jay Petroleum
LLC and Jay


                                      -18-

<PAGE>

Management Company LLC, as Respondents.  The arbitration  proceeding and the law
suit have been resolved pursuant to a Settlement  Agreement and Release,  a copy
of which was filed as an Exhibit to Form 8-K for the month of March,  1998.  The
Claimants are  hereinafter  referred to as the "Hollo Group" and the Respondents
are hereinafter referred to as the "Isramco Group".

     Pursuant to the terms of the  Settlement  Agreement and Release,  the Hollo
Group  assigned all of their right,  title and interest in Jay Petroleum LLC and
Jay Management  Company LLC including their complete  ownership interest and any
and all rights to  undistributed  profits in these  entities  to the  Company in
consideration  for the Company (i) paying to Jay Resources  Corporation  and Jay
Natural  Resources  Inc.  the sum of $255,000,  (ii)  agreeing to assume any tax
liabilities or tax burdens arising solely from such undistributed  profits,  and
(iii) agreeing to assume a debt of $69,754  reflected as an accounts  receivable
of Jay Resources Corporation owed to Jay Petroleum LLC. In addition, the Isramco
Group agreed to use its best  efforts,  without cost, to effect a removal of the
Hollo Group as a guarantor  and/or  co-maker  of any loan of Jay  Petroleum  LLC
and/or  Jay  Management  Company  LLC.  The  effective  date  of the  Settlement
Agreement was December 31, 1997.

     The  Company's   Certificate  of  Incorporation  limits  the  liability  of
directors to the maximum extent permitted by Delaware Law and the By-laws of the
Corporation provide for indemnification of officers and directors of the Company
as permitted by Section 145 of the Delaware General Corporation Law. The Company
has also entered into agreements to indemnify its officers and directors and the
officers and directors of its subsidiaries.

Item 4. Submission of Matters to a Vote of Security Holders

     The Company held its Annual Meeting of Shareholders on May 18, 1998 and the
shareholders  voted as to the  following:  (a)  election of Haim  Tsuff,  Daniel
Avner, Tina Maimon Arckens,  Professor Avihu Ginzburg and Professor Linda Canina
as directors to serve for a term of one (i) year or until  his/her  successor is
duly  elected;  (ii)  approval  of an  amendment  to the  Company's  Articles of
Incorporation  to effect a  one-for-ten  reverse  stock  split of the  Company's
Common  Stock and (b) the  approval  of the firm of Hein &  Associates,  LLP. as
auditors for the year ending  December 31, 1998.  Hein & Associates has resigned
in November 1998 and, on March 10 1999, the Company has retained the services of
KPMG LLP to audit its 1998 financial statements. See Item 8.

     No other matters were submitted to a vote of  shareholders  during the year
ended December 31, 1998.

                                     PART II

Item 5. Market for Common Equity and Related Stockholder Matters

     The number of record  holders of the  Company's  Common  Stock on March 31,
1999 was approximately  341 not including an undetermined  number of persons who
hold their 

                                      -19-

<PAGE>


stock in street name.

     The high and low bid prices as  reported  on the  National  Association  of
Securities Dealers Automated  Quotations System National Market System are shown
in the table below.  These  over-the-market  quotations  reflect  prices between
dealers,  without  retail  mark-ups,  mark-downs  or  commissions  and  may  not
represent actual transactions.


<TABLE>
<CAPTION>
                                   Common Stock                   Class A Warrants**              Class B Warrants**
Quarter Ended                    High          Low               High            Low              High          Low
-------------------------------------------------------------------------------------------------------------------
<S>                             <C>            <C>               <C>             <C>              <C>           <C>
1998
March 31                        9 1/16         4 3/8               4/16            3/16             1/32          1/32
June 30*                        5 15/16        3 3/32              3/16            3/32             1/32          1/32
September 30                    3 3/8          1 21/32             3/32            1/64             1/32          1/32
December 31                     3              2 7/32              **              **               **            **
                                              
1997                                          
March 31                        7 1/2          5 5/16               3/32           1/16             1/16          1/32 
June 30                         6 1/4          5 5/16               3/32           1/16             1/32          1/32 
September 30                   11 1/4          5 15/16              5/16           5/32             7/32          1/16 
December 31                    10 5/8          6 1/4               17/64           5/32             1/8           1/16 
</TABLE>                                     

*    In May 1998, the Company effected a one-for-ten reverse stock split.

**   In  November,  1998,  the Class A Warrants  and the Class B  Warrants  were
     delisted.

     The Company has never paid a dividend on its Common  Stock.  The payment by
the Company of dividends,  if any, in the future rests within the  discretion of
its Board of Directors and will depend,  among other things,  upon the Company's
earnings, capital requirements and financial condition.

Item 6. Management's  Discussion and Analysis of Financial Condition and Results
of Operations and Selected Financial Data

     Statements  contained  in this  Report on Form  10-KSB  that are not purely
historical are  forward-looking  statements within the meaning of Section 27A of
the  Securities  Act of 1933,  as amended,  and  Section  21E of the  Securities
Exchange Act of 1934, including statements regarding the Company's expectations,
hopes,  intentions or  strategies  regarding  the future.  Such  forward-looking
statements  involve known and unknown factors that could cause actual results of
the Company to be materially  different from the historical  results or from any
future results expressed or implied by such forward looking statements.





                                      -20-

<PAGE>

Set forth below is a summary of certain financial information of the Company.

Statement of Operations Data (thousands)

<TABLE>
<CAPTION>
                                                                    1998           1997          1996          1995           1994
                                                                    ----           ----          ----          ----           ----
<S>                                                                <C>            <C>           <C>         <C>            <C>
Operator's fees                                                      $720           $461          $468        $1,115         $3,149
Oil and Gas Revenue                                                $1,410         $2,001          $335          $644             --
Interest income                                                      $557         $1,085        $1,175        $1,126           $769
Office services and other                                            $613           $483          $463          $428           $444
Equity in earnings of Jay Management LLC                              $16            $39            --            --             --
Reinbursement of exploration cost                                     255             --            --            --             --
Gain from sale of oil and gas properties and equipment                931             --            --            --             --

Gain (Loss) on marketable securities                                $(973)         $(272)         $706         $(367)       $(2,269)
Impairment of oil & gas properties                                   $571            $12            --            --             --
Exploration costs                                                     $81            $11           $34          $173           $532
Lease operating expenses and severance taxes                         $883           $972            --            --             --
Depreciation, depletion and amortization                             $815           $684            --            --             --
Operator expense                                                     $487           $507          $657          $619           $704
General and administrative expenses                                $1,196         $1,289        $1,254          $720           $720
Interest Expense                                                     $326           $341            --            --             --
Net Income (loss)                                                   $(851)          $(14)         $828          $635            $59
Net Income (loss) per share                                        $(0.32)        $(0.01)        $0.31         $0.24          $0.02
Weighted average number of shares                                   2,640          2,640         2,649         2,669          2,660
</TABLE>


<TABLE>
<CAPTION>
                                                                                         December 31,
                                                     -------------------------------------------------------------------------------
                                                       1998              1997              1996              1995             1994
                                                       ----              ----              ----              ----             ----
<S>                                                  <C>               <C>               <C>               <C>               <C>
Balance Sheet Data
Total assets                                         $24,486           $26,783           $23,263           $22,620           $22,077
Total liabilities                                     $2,422            $3,868              $335              $358              $450
Shareholders' equity                                 $22,064           $22,915           $22,928           $22,262           $21,628
</TABLE>


Liquidity and Capital Resources

     Working capital (current assets minus current  liabilities) was $17,543,000
and  $18,287,000  at December 31, 1998 and 1997,  respectively.  

     Net cash flow provided by operating  activities was $1,082,000 and $506,000
in 1998 and 1997, respectively.

     Net cash flow  provided by  investing  activities  was  $4,864,000  in 1998
compared to net cash (used in) investing  activities of $8,909,000 in 1997.  The
increase in cash flow provided by investing activities is primarily attributable
to net cash  inflow  from the  purchase  and sale of  marketable  securities  of
$2,024,000  in 1998 as compared to a net cash outflow from the purchase and sale
of marketable  securities of $703,000 in 1997 and the  $1,900,000  proceeds from
certificates  of  deposits  in 1998  compared  to the  $1,900,000  payments  for
certificates  of deposits in 1997.  As of December 31, 1998,  the Company  owned
approximately  5.5% of the issued shares of J.O.E.L. - Jerusalem Oil Exploration
Ltd.  ("JOEL"),  the controlling  shareholder of Naphta Israel  Exploration Ltd.
("Naphta").  Naphta, through a wholly owned subsidiary,  holds approximately 58%
of the Company's  outstanding  common stock (assuming the exercise of all of the
Class A & B Warrants  held by  Naphta).  Shares of JOEL and Naphta are traded on
the Tel Aviv Stock Market.



                                      -21-
<PAGE>

     Capital  expenditures  were  $212,000  and  $6,328,000  in 1998  and  1997,
respectively.  The higher amount in 1997 was  attributable to purchase by Jay of
the Snyder properties and the purchase by the Company of interests in the Congo.

     As of December 31, 1998,  Jay had  outstanding  indebtedness  of $1,778,891
under  a bank  loan  facility  of $10  million  from  Comerica  Bank-Texas  (the
"Comerica Loan"). The Comerica Loan bears interest at prime plus 1% with monthly
payments of $31,208  plus  interest and matures in 2000.  The  Comerica  Loan is
secured by oil and gas  properties  and cannot exceed the  "Borrowing  Base" (as
defined in the loan documents),  which is subject to annual  re-determination by
Comerica.  The Company is not a borrower or guarantor  under the  Comerica  Loan
Facility. The Comerica Loan documentation contains restrictions on Jay's ability
to  freely  declare  or  pay a  dividend  or make  any  distribution  in cash or
otherwise. Jay was in default of certain debt covenants at December 31, 1998 for
which  waivers  were  obtained  from the bank in  respect  of the  period  ended
December 31, 1998.  Future  principal  payments on the bank loan  facility as of
December 31, 1988 are $374,496 and $1,404,395 in 1999 and 2000.

     The  Company  believes  that  existing  cash  balances  and cash flows from
activities will be sufficient to meet its financing  needs.  The Company intends
to finance its ongoing oil and gas  exploration  activities from working capital
and the Comerica  Loan facility.

Results of Operations                 

     The  Company  reported  net loss of  $851,000  ($0.32  per  share)  in 1998
compared  to a net loss of $14,000  ($0.01 per share) in 1997.  The loss  during
1998 compared to 1997 is primarily a result of the decrease in operating  income
from oil and gas  activities  and from the  increase in a loss  attributable  to
marketable securities of $701,000.

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

United States

Oil and Gas Revenues   (in thousands)

                                                    1998              1997
                                                    ----              ----
Oil Volume Sold (Barrels)                             31                40

Gas Volume Sold (MMCF)                               523               604

Oil Sales ($)                                        395               676

Gas Sales ($)                                      1,015             1,325

Average Unit Price

Oil ($/Bbl) *                                      12.74             16.90
Gas ($/MMCF) **                                     1.94              2.19

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

**   MMCF - 1,000 Cubic Feet

                                      -22-
<PAGE>

     On August 27, 1998,  Jay Petroleum  sold 100% working  interest in 25 wells
     located in Jack & Clay Counties Texas, for $220,000.  The effective date of
     this sale was August 1, 1998.

     During October 1998, Jay Petroleum sold:

     a.   100% working  Interest in 5 wells located in Beckham County,  Oklahoma
          for $195,200. The effective date of this sale was October 1, 1998.

     b.   81.3%  working  interest  in one gas  well  located  in  Devil  field,
          Jefferson  County,  Texas. The amount received was $1,000,000,  and an
          overriding  royalty  interest  of 2.02%  on a 320 acre gas unit  which
          includes the  production of the gas well.  The effective  date of this
          sale was July 1, 1998.

     The impact of the August and October sales is a monthly  reduction of about
     22,000 MMCF of gas and 90 Barrels of oil,  and a reduction  in cash flow of
     approximately $16,000 per month.

     As a result of the above  sales,  the  Company  paid down  Jay's  debt with
     Comerica Bank in 1998, by the amount of $1,137,900, and reduced the monthly
     loan payment from $45,000 to $31,208.

Israel
------

The Negev Med Licenses Venture
------------------------------

     During 1998 the Negev Med Joint Venture  expended  $345,000,  primarily for
the purposes of acquiring,  processing and  interpreting  the results of seismic
surveys. The Company's share or the expense was $3,500. The result indicates the
existence of drillable prospects of Yam Nitzanim.

     Several meetings were held with the representatives of the Israeli Ministry
of Defense and the Petroleum  Commissioner to discuss a possible solution to the
restrictive  conditions of the licenses so as to enable the Company to carry out
prospective  drilling within the license areas. See "Summary  Description of the
Ventures,  the  Petroleum  Assets,  Related Work  Obligations  and  Explorations
Efforts in Israel"



                                      -23-
<PAGE>

Yam Ashdod Carveout Venture (within the Med Ashdod License)
-----------------------------------------------------------

     During the year of 1998 the Yam Ashdod Carveout Venture expended  $174,000.
The Company's share was $1,700. Standard processing of the seismic data that was
acquired  in  connection  with the Yam Ashdod  Carveout  was  completed  and the
results have been  interpreted.  The preliminary  results of the  interpretation
indicate  the  existence  of a drillable  prospect in the  southern  part of the
Carveout (Yam Nitzanim  prospect).  The Company has evaluated different drilling
companies  concerning their  availability to supply an offshore drilling unit in
order to explore  the  possibility  of drilling  the Yam 3 well,  subject to the
approval of the Ministry of Defense,  or the Yam  Nitzanim  well during the year
1999.  The  Company  has  received  positive  responses  from  several  drilling
companies that are willing and capable to drill the above wells.

     If the Company  reaches an  agreement  with the  Ministry  of Defense,  the
Company  shall give  priority  to the  drilling  of the Yam-3  well or  possibly
deepening and re-testing of the Yam-2 well. If no such agreement is reached, the
Company shall consider  drilling the Nitzanim  well. The Company  estimates that
the cost of drilling these wells will be approximately $25,000,000, of which the
Company's share is estimated at $125,000.

Shederot License
----------------

     In 1998 the  participants  of the venture drilled the Gevim well to a depth
of 15,157 feet. The well was declared a dry hole. The total cost of the well was
$6.6 million, of which the Company' share was approximately $66,000.

Congo

     The Operator,  Naphtha  Congo,  has submitted to the Congolese  Ministry of
Petroleum  a work  program  for the  development  of the  Tilapia  and  Marine 3
concessions.  A  Management  Committee  meeting  between  Naphtha  Congo and the
Congolese Ministry of Petroleum scheduled for July 1998 was postponed. On August
26, 1998 the Minister of Petroleum of Congo  informed the Company that according
to the  Decree  submitted  to the  Company  and signed by the  President,  Prime
Minister, Minister of Petroleum and Minister of Finance, the permits will become
effective from the date of publishing the production sharing contracts as a law,
and that the Management  Committee meeting can only be held after the completion
the formality of these process.  Therefor, until the publishing of the law , the
Company cannot go forward with the work program.

     The two permits are included in oil and gas properties in the balance sheet
at $2,700,000. Management believes that the permits are not impaired at December
31, 1998.  However,  the  Company's  recovery of its  investment in the Congo is
dependent upon  successful  outcome of the  permitting  and  production  sharing
contracts which cannot be assessed.



                                      -24-
<PAGE>

Operator's Fees

     In 1998 the Company earned $720,000 in operator fees,  compared to $461,000
in 1997.  The  increase in the  operator  fees is due  primarily to the drilling
activities at Gavin under the Shederot license.

Oil and Gas Revenues and Gas Revenues

     In 1998 and 1997 the Company had oil and gas  revenues  of  $1,410,000  and
$2,001,000,  respectively.  The decrease is due mainly to 34%-43% decline in oil
and gas prices and the sale of oil and gas properties in 1998, which resulted in
a gain of $931,000.

Lease Operating Expenses and Severance Taxes

     Lease  operating  expenses and severance taxes were primarily in connection
with oil and gas  fields  in the  United  States.  Oil and gas  lease  operating
expenses  and  severance  taxes were  $883,000  and  $972,000 for 1998 and 1997,
respectively.  The decrease in lease  operating  expenses and severance taxes is
due to the decline in oil and gas prices and lower production in 1998.

Interest Income

     Interest  income  during  the year ended  December  31,  1998 was  $557,000
compared to  $1,085,000  for the year ended  December 31, 1997.  The decrease is
attributable  mainly to lower  average  earning  investment  balances and to the
devaluation of the Israeli currency against the US Dollar.

Loss on Marketable Securities

     In 1998,  the Company  recognized  net  realized and  unrealized  losses of
$973,000 compared to $272,000 in 1997.

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

Impairment of Oil and Gas Properties

     The increase in the  impairment of oil and gas properties in 1998 is mainly
due to the 34% - 43% decline in oil and gas prices.

Operator Costs

     Operator's  costs  decreased  in 1998 as compared to 1997,  primarily  as a
result of lower  manpower  costs and reduced  rent  payments  for the  Company's
offices in Israel.


                                      -25-
<PAGE>



General and Administrative Expenses

     The  decrease in general  and  administrative  expenses  for the year ended
December 31, 1998 compared to the year ended December 31, 1997 was mainly due to
a decrease in consulting fees and salaries.  General and administrative expenses
as of December 31, 1998 include approximately $190,000 of legal expenses related
to the  settlement  with Mr.  Reuven Hollo,  Jay Resources  Inc. and Jay Natural
Resources.

Impact of the Year 2000 Issueof the Year 2000 Issue

     The Year 2000 Issue  ("Y2K") is a general term used to describe the various
problems that may arise as a result of computer programs being written using two
digits  rather than four to define the  applicable  year.  Any of the  Company's
computer programs that have  date-sensitive  software may recognize a date using
"00" as the year 1900 rather than the year 2000.  This could  result in a system
failure or miscalculations causing disruptions of operations,  including,  among
other things, a temporary inability to process  transactions,  send invoices, or
engage in similar normal business activities. The Y2K software compliance issues
affect the Company and most companies in the world.

     The Company is  conducting  a review of its  operations  to identify  those
systems that could be affected by the Y2K issue.  The review covers  information
systems,  mainframe and personal  computers and the Company's  delivery systems.
The  Company's   information   systems  include   administrative  and  financial
applications,  such as for order processing and collection.  In the event one of
these  systems  were to fail,  the  Company's  ability to capture,  schedule and
fulfill  customer  demands  would  be  impaired.   Similarly,  if  a  collection
processing  system were to fail, the Company would not be able to properly apply
payment to customer balances or correctly determine cash balances.  However, the
Company would  consider  various  alternatives,  including  performing  manually
certain functions that it had performed manually before the applicable  computer
system was in use. Management also intends to review its external  relationships
to address  potential Y2K issues  arising from  relationships  with  significant
suppliers, service providers and customers.

     Management presently believes that the Company has substantially  completed
its Y2K planning of its internal systems and facilities  utilizing both internal
and external resources.  The Company has been advised that its accounting system
software  systems will  properly  utilize  dates beyond  December 31, 1999.  The
Company  plans to complete  its Y2K project not later than  November  30,  1999.
Management  anticipates that the total cost of the Y2K project should not exceed
$25,000 and will be funded through operating cash flows.

     The  Company  has  not  initiated  formal  communications  with  all of its
significant  suppliers and large  customers to determine the extent to which the
Company is vulnerable  to those third  parties'  failure to remediate  their own
Year 2000  Issue.  The costs of the  project  and the date on which the  Company
plans to complete the Y2K


                                      -26-
<PAGE>

modifications  are based on  management's  best  estimates,  which were  derived
utilizing  numerous   assumptions  of  future  events  including  the  continued
availability  of certain  resources,  third party  modification  plans and other
factors.  However,  there  can be no  assurance  that  these  estimates  will be
achieved and actual results could differ  materially from those plans.  Specific
factors that might cause such material  differences include, but are not limited
to, the availability and cost of personnel  trained in this area, the ability to
locate and correct all relevant computer codes, and similar uncertainties.

     Contingency  plans  will be  considered  by the  Company  and to the extent
practicable  will be put in place,  as  required,  in the event that the Company
determines that it is at significant  risk in regard to suppliers,  customers or
its  own  internal   hardware  and  software.   Contingency  plans  may  include
consideration of alternative sources of supply, customer communication plans and
plant and business response plans.

     In general, the Company's plans are intended to provide a means of managing
risk,  but cannot  eliminate  the potential  for  disruption  due to third party
failure. The Company believes that due to the widespread nature of the potential
Y2K issues,  its  contingency  planning is an ongoing process which will require
further consideration as the Company obtains additional information. The Company
will define strategy based on the importance of a particular  relationship.  The
Company's  efforts with respect to specific  problems  identified will depend in
part  upon its  assessment  of the risk that such  problem  may have an  adverse
impact on its operations.

     The failure to correct a material Y2K problem could,  of course,  result in
an  interruption  in, or failure  of,  certain  normal  business  activities  or
operations,  including curtailment of production and failure to bill and collect
revenues.  Such failures could materially and adversely affect the Company. More
specifically,  the  Company  would be  materially  adversely  affected  if third
parties  with which it does  business  or that  provide  essential  products  or
services are not Year 2000 ready. Due to the general uncertainty inherent in the
Year  2000  problem,  resulting  in part from the  uncertainty  of the Year 2000
readiness of the Company's suppliers, other third party providers and customers,
the Company is unable to determine at this time whether the  consequences of any
Year 2000  failures  will have a material  impact on the  Company.  The  Company
believes  that with the  implementation  of the new  accounting  systems and the
completion of its other measures,  the possibility of significant  interruptions
of normal operations should be mitigated.

Item 7. Financial Statements and Supplementary Data.

     The information  called for by this Item 7 is included following the "Index
to Financial Statements" contained in this Annual Report on Form 10KSB.


                                      -27-
<PAGE>


Item  8.  Changes  in and  Disagreements  With  Accountants  on  Accounting  and
          Financial Disclosure.

     On March 10, 1999,  the Company  retained the certified  public  accounting
firm  of KPMG  LLP as  independent  accountants  of the  Company  to  audit  the
Company's financial statements.  The Company's previous principal auditors, Hein
& Associates LLP ("Hein"), resigned in November, 1998.

     During  the fiscal  year ended  December  31,  1997 and the period  between
January 1, 1998, up to and including the day of its  resignation,  there were no
disagreements  between  the  Company  and  Hein  on  any  matter  of  accounting
principles or practices,  financial  statement  disclosure or auditing  scope or
procedures which if not resolved to Hein's  satisfaction  would have caused them
to make reference in connection  with their opinion to the subject matter of the
disagreement.  However, Hein advised the Company that it would be able to accept
the appointment to audit the Company's financial  statements for the fiscal year
ended  December  31, 1998 only if the Company  hired a corporate  controller  to
reside and work in Houston,  Texas and if Hein and the Company  would come to an
agreement  concerning  fees  for  the  audit.  The  Company  declined  to hire a
corporate controller to reside and work in Houston.

     Hein's report on the financial statements of the Company for the year ended
December 31, 1997, contained no adverse opinion or disclaimer of opinion and was
not qualified as to uncertainty,  audit scope or accounting  principles.  Hein's
furnished  the  Company  with a  letter  addressed  to the  SEC  confirming  its
agreement with the above statements,  a copy of which was filed as an exhibit to
the report filed on Form 8-K on November 23, 1998.


                                    PART III

Item 9. Directors and Executive Officers of the Registrant

      As of March 30, 1998, the executive  officers and directors of the Company
are as follows:

Name              Age               Position

Haim Tsuff         41    Chairman of the Board and Chief
                         Executive Officer of the Company

Daniel Avner       36    President of the Company

Yossi Levy         47    Branch Manger of the Company's  Branch Office in
                         Israel

Pinchas Pinchas    44    Chief Controller of the Company Branch Office in Israel

Adv. Noa Lendner   48    Director



                                      -28-
<PAGE>

Tina Maimon
Arckens            44    Director and Secretary

Prof. Linda
Canina             44    Director

Prof. Avihu
Ginzburg           72    Director

     All officers  serve until the next annual  meeting of  directors  and until
their successors are elected and qualified.

     Haim Tsuff has been a director of the Company  since  January  1996 and the
Chairman of the Board of Directors and Chief  Executive  Officer since May 1996.
Mr. Tsuff is the sole director and owner of United Kingsway Ltd. and Chairman of
YHK General Manager Ltd. (which entity  effectively  controls Equital Ltd., JOEL
Ltd.,  Naphtha,  Naphtha  Holdings Ltd.,  public companies in Israel) and may be
deemed to control the Company.  During the past five years, Mr. Tsuff has served
as General Manager of Painton Chemical Industries Ltd., a private company, which
produces printed material.  Mr. Tsuff is also the Managing Director and Chairman
of the Board of Y. Habaron Ltd. (real  estate),  Painton  Chemical  Factors Ltd.
(printed  material),  Madad  Ltd.  (printed  material),  Benfica  Holdings  Ltd.
(construction)  and  Benfica  Ltd.  (construction),  all of  which  are  private
companies. See Security Ownership of Certain Beneficial Owners.

     Daniel Avner has been  President of the Company since July 1997. On July 9,
1998, Mr. Avner resigned as director and as Secretary of the Company,  positions
which he has held since May 1996.  Since  1992,  Mr.  Avner has been the General
Manager of E.D.R.  GMBH Co., a company that engages in  investment,  development
and management of residential  property in Germany.  From 1991 to 1992 Mr. Avner
was a Financial  Analyst  with  Proctor & Gamble  Company in Germany.  Mr. Avner
holds a BA Degree in Accounting  and Economics  from the  University of Tel Aviv
and a Masters of Business Administration from Duke University.

     Yossi Levy has been Branch Manager of the Company's Branch Office in Israel
since August, 1996. Since 1988 Mr. Levy has held the position of General Manager
of Naphtha - Israel Petroleum Corp.  (Naphtha),  a public company in the oil and
gas business in Israel.  Since 1995 Mr. Levy has been General  Manager of N.I.R.
(Naphtha  International  Resources) Ltd. Naphtha through its subsidiary (Naphtha
Holdings Ltd.) may be deemed to be a controlling shareholder of the Company.

     Pinchas  Pinchas  has been the Chief  Controller  of the  Company's  Israel
Branch  since  December  31,  1997.  Mr.  Pinchas is not  employed or  otherwise
retained by the Company.  Mr.  Pinchas serves as the Controller of Naphta (which
holds 100% of Naphta  Holdings Ltd.,  which company holds 58% of the outstanding
common stock of the Company (assuming exercise of the Class A & B Warrants)) and
also as controller of


                                      -29-
<PAGE>

J.O.E.L.  (which holds  approximately  87% of Naphta) and  Equital.  The Company
participates in Mr. Pinchas salary' which is payable by J.O.E.L. in an aggregate
monthly amount of $4,000.

     Noa Lendner,  Adv. has been a director of the Company since July 1998.  Ms.
Lendner has served as legal  counsel to  Equital,  Naphtan  and  J.O.E.L.  since
February 1997. Ms. Lendner also serves as Secretary of Naphta, a related entity,
since 1997.  From  December,  1995 through  January 1997,  Ms.  Lendner has also
served on the Board of Directors of J.O.E.L. From 1995 through January 1997, Ms.
Lendner engaged in the private  practice of law,  specializing in the commercial
and  corporate  areas.  Ms.  Lendner  received  an LL.B.  degree form the Hebrew
University  in Jerusalem in 1976 and since 1977 has been a member of the Israeli
Bar.

     Tina  Maimon  Arckens  has been a director of the Company and a director of
Isramco Oil and Gas Ltd.  since March 1997 and  Secretary  of the Company  since
July 14,  1998.  Mrs.  Arckens is a director of YHK General  Manager  Ltd.  Mrs.
Arckens is the sister of Jackob  Maimon,  the Chairman of the Board of Directors
of Naphtha Israel Petroleum Corp. Ltd. Mrs. Maimon Arckens is a housewife.

     Linda Canina has been a director of the Company since December  1997.  From
1993 to the present Dr.  Canina has held the position of Professor of Finance at
Cornell  University,  Ithaca,  New York.  Dr.  Canina also holds the position of
Visiting  Assistant  Professor of Finance at the Recanati  School of Business in
Tel  Aviv,  Israel.  From July 1992 - January  1993 Dr.  Canina  was a  Research
Fellow, Johnson Graduate School of Management, Cornell University.

     Avihu  Ginzburg  has been a director  of the Company  since July 1997.  Dr.
Ginzburg is currently  Emeritus  Professor in Geophysics at Tel Aviv University.
In  1996  he  was  Visiting  Professor  in  Exploration   Geophysics  at  Curtin
University,  Perth, Western Australia; and, Research Fellow at the Department of
Geological Sciences,  University College,  London. From 1992 - 1995 Dr. Ginzburg
held the position of Chairman of Geophysics and Planetary Science at Tel Aviv.

     There are no family  relationships,  as  defined,  between any of the above
executive officers,  and there is no arrangement or understanding between any of
the above  executive  officers  and any other  person  pursuant  to which he was
selected as an officer.  Each of the above executive officers was elected by the
Board of Directors to hold office until the next annual election of officers and
until his successor is elected and qualified or until his earlier resignation or
removal.  The Board of Directors  elects the officers in  conjunction  with each
annual meeting of the stockholders.

SECTION 16 FILINGS

     No person  who,  during the fiscal  year ended  December  31,  1998,  was a
director,  officer or beneficial owner of more than ten percent of the Company's
Common Stock, or a 'Reporting Person', failed to file on a timely basis, reports
required by Section 16 of the


                                      -30-
<PAGE>

Act during the most recent  fiscal  year.  The  foregoing is based solely upon a
review by the  Company of Forms 3 and 4 during the most  recent  fiscal  year as
furnished  to the Company  under Rule  16a-3(d)  under the Act,  and Forms 5 and
amendments  thereto  furnished  to the Company  with  respect to its most recent
fiscal year, and any  representation  received by the Company from any reporting
person that no Form 5 is required.

Item 10. Executive Compensation

     The following table sets forth the  compensation  paid for 1998 and 1997 to
the Chief  Executive  Officer  and the other  highly  paid  officers  and/or key
employees of the Company.

<TABLE>
<CAPTION>
                                                   Summary Compensation Table

                                                       Annual Compensation                          Long-Term Compensation
                                            ---------------------------------------------        ---------------------------
                                                                               Other             Securities          All
         Name and                               Salary/                       Annual             Underlying         Other
    Principal Position           Year       Consulting Fee     Bonus     Compensation (7)          Option       Compensation
    ------------------           ----       --------------     -----     ----------------          ------       ------------

<S>                                <C>         <C>              <C>             <C>                  <C>             <C>
Haim Tsuff                         1998        240,000          ---             ---                  ---             ---
  Chairman of the Board            1997        216,000          ---             ---                  ---             ---
  and Chief Executive Officer(1)

Daniel Avner                       1998         90,000          ---             ---                  ---             ---
  President and Secretary(2)       1997         37,900          ---             ---                  ---             ---

Yossi Levy                         1998         88,000          ---             ---                  ---             ---
  Branch Manager(3)                1997         92,230          ---             ---                  ---             ---

Pinchas Pinchas                    1998         48,000          ---             ---                  ---             ---
  Controller Branch Office(4)      1997           ---           ---             ---                  ---             ---

Joshua Folkman                     1998         95,600          ---             ---                  ---             ---
  Exploration Manager              1997        101,128          ---             ---                  ---             ---
  Branch Office

Yuval Ran(5)                       1998          ----           ---             ---                  ---             ---
  Former President                 1997        151,000          ---             ---                  ---             ---

Raanan Wiessel                     1998          ----           ---             ---                  ---             ---
  Former Treasurer                 1997         91,358          ---             ---                  ---             ---
  Controller, Branch
  Office(6)
</TABLE>

Notes

(1)  In May of 1996 the  Company  entered  into a  Consulting  Agreement  with a
     company owned and  controlled by Haim Tsuff,  the Chairman of the Board and
     Chief Executive



                                      -31-
<PAGE>

     Officer  of the  Corporation.  Pursuant  to this  Consulting  Agreement  as
     amended April 1997,  the Company pays to consultant the sum of $240,000 per
     annum in  installments  of $20,000 per month in addition to reimbursing all
     reasonable  business  expenses  incurred in  connection  with the  services
     rendered on behalf of the Company.

(2)  In August of 1997 the Company  entered  into a  Consulting  Agreement  with
     Romulas  Investment Ltd.  (which  Agreement has been assigned to Remarkable
     Holdings  Ltd.),  a company which is wholly owned and  controlled by Daniel
     Avner,  the  President  of the  Company.  Pursuant to this  agreement,  the
     Company has agreed to pay the  Consultant  the sum of $7,500 per month plus
     expenses.  In February  1999,  the  agreement  was amended to increase  the
     amount payable per month to $15,000.  Pursuant to the amendment in February
     1999, expenses are no longer  reimbursable.  The Company has also agreed to
     provide a company car and company  furnished  apartment to  Consultant,  if
     available. The agreement is in force through July 2,000.

(3)  In November of 1996 the Company  entered into an Employment  Agreement with
     Yossi Levy, the Managing  Director of Naphtha Israel Petroleum Company Ltd.
     to employ Mr.  Levy as the  General  Manager  of the  Israel  Branch of the
     Company.

(4)  Mr.  Pinchas is employed as  Controller  of Naphta,  J.O.E.L.  and Equital,
     affiliates of the Company. As of January 1, 1998, the Company  participates
     in the payment by J.O.E.L.  of Mr. Pinchas' salary in an aggregate  monthly
     amount of $4,000.

(5)  In August of 1996 the Company  entered  into a  Consulting  Agreement  with
     Yuval Ran, the former President of the Company.  Pursuant to the Consulting
     Agreement as amended  April 1997,  the Company has agreed to pay to Mr. Ran
     the sum of $240,000 per annum payable in  installments of $20,000 per month
     in addition to reimbursing  all reasonable  business  expenses  incurred in
     connection  with  performing  the  consulting  services  on  behalf  of the
     Company. Mr. Ran resigned as President of the Company on July 15, 1997.

(6)  Mr. Wiessel's services were terminated in December 1997.

(7)  Does not  include  personal  benefits,  which do not exceed 10% of the cash
     compensation of all officers as a group.

     The following table sets forth information concerning the exercise of stock
options during 1997 by each of the named executive  officer and key employee and
the year end value of unexercised options.


                                      -32-
<PAGE>

         Aggregated Option Exercises in 1998 and Year End Option Values

<TABLE>
<CAPTION>
                                                                    Number of Securities           Value of Unexercised
                                 Shares                                 Underlying                     In the Money
                                Acquired               Value            Unexercised                  Options at Year
           Name                on Exercise          Realized ($)        Options (#)                    End ($) (2)
           ----                -----------          ------------        -----------                    -----------
<S>                                 <C>                  <C>               <C>                              <C>
Joshua Folkman                      0                    0                 2,000                            0

Raanan Wiessel(1)                   0                    0                 2,500                            0
</TABLE>

Notes

(1)  The  services  of  Raanan  Wiessel,  the  Company's  former  treasurer  and
     controller of the Company's  Israel Branch,  were terminated as of December
     1997. 

(2)  The value reported is based on the closing price of the common stock of the
     Company as reported on NASDAQ on the date of the exercise less the exercise
     price.

There were no grants of any options in 1998 and 1997.

     All stock  options were granted with an exercise  price equal to the market
price of the common stock on the date of grant.

     The  Company  during  1998 did not amend or adjust  the  exercise  price of
outstanding  stock  options  previously  awarded  to any of the named  executive
officers or directors or employees.  The only incentive plan,  which the Company
has, is its 1993 Stock Option Plan (the "Stock Option Plan").

Stock Option Plan

     Directors,  officers,  employees  and  consultants  of the  Company and its
subsidiaries  adopted the  Company's  Stock  Option Plan with the  intention  of
encouraging stock ownership. The plan provides for stock options of up to 50,000
shares of common stock of the Company  (after giving effect to the reverse stock
split).  Options may either be options  intended to qualify as "incentive  stock
options" or  "non-statutory  stock  options",  as those terms are defined in the
Internal Revenue Code.

     Employees  (including  officers)  of the  Company  are  eligible to receive
incentive stock options, however,  non-statutory stock options may be granted to
officers,   directors,   employees  and  consultants  of  the  Company  and  its
subsidiaries.  Options are granted for a period of up to ten (10) years from the
grant date for an exercise  price of not less than 100% of the fair market value
of the securities of the Company's common stock on the date of grant. As of this
date no  persons  have  been  appointed  to fill the  current  vacancies  on the
committee which administers this plan.


                                      -33-

<PAGE>

Item 11. Security Ownership of Directors, Officers and Key Employees

     The following table sets forth certain  information,  as of March 30, 1999,
concerning the ownership of the Common Stock (comprising of the shares of common
stock if the Company's Class A and Class B Warrants were  exercised)by  (a) each
person who, to the best of the Company's  knowledge,  beneficially owned on that
date  more than 5% of the  outstanding  Common  Stock (b) each of the  Company's
directors (c) all current directors,  officers and significant  employees of the
Company as a group.  Except as otherwise  indicated,  the stockholders listed in
the table have the sole voting and  investment  power with respect to the shares
indicated.

<TABLE>
<CAPTION>
                                                         Number of              Percent
                                                         Shares Owned           of
Name                     Position                        Beneficially           Class
----                     --------                        ------------           -----
<S>                      <C>                             <C>                    <C>
Haim Tsuf                Chairman of the
                         Board, Chief Executive
                         Officer and Director            1,320,222(1)           50.01%

Daniel Avner             President                               0


Yossi Levy               Manager of the Company's
                         Israel Branch                           0


Pinchas Pinchas          Controller of the Company's
                         Israel Branch                           0

Joshua Folkman           Exploration Manager (Israel)            0

Noa Lendner, Adv.        Director                                0

Tina Maimon
Arckens                  Director and Secretary                  0

Prof. Avihu Ginzburg     Director                                0

Prof. Linda Canina       Director                                0

All directors and
Officers as a group                                      1,320,222              50.01%
</TABLE>



                                      -34-
<PAGE>

Notes

(1)  Haim Tsuff owns 100% of United  Kingsway  Ltd.,  which  through YHK General
     Manager Ltd. controls various entities,  which may be deemed to control the
     Company.  For more information see Security Ownership of Certain Beneficial
     Owners.

                 Security Ownership of Certain Beneficial Owners

     Set forth below is certain  information  with  respect to  ownership of the
Company's  securities  as of March 30, 1999 by persons or entities who are known
by the Company to own beneficially more than 5% of the outstanding shares of the
common stock, as determined in accordance with Rule 13d-3 under the Act.

           Name of                             No. of
       Beneficial Owner                      Common Shares            Percentage
       ----------------                      -------------            ----------

Naphtha Holdings Ltd.*                         1,320,222                 50.01%

Haim Tsuff*

United Kingsway Ltd.*

YHK Investment Limited Partnership*


Notes

*    Haim Tsuff owns and controls 100% of United Kingsway Ltd.  (Kingsway) which
     holds a 74% interest in YHK Investment Limited  Partnership (YHK).  Avraham
     Livnat Ltd. through its subsidiary Carmen Management and Assets (1997) Ltd.
     owns 26% of YHK. The General Partner of YHK is YHK General Manager Ltd. and
     Haim Tsuff, Joseph Tsuff (the father of Haim Tsuff) and Tina Maimon-Arckens
     (the sister of the  Chairman of the Board of Naphtha are the  directors  of
     YHK General Manager Ltd. YHK owns of record 42.4% of Equital Ltd. (formerly
     known as Pass-port Ltd.),  Equital Ltd. owns 43.4% of J.O.E.L.  - Jerusalem
     Oil Exploration Ltd. (JOEL),  JOEL owns 86.6% of Naphtha,  which holds 100%
     of Naphtha Holdings Ltd. JOEL also owns 9.7% of the shares of Equital Ltd..
     Naphtha  Holdings Ltd. owns of record  approximately  58% of the issued and
     outstanding  common  stock  of the  Company  (if the  Class  A and  Class B
     Warrants are  exercised).  Naphtha  Holdings  Ltd.  holds  250,000  Class A
     Warrants and 250,000 Class B Warrants of the Company.

     Information  regarding  these  relationships  is set  forth on the Chart of
     Ownership and in Schedule 13d filings and  amendments  made thereto made on
     behalf of the above  entities,  which are on file with the  Securities  and
     Exchange Commission.

     As a result of the  foregoing,  Haim Tsuff,  Kingsway,  YHK,  Equital Ltd.,
     JOEL,


                                      -35-
<PAGE>


     Naphtha and Naphtha Holdings Ltd. may be deemed to control the Company.

     This  percentage is based on 2,639,809  shares of common stock  outstanding
     March 31, 1999.


Item 12. Certain Relationships and Related Transactions

     In May of  1996  the  Company  entered  into a  Consulting  Agreement  with
Goodrich Global L.T.D. B.V.I., a company owned and controlled by Haim Tsuff, the
Chairman  of  the  Board  of  Directors  and  Chief  Executive  Officer  of  the
Corporation.  Pursuant to this Consulting  Agreement which had a term of two (2)
years,  the Company agreed to pay the sum of $144,000 per annum in  installments
of $12,000  per month,  in  addition  to  reimbursing  all  reasonable  business
expenses incurred during the term in connection with the performance of services
on  behalf  of the  Company.  In April  1997  the  consulting  compensation  was
increased to $240,000 per annum and in December  1997 the term of the  Agreement
was extended to May 31, 2001.  The Consulting  Agreement  provides that the term
shall be  automatically  extended  for an  additional  term of three (3)  years,
commencing  June 1, 2001,  unless the Company has given  notice at least  ninety
(90)  days  prior  to June 1,  2001,  that it does not  intend  that the term be
renewed.

     In August of 1997 the Company  entered  into a  Consulting  Agreement  with
Romulas  Investment  Ltd.  (which  Agreement  has been  assigned  to  Remarkable
Holdings  Ltd.), a company which is wholly owned and controlled by Daniel Avner,
the President of the Company. Pursuant to this Agreement which has a term of one
(1) year through July 31, 1998, the Company has agreed to pay the Consultant the
sum of $7,500  per  month  plus  expenses.  In  February  1999,  the  Consulting
Agreement was amended to increase the monthly compensation payable thereunder to
$15,000 and  pursuant  to the  amendment,  the  reimbursement  of  expenses  was
disallowed.  The  Company  has also  agreed to make  provide  a company  car and
company  furnished  apartment  to  Consultant,   if  available.  The  Consulting
Agreement is in effect through July 2000.

     On January 21,  1998,  the  Company  entered  into a  Inventory  Management
Agreement with Equital Ltd. pursuant to which the Company is obligated to pay to
Equital Ltd. $1,650 plus VAT payable December, March, June and September of each
year during the term of the Agreement.  In the case of the drilling of a well if
the total  monthly  hours of services  provided  to the Company by Equital  Ltd.
exceed 30 hours per month,  then the Company shall pay an additional  $40.00 per
hour plus VAT for services  rendered.  The  Agreement may be terminated on three
(3) month's  written  notice.  The Company  believes that the prices  charged by
Equital Ltd. to the Company for these  services are  comparable  to the cost for
such  services  negotiated  in arm's  length  transactions.  Equital Ltd. may be
deemed to be a control person to the Company.

     Pursuant to the agreement terminating the employment of Mr. Toledano as the
Company's  President and Chief  Operating  Officer in October 1995, Mr. Toledano
executed a Covenant Not to Compete  Agreement with the Company.  Pursuant to the
terms of the Covenant Not to Compete,  Mr.  Toledano agreed that for a period of
five (5) years he would


                                      -36-
<PAGE>

not  directly or  indirectly  compete  with the Company in  connection  with the
exploration for oil and gas in the State of Israel,  the territorial  waters off
Israel or the  territories  currently  under control of the State of Israel.  In
consideration for the Covenant Not To Compete,  the Company paid to Mr. Toledano
the sum of $200,000.  The Company also entered into a Consulting  Agreement with
Natural  Resources   Exploration   Services  B.V.,  a  Netherlands   corporation
controlled by Mr.  Toledano.  Pursuant to the Consulting  Agreement  between the
Company and Natural Resources Exploration Services B.V., the Company paid a lump
sum payment of $72,000 to Natural Resources Exploration Services B.V. to provide
the services of Mr. Toledano to the Company through June 23, 1997.

     In July  of 1995  the  Company  formalized  its  existing  oral  consulting
agreement  with  Dr.  Joseph  Elmaleh  and  entered  into a  written  Consulting
Agreement for the payment to Dr. Elmaleh of an annual fee of $99,000  payable in
equal  monthly  installments  of  $8,250.  The  expiration  of the  term  of the
Consulting  Agreement  commenced August 1, 1995 and was to expire July 31, 1997.
Under the terms of a Termination  Agreement  made on April 17, 1996, Dr. Elmaleh
resigned as the Chairman of the Board, Chief Executive Officer and a director of
Isramco  and its  subsidiaries,  the  Company  terminated  the  1995  Consulting
Agreement with Dr. Elmaleh and (i) paid to him the sum of $123,750  representing
the balance of unpaid  consulting fees; (ii) paid to him the sum of $270,000 for
a non-compete  agreement  for a term of three (3) years in  connection  with the
exploration for oil and gas in the State of Israel,  the territorial  waters off
Israel or the territories  currently  under control of the State of Israel.  The
Company  also  purchased  from  Southern  Shipping  and Energy  Inc.  (a company
controlled by Dr. Elmaleh) 29,268 shares of the common stock of the Company held
by Southern Shipping and Energy Inc. for a purchase price of $208,238.




                                      -37-

<PAGE>

                                    GLOSSARY

     "Authorization  for Expenditure  (AFE)" shall mean a proposal for financial
expenditure within the framework of petroleum  explorations,  which the Operator
proposes  from time to time to the  partners in the  Petroleum  Assets  which it
manages,  for the purpose of the approval of the participants.  When approved by
them, it constitutes  the budget for the execution of the petroleum  exploration
and the remainder of the operations of the Petroleum Assets.

     "Carveout" shall mean an area in a Petroleum  License or Lease in which the
ownership is different from the ownership in the License or Lease.

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

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

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

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

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



                                      -38-
<PAGE>

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

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

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

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

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

     "Petroleum Law" shall mean the Israel Petroleum Law, 5712-1952.

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

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

     "Sole  Risk  operation"  is an  operation  in which  fewer  than all of the
participants in a venture participate, and the non-consenting participant has no
financial  obligation  but also loses his right to participate in the results of
the operation.

     "Test  Drilling"  shall mean the  drilling of test wells for the purpose of
finding of  petroleum  or  ascertaining  the size or  boundaries  of a petroleum
field.

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

     "Voting  Agreement"  shall mean the Voting  Agreement  made the 30th day of
June, 1988 between the Negev 2 Venture participants, excluding HEI.

     "Working Interest" shall mean an interest in a Petroleum Asset granting the
holder


                                      -39-
<PAGE>

thereof the right to participate  pro rata in exploiting the Petroleum Asset for
petroleum exploration,  development and petroleum production, subject to its pro
rata  participation in the expenses involved therein after acquiring the Working
Interest.

     Israel Petroleum Law

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

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

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

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

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

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

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

                                      -40-
<PAGE>

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

Item 13.  Exhibits and Reports on Form 8-K and Financial Statements

     (a)  Exhibits

1.1       Underwriting Agreement,  filed as an Exhibit with the S-l Registration
          Statement, File No. 33-57482.

1.2       Selected  Dealers  Agreement,   filed  as  an  Exhibit  with  the  S-l
          Registration Statement, File No. 33-57482.

1.3       Underwriter's  Warrant  Agreement,  filed as an  Exhibit  with the S-l
          Registration Statement, File No.33-57482.

3.1       Articles of  Incorporation  of Registrant with all amendments filed as
          an Exhibit to the S-l Registration Statement, File No. 2-83574.

3.2       Amendment to Certificate of Incorporation  filed March 17, 1993, filed
          as an Exhibit with the S-l Registration Statement, File No. 33-57482.

3.3       By-laws of Registrant with all amendments,  filed as an Exhibit to the
          S-l Registration Statement, File No. 2-83570.

4.1       Form  of  Warrant  Agreement  with  respect  to  Class  A and  Class B
          Redeemable  Warrants,  filed as an Exhibit  with the S-l  Registration
          Statement, File No. 33-57482.

4.2       Form  of  Deposit  Agreement,   filed  as  an  Exhibit  with  the  S-l
          Registration Statement, File No. 33-57482.

10.1      Oil Marketing  Agreement,  filed as Exhibit with the S-l  Registration
          Statement, File No. 2-83574.

10.3      License  Agreement  dated  February  29, 1984  between the Company and
          Petronav,  Inc.,  filed as an Exhibit to Form 10-K  Fiscal  1984,  and
          incorporated herein by reference.

10.5      Consulting Agreement dated April 1, 1985 between the Company and Elmco
          Holdings Limited (subsequently assigned by Elmco Holdings Ltd. to H.G.
          Finance  Ltd.),  filed as an Exhibit  to Form 10-K  Fiscal  1985,  and
          incorporated herein by reference.

                                      -41-
<PAGE>

10.6      Employment  Agreement and Stock Option  Agreement  dated March 1, 1985
          between the Company and William W. Houck,  filed as an Exhibit to Form
          10-K Fiscal 1985, and incorporated herein by reference (now expired).

10.9      Farmout Agreement dated March 30, 1986 between the Company and Naphtha
          Israel  Petroleum Corp.  Ltd., filed as an Exhibit to Form 10-K Fiscal
          1986, and incorporated herein by reference.

10.12     Exchange  Agreement  dated May 22,  1986  between  the Company and SSE
          (UK),  filed as an  Exhibit  to Form 8-K for the month of May 1986 and
          incorporated herein by reference.

10.13     Assignment  Agreement  dated as of May 5, 1988 between the Company and
          SSE (UK),  filed as an  Exhibit to Form 8-K for the month of June 1988
          and incorporated herein by reference.

10.14     Joint Venture  Agreement and Joint Operating  Agreement dated June 30,
          1988  by and  among  HEI  Oil  and  Gas  Limited  Partnership,  JOEL -
          Jerusalem Oil Exploration Ltd., Delek Oil Exploration Ltd., Delek, The
          Israel Fuel  Corporation  Ltd.,  the  Company,  Southern  Shipping and
          Energy (U.K.), Naphtha, Israel Petroleum Company Ltd., Oil Exploration
          of Pat Ltd., LPS Israel Oil Inc.,  Donesco Venture Fund One, a Limited
          Partnership  and Mazaloil Inc. filed as an Exhibit to Form 8-K for the
          month of September 1988.

10.15     Agreement(re:  Negev Joint  Venture No. 2 -  Assignment  of  Interest)
          dated  December 9, 1988 between the Company and Southern  Shipping and
          Energy  (U.K.),  filed  as an  Exhibit  to Form  8-K for the  month of
          November 1988 and incorporated herein by reference.

10.17     Amendment  No.  1 to  Agreement  (re:  Negev  Joint  Venture  No.  2 -
          Assignment of Interest) with Southern Shipping and Energy (U.K.) dated
          January 12, 1989 between the Company and Southern  Shipping and Energy
          (U.K.),  filed as an Exhibit to Form 8-K for the month of January 1989
          and incorporated herein by reference.

10.19     Management Services Agreement dated November, 1988 and effective as of
          July 1, 1988 between the Company and H.G.  Finance  Ltd.,  filed as an
          Exhibit to Form 10-Q for the Company for the quarter ending  September
          30, 1988 and incorporated herein by reference.

10.20     Grant  Agreement with the Government of Israel,  undared,  between the
          Company and the Government of Israel on behalf of the State of Israel,
          filed as an Exhibit to Form 10-Q for the Company for the period ending
          September 30, 1988 and incorporated herein by reference.



                                      -42-
<PAGE>

10.23     Translated  from  Hebrew,  Transfer  of Rights  Agreement  between the
          Company and  Isramco-Negev 2 dated March 5, 1989,  filed as an Exhibit
          to Form 8-K for the  month of March  1989 and  incorporated  herein by
          reference.

10.24     Translated from Hebrew,  Limited Partnership Agreement between Isramco
          Oil and Gas Ltd.  and Isramco  Management  (1988) Ltd.  dated March 2,
          1989,  filed as an Exhibit to Form 8-K for the month of March 1989 and
          incorporated herein by reference.

10.25     Translated  from Hebrew,  Trust Agreement  between Isramco  Management
          (1988) Ltd. and Kesselman and Kesselman dated March 3, 1989,  filed as
          an Exhibit  to Form 8-K for the month of March  1989 and  incorporated
          herein by reference.

10.26     Translated from Hebrew,  Indemnity  Agreement  between the Company and
          Isramco  Management  (1988)  Ltd.  dated  March _,  1989,  filed as an
          Exhibit  to Form  8-K for the  month of  March  1989 and  incorporated
          herein by reference.

10.27     Consulting  and  Option  Agreement  dated  March 17 1989  between  the
          Company and M.H. Meyerson & Co., Inc., filed as an Exhibit to Form 8-K
          dated March 20, 1989 and incorporated herein by reference.

10.29     Agreement  dated as of March 30,  1989  between  the  Company  and SSE
          (U.K.)  and filed as an Exhibit to Form 8-K for the month of June 1989
          and incorporated herein by reference.

10.33     Negev Ashquelon/224 License, filed with Post-effective Amendment No. 7
          to  Form  S-l  Registration   Statement  and  incorporated  herein  by
          reference. File No. 2-83574.

10.34     Consulting  and Option  Agreement  dated  December 4, 1989 between the
          Company and Ladenburg,  Thalmann & Co.,  Inc.,  filed as an Exhibit to
          Form 8-K for the month of December 1989.

10.36     Amendment No. 1 to the Negev 2 Venture  Agreement made as of August 1,
          1989 and Amendment No. 2 to the Negev 2 Venture  Agreement  made as of
          September  22, 1989 by and  between the Negev 2 Venture  Participants,
          filed as an Exhibit to the Post-effective  Amendment No. 8 to Form S-l
          Registration Statement. File No. 2-83574.

10.37     Amendment  Agreement  to Grant  Agreement  between the Company and the
          Government  of  Israel,  filed as an  Exhibit  to this  Post-effective
          Amendment No. 8 to Form S-l Registration Statement. File No. 2- 83574.

10.38     Amendment  to Agreement  between the Company and M.H.  Meyerson & Co.,
          Inc.  made as of February 28, 1991, as filed as an Exhibit to Form 8-K
          for the month of 


                                      -43-
<PAGE>


          February 1991 and incorporated herein by reference.

10.40     Stock  Option  Agreement  dated as of May 25, 1990 between the Company
          and J. Jerome Williams,  filed as an Exhibit to Form 8-K for the month
          of May, 1990 and incorporated herein by reference.

10.41     Supplement to Transfer of Rights Agreement dated July 22, 1991 between
          the Company  and  Isramco-Negev  2,  Limited  Partnership  filed as an
          Exhibit  to Form  8-K of the  Company,  dated  August  27,  1991,  and
          incorporated herein by reference.

10.42     Clarification  Agreement  dated March 3, 1992  between the Company and
          JOEL - Jerusalem  Oil  Exploration  Ltd.,  filed as an Exhibit to Form
          10-K for Calendar  Year ended  December 31, 1991 dated March 26, 1992,
          and incorporated herein by reference.

10.43     Underwriting  Agreement  dated March 11, 1992 between  Isramco-Negev 2
          Limited  Partnership,  Isramco Oil and Gas Ltd.,  Pat Oil  Exploration
          Limited,  JOEL -Jerusalem Oil  Exploration  Ltd.,  Isramco  Management
          (1988) Limited, East Mediterranean Oil and Gas Limited and the Company
          (executed in Hebrew with an English translation attached), filed as an
          Exhibit to Form 10-K for Calendar  Year ended  December 31, 1991 dated
          March 26, 1992, and incorporated herein by reference.

10.44     Assignment  of  Rights  Agreement  dated  March 8, 1992  between  JOEL
          Jerusalem Oil  Exploration  Ltd.,  Pat Oil  Exploration  Limited,  the
          Company and  Isramco-Negev 2 Limited  Partnership  (executed in Hebrew
          with an  English  translation  attached),  filed as an Exhibit to Form
          10-K for Calendar  Year ended  December 31, 1991 dated March 26, 1992,
          and incorporated herein by reference.

10.45     Supplement  to  Assignment  of Rights  Agreement  dated  March 8, 1992
          between JOEL  -Jerusalem Oil  Exploration  Ltd.,  Pat Oil  Exploration
          Limited, the Company and Isramco-Negev 2 Limited Partnership (executed
          in Hebrew with an English translation  attached),  filed as an Exhibit
          to Form 10-K for Calendar Year ended December 31, 1991 dated March 26,
          1992, and incorporated herein by reference.

10.46     Sole Risk  Agreement  #1 (NIRIM)  dated as of October 1 , 1991 between
          Isramco-Negev 2 Limited Partnership,  JOEL - Jerusalem Oil Exploration
          Ltd., the Company,  Delek Oil  Exploration  Ltd.,  Delek - The Israeli
          Fuel Corporation  Ltd., Oil Exploration of Pat Ltd. and Naphtha Israel
          Petroleum  Company Ltd., filed as an Exhibit to Form 10-K for Calendar
          Year ended  December 31, 1991 dated March 26, 1992,  and  incorporated
          herein by reference.

10.47     Sole Risk Notice (Nirim) dated August 30, 1991, filed as an Exhibit to
          Form 10-K for  Calendar  Year ended  December 31, 1991 dated March 26,
          1992, and incorporated herein by reference.



                                      -44-
<PAGE>

10.48     Deed of Assignment for Petroleum License No. 224/Negev  Ashhquelon and
          Petroleum  License No. 227/Nirim for the benefit of Isramco  Resources
          Inc.  filed as an  Exhibit  to Form 8-K for the month of ended  August
          1992 and dated September 9, 1992.

10.49     Service  Letter  Agreement  dated June 28,  1992  between  J.O.E.L.  -
          Jerusalem Oil Exploration Ltd. and the Company  regarding office space
          and  services  filed as an Exhibit to Form 10-Q for the six (6) months
          ending June 30, 1992, dated August 10, 1992 and incorporated herein by
          reference.

10.50     Cancellation  of Forfeiture and  Ratification  Agreement and Amendment
          No. 1 to Cancellation of Forfeiture and  Ratification  Agreement filed
          as an Exhibit to Form 8-K for the month of January 1993 dated  January
          21, 1993 and incorporated herein by reference.

10.51     Option Agreement  between Isramco Resources Inc. and Naphtha Petroleum
          Corporation  Ltd.  filed as an  Exhibit  to Form 8-K for the  month of
          January  1993  dated  January  21,  1993 and  incorporated  herein  by
          reference.

10.52     Option  Agreement  between  Isramco  Resources  Inc.  and  J.O.E.L.  -
          Jerusalem Oil Exploration Ltd., Oil Exploration of Pat Ltd.,  Isramco-
          Negev 2 Limited  Partnership  and the  Company  filed as an Exhibit to
          Form 8-K for the month of January  1993  dated  January  21,  1993 and
          incorporated herein by reference.

10.53     Equalization  of  Rights  Agreement  between  Isramco-Negev  2 Limited
          Partnership and Delek Oil Exploration Ltd. and Delek - The Israel Fuel
          Corporation  Ltd,  filed as an  Exhibit  to Form 8-K for the  month of
          January  1993  dated  January  21,  1993 and  incorporated  herein  by
          reference.

10.54     Option  Agreement   between  Isramco  Resources  Inc.  and  Delek  Oil
          Exploration Ltd. and Delek - The Israel Fuel Corporation Ltd. filed as
          an Exhibit to Form 8-K for the month of January 1993 dated January 21,
          1993 and incorporated herein by reference.

10.55     Letter to Isramco-Negev 2 Limited  Partnership  dated as of January 6,
          1993 re: Negev  Ashquelon  License and Negev Nirim License filed as an
          Exhibit to Form 8-K for the month of January  1993 dated  January  21,
          1993 and incorporated herein by reference.

10.56     Agreement  between the Company and Technion  Research and  Development
          Foundation dated November 2, 1992 filed as an Exhibit to Form 10-K for
          1993 and incorporated herein by reference.

10.57     Investment  Banking  Agreement  filed  as  an  Exhibit  with  the  S-l
          Registration 


                                      -45-
<PAGE>


          Statement, Filed No. 33-574482.

10.58     Consulting  Agreement  with Dr.  Joseph  Elmaleh  dated June 20, 1995,
          filed  as an  Exhibit  to Form 8-K for the  month  of  July,  1995 and
          incorporated  herein by reference.  

10.59     Employment  Agreement  with Danny  Toledano made as of the 16th day of
          October,  1995,  filed  as an  Exhibit  to Form  8-K for the  month of
          November, 1995 and incorporated herein by reference.

10.60     Consulting  Agreement  with  Zenith  Holdings  Ltd.,  a company  which
          employs  Haim Tsuff made May _, 1996,  filed as an Exhibit to Form 8-K
          for the month of June, 1996 and incorporated herein by reference.

10.61     Termination  Agreement  between the Company and Danny Toledano made as
          of the 23rd day of June 1996,  filed as an Exhibit to Form 8-K for the
          month of June, 1996 and incorporated herein by reference.

10.62     Non-Compete  Agreement  between the Company and Danny Toledano made as
          of the 23rd day of June 1996,  filed as an Exhibit to Form 8-K for the
          month of June, 1996 and incorporated herein by reference.

10.63     Consulting Agreement between the Company and Danny Toledano made as of
          the 23rd day of June  1996,  filed as an  Exhibit  to Form 8-K for the
          month of June, 1996 and incorporated herein by reference.

10.64     Termination Agreement between the Company and Dr. Joseph Elmaleh dated
          April 16,  1996,  filed as an Exhibit to Form 10-Q for the three month
          period ending March 31, 1996 and incorporated herein by reference.

10.65     Consulting  Agreement  between the Company and Yuval Ran dated the 1st
          day of August,  1996, filed as an Exhibit to Form 8-K for the month of
          August, 1996 and incorporated herein by reference.

10.66     Agreement  by and among  Naphtha  Congo  Ltd.,  Equital  Ltd.  and the
          Company dated  September 4, 1997,  filed as an Exhibit to Form 8-K for
          the month of September, 1997 and incorporated herein by reference.

10.67     Amendment to  Consulting  Agreement  between  Goodrich  Global  L.T.D.
          B.V.I.  and the Company dated December _, 1997, filed as an Exhibit to
          Form 8-K for the month of December,  1997 and  incorporated  herein by
          reference.

10.68     Consulting  Agreement between Romulas  Investment Ltd. and the Company
          dated August _, 1997, filed as an Exhibit to Form 8-K for the month of
          September,  1997 and  incorporated  herein by  reference,  assigned by
          Romulas  Investment  Ltd. on December 31, 1997 to Remarkable  Holdings
          Ltd.



                                      -46-
<PAGE>

10.69     Amendment  dated  February 23, 1999, to Consulting  Agreement  between
          Remarkable Holdings Ltd. and the Company filed hereto as Exhibit 10.69

10.70     Settlement  Agreement and Release  dated March _, 1998 between  Reuven
          Hello,  Jay Resources  Corporation,  Jay Natural  Resources  Inc., Jay
          Petroleum  LLC and Jay  Management  Company LLC, as Claimants  and the
          Company,  NIR Resources  Inc.,  Jay  Petroleum LLC and Jay  Management
          Company LLC, as  Respondents,  filed as an Exhibit to Form 8-K for the
          month of March, 1998 and incorporated herein by reference.

10.71     Inventory Services Management Agreement dated December _, 1997 between
          the  Company  and Equital  Ltd.  filed as Exhibit  10.70 to the Annual
          Report on Form 10KSB for the year ended December 31, 1997.

10.72     Consulting Agreement dated August 20, 1997 between the Company and JFC
          Enterprises,  LLC filed as Exhibit  10.71 to the Annual Report on Form
          10KSB for the year ended December 31, 1997.

     (b)  Reports on Form 8-K

          1.   Form 8-K for Janurary 1998, dated January 27, 1998.

          2.   Form 8-K for February 1998, dated February 11, 1998.

          3.   Amendment to Form 8-K for February 1998, dated February 20, 1998.

          4.   Form 8-K for March 1998, dated March 18, 1998.

          5.   Form 8-K for March 1998, dated March 26, 1998.

          6.   Form 8-K for July 1998, dated July 16, 1998.

          7.   Form 8-K for August 1998, dated August 21, 1998.

          8.   Form 8-K for November 1998, dated November 30, 1998.

          9.   Amendment to Form 8-K for December 1998, dated December 10, 1998.

     (c)  Financial Statements

          Report of Independent Auditors'

          Consolidated Balance Sheets at December 31, 1998

          Consolidated Statement of Operations for the years ended 
          December 31, 1998 and 1997

          Consolidated Statement of Changes in Shareholders' Equity 
          for the years ended December 31, 1998 and 1997

          Consolidated Statement of Cash Flows for the years ended
          December 31, 1998 and 1997

          Notes to Consolidated Financial Statements




                                      -47-

<PAGE>

                                   SIGNATURES

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

                                                ISRAMCO,  INC.
                                                Registrant

                                                By: /s/ HAIM TSUFF

                                                Haim Tsuff,
                                                Chairman of the Board and
                                                   Chief Executive Officer


Date: April 14, 1999

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

Signature                      Capacity                       Date
---------                      --------                       ----

Noa Lendner                    Director

Tina Maimon Arckens            Director and Secretary

Prof. Avihu Ginzburg           Director

Prof. Linda Canina             Director



                                      -48-

<PAGE>

                          INDEPENDENT AUDITORS' REPORT



The Board of Directors
Isramco Inc.

We have audited the consolidated  balance sheet of Isramco Inc. and subsidiaries
as of December 31, 1998, and the related  consolidated  statement of operations,
shareholders'  equity and cash flows for the year then ended. These consolidated
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is  to  express  an  opinion  on  these  consolidated  financial
statements based on our audit.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects,  the consolidated financial position of Isramco, Inc. and
subsidiaries  as of December 31, 1998,  and the results of their  operations and
their cash flows for the year then ended, in conformity with generally  accepted
accounting principles.


                                                          KPMG LLP


March 29, 1999
Houston, Texas




                                      -49-

<PAGE>


                         REPORT OF INDEPENDENT AUDITORS



Board of Directors
Isramco Inc.

We  have  audited  the   consolidated   statement  of  operations,   changes  in
shareholders'  equity and cash flows of Iramsco,  Inc. and  subsidiaries for the
year ended December 31, 1997. These  consolidated  financial  statements are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all material  respects,  the consolidated  results of their operations and their
cash flows of Iramsco,  Inc. and  subsidiaries  for the year ended  December 31,
1997, in conformity with generally accepted accounting principles.


HEIN + ASSOCIATES LLP

Houston, Texas
March 24, 1998




                                      -50-

<PAGE>

                          ISRAMCO INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEET
                   (in thousands except for share information)

                                                               December 31, 1998
                                                               -----------------
ASSETS

Current assets:
     Cash and cash equivalents                                         $ 14,240
     Marketable securities, at market                                     3,846
     Accounts receivable                                                    268
     Prepaid expenses and other current assets                              207
                                                                       --------
         Total current assets                                            18,561

Property and equipment, (successful efforts method for oil
     and gas properties), net of accumulated depreciation,
     depletion, amortization and provision for impairment of
     $1,863 at December 31, 1998                                          5,450
Other assets:
     Investment in affiliate                                                285
     Covenants not to compete, less accumulated amortization
     of $348 at December 31, 1998                                           122
     Other                                                                   68
                                                                       --------

         Total assets                                                  $ 24,486
                                                                       ========

             LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
     Current portion of long-term debt                                 $    374
     Accounts payable and accrued expenses                                  644
                                                                       --------
         Total current liabilities                                        1,018

Long-term debt                                                            1,404
                                                                       --------

         Total liabilities                                                2,422


Commitments, contingencies and other matters

Shareholders' equity:
     Common stock, $.01 par value; authorized 75,000,000 shares;
       2,669,120 shares issued and outstanding at
       December 31, 1998                                                     27
     Additional paid-in capital                                          26,168
     Accumulated deficit                                                 (3,967)
     Treasury stock, 29,267 shares at December 31, 1998                    (164)
                                                                       --------

         Total shareholders' equity                                      22,064
                                                                       --------

         Total liabilities and shareholders' equity                    $ 24,486
                                                                       ========

See accompanying notes to the consolidated financial statements.




                                      -51-

<PAGE>


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

<TABLE>
<CAPTION>
                                                                Year Ended December 31,
                                                              --------------------------
                                                                  1998           1997
                                                              -----------    -----------
<S>                                                           <C>            <C>
Revenues:
     Operator fees from related party                         $       720    $       461
     Oil and gas sales                                              1,410          2,001
     Interest income                                                  557          1,085
     Office services to related party                                 613            483
     Equity in earnings of Jay Management, L.L.C                       16             39
     Reimbursement of exploration costs                               255             --
     Gain from sale of oil and gas properties and equipment           931             --
                                                              -----------    -----------
         Total revenues                                             4,502          4,069
                                                              -----------    -----------

Expenses:
     Impairment of oil and gas properties                             571             12
     Interest expense                                                 326            341
     Depreciation, depletion and amortization                         815            684
     Lease operating expense and severance taxes                      883            972
     Exploration costs                                                 81             11
     Operator expense                                                 487            507
     General and administrative                                     1,196          1,289
     Loss on marketable securities                                    973            272
                                                              -----------    -----------
         Total expenses                                             5,332          4,088
                                                              -----------    -----------

Loss before taxes and minority interest                              (830)           (19)

Minority interest                                                      17              5

Income taxes                                                           38             --
                                                              -----------    -----------

NET LOSS                                                      $      (851)   $       (14)
                                                              ===========    ===========
Loss per share (basic and diluted)                            $     (0.32)   $     (0.01)
                                                              ===========    ===========
Weighted average number of shares outstanding                   2,639,853      2,639,853
                                                              ===========    ===========
</TABLE>


See accompanying notes to the consolidated financial statements.


                                      -52-

<PAGE>

                          ISRAMCO INC. AND SUBSIDIARIES
            CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
                      FOR THE YEAR ENDED DECEMBER 31, 1998
                   (in thousands except for share information)


<TABLE>
<CAPTION>
                                            Common Stock       Additional     Total           Treasury Stock
                                        -------------------     Paid-In    Accumulated     --------------------     Shareholders'
                                         Shares      Amount     Capital      Deficit        Shares       Amount        Equity
                                         ------      ------     -------      -------        ------       ------        ------
<S>                                     <C>            <C>      <C>          <C>           <C>           <C>          <C>
Balances-December 31, 1996              2,669,120      $27      $26,168      $(3,102)      (29,267)      $(164)       $22,929

Net Loss                                       --       --           --          (14)           --          --            (14)
                                        ---------      ---      -------      -------       -------       -----       --------
Balances - December 31, 1997            2,669,120      $27      $26,168      $(3,116)      (29,267)      $(164)       $22,915

Net Loss                                       --       --           --         (851)           --          --           (851)
                                        ---------      ---      -------      -------       -------       -----       --------
Balances December 31, 1998              2,669,120      $27      $26,168      $(3,967)      (29,267)      $(164)       $22,064
                                        =========      ===      =======      =======       =======       =====       ========
</TABLE>







See accompanying notes to the consolidated financial statements.


                                      -53-

<PAGE>

                          ISRAMCO INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)

<TABLE>
<CAPTION>
                                                              Year Ended December 31,
                                                              -----------------------
                                                                  1998       1997
                                                               ---------   ---------
<S>                                                            <C>         <C>      
Cash flows from operating activities:
  Net loss                                                     $   (851)   $    (14)
  Adjustments to reconcile net loss to net cash
    provided by (used in) operating activities:
  Depreciation, depletion, amortization and provision
    for impairment                                                1,386         696
  Minority interest                                                 (17)         (5)
  Loss on marketable securities                                   1,243          68
  Gain on sale of oil and gas properties
    and equipment                                                  (931)         (3)
  Changes in assets and liabilities:
  (Increase) decrease in accounts receivable                        505        (215)
  (Increase) decrease in prepaid expenses
    and other current assets                                         96         (15)
  (Increase) decrease in other assets                                15         (78)
  Increase (decrease) in accounts payable
    and accrued expenses                                           (364)         72
                                                               --------    --------
  Net cash provided by operating activities                       1,082         506
                                                               --------    --------
Cash flows from investing activities:
  Exploration costs                                                  --         (11)
  Purchase of equipment                                             (60)        (96)
  Purchase of oil and gas properties                                (89)     (5,196)
  Purchase of Jay Petroleum, L.L.C. and of Jay Management
    L.L.C., net of cash acquired                                    (63)     (1,036)
  Proceeds from sale of oil and gas properties and equipment      1,437           6
  Purchase of marketable securities                              (1,966)     (3,767)
  Proceeds from sale of marketable securities                     3,990       3,064
  Proceeds from (payments for) Certificate of deposit             1,900      (1,900)
  Investment in affiliate                                          (285)         --
  Other                                                              --          27
                                                               --------    --------
  Net cash provided by (used in) investing activities             4,864      (8,909)
                                                               --------    --------
Cash flows from financing activities:
  Proceeds from long-term debt                                      137       3,000
  Principal payments on long-term debt                           (1,584)       (855)
                                                               --------    --------

  Net cash (used in) provided by financing activities            (1,447)      2,145
                                                               --------    --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS              4,499      (6,258)

Cash and cash equivalents - beginning of year                     9,741      15,999
                                                               --------    --------

Cash and cash equivalents - end of year                        $ 14,240    $  9,741
                                                               ========    ========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest                       $    326    $    341
                                                               ========    ========
</TABLE>

See accompanying notes to the consolidated financial statements.


                                      -54-

<PAGE>

                          ISRAMCO INC. AND SUBSIDIARIES
                          NOTES TO FINANCIAL STATEMENTS


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

     [1] The Company

     Isramco,   Inc.  and  subsidiaries   (the  Company),   is  engaged  in  the
acquisition,  exploration,  operation and  development of oil and gas properties
and the temporary investment of surplus funds in securities.  As of December 31,
1998, the Company owns properties in Texas,  Louisiana,  Oklahoma,  Wyoming, New
Mexico, the Republic of Congo, Africa, and a 1.0043% working interest in various
properties located in Israel.

     [2] Consolidation

     The consolidated  financial statements include the accounts of the Company,
its direct and indirect wholly-owned  subsidiaries Isramco Oil and Gas Ltd. (Oil
and Gas) and Isramco  Resources  Inc., a British  Virgin  Islands  company,  its
wholly  owned  subsidiary,  Jay  Petroleum,  L.L.C.,  (Jay)  and  an  immaterial
wholly-owned  foreign  subsidiary.  Intercompany  balances and transactions have
been  eliminated  in  consolidation.  Another  wholly-owned  subsidiary  of  the
Company,  Isramco Management (1988) Ltd., an Israeli Company, is not included in
the consolidation  because the Company has no voting rights.  This entity serves
as the  nominee  for a  Limited  Partnership  and has no  significant  assets or
operations.  The Company  held a 35%  interest in Jay  Management,  L.L.C.  (Jay
Management)  during  January,  February  and March  1998.  This  investment  was
accounted for under the equity  method of  accounting  prior to acquistion of an
additional  30% interest in Jay  Management  interest in March 1998. At December
31, 1998 the Company acquired the remaining 35% interest in Jay Management.

     [3] Method of Accounting for Oil and Gas Operations

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

     Depletion and  depreciation of capitalized  costs for producing oil and gas
properties is provided  using the  units-of-production  method based upon proved
reserves.  Depreciation,  depletion,  amortization  and provision for impairment
expense for the  Company's  oil and gas  properties  amounted  to  approximately
$1,255,000 and $502,000 for 1998 and 1997, respectively.


                                      -55-

<PAGE>


                          ISRAMCO INC. AND SUBSIDIARIES
                          NOTES TO FINANCIAL STATEMENTS


     [4] Marketable Securities

     Statement  of  Financial  Accounting  Standard  No.  115  (SFAS  No.  115),
Accounting for Certain Investments in Debt and Equity Securities,  requires that
marketable  securities  held for  trading be  recorded  at their  market  value.
Company  management  considers its marketable  securities to be held for trading
purposes as defined by SFAS No. 115, and as such the  securities are recorded at
fair  value,  including  such  investment  securities  of related  parties,  and
realized  gains  and  losses  from the  sale of the  marketable  securities  are
determined on the specific  identification  method.  Unrealized gains and losses
arising from the marketable securities are reflected in current operations.

     [5] Equipment

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

     [6] Translation of Foreign Currencies

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

     [7] Income Per Common Share

     The Company  follows SFAS No. 128,  Earnings per Share,  for  computing and
presenting  earnings  per  share,  which  requires,  among  other  things,  dual
presentation of basic and diluted loss per share on the face of the statement of
operations.  At December 31, 1998 and 1997  earnings per share amounts are based
on the weighted average number of shares outstanding.  The assumed conversion of
warrants and exercise of options do not result in material dilution.

     [8] Cash Equivalents

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

     [9] Noncompete Agreements

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


                                      -56-

<PAGE>

                          ISRAMCO INC. AND SUBSIDIARIES
                          NOTES TO FINANCIAL STATEMENTS


     [10] New Pronouncements

     In June 1997, The Financial  Accounting  Standards Board (FASB) issued SFAS
No. 130, Reporting  Comprehensive Income. SFAS No. 130 establishes standards for
reporting and display of  comprehensive  income,  its components and accumulated
balances. Among other disclosures, SFAS No. 130 requires that all items that are
required to be recognized  under current  accounting  standards as components of
comprehensive  income be reported in a financial  statement  that displays these
items with the same  prominence as other financial  statements.  SFAS No. 130 is
effective for both interim and annual periods beginning after December 15, 1997.
Adoption by the Company of SFAS No. 130  effective  January 1, 1998,  has had no
impact to the Company's financial statements presented herein.

     In June 1997,  the FASB issued SFAS No. 131  establishing  standards on the
way that public companies report financial  information about operating segments
in annual financial  statements and requires  reporting of selected  information
about operating  segments in interim financial  statements issued to the public.
It also establishes  standards for disclosures  regarding products and services,
geographic areas and major customers. SFAS No. 131 defines operating segments as
components of a company in which  separate  financial  information  is available
that is evaluated  regularly by the chief  operating  decision maker in deciding
how to  allocate  resources  and  in  assessing  performance.  SFAS  No.  131 is
effective for periods beginning after December 15, 1997. The Company has adopted
SFAS No. 131 for the fiscal year ended December 31, 1998.

     SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities,
was issued by the FASB in June 1998.  SFAS No. 133  standardizes  the accounting
for derivatives  instruments,  including certain derivative instruments embedded
in other contracts.  SFAS No. 133 is effective for periods  beginning after June
15,  1999.  The Company  believes  that  adoption of this  financial  accounting
standard will not have material effect on its financial  condition or results of
operations.

     [11] Use of Estimates

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

     Oil  and gas  reserve  quantities  are the  basis  for the  calculation  of
depreciation, depletion and impairment of oil and gas properties. An independent
petroleum-engineering firm determines the Company's reserve estimates.  However,
management  emphasizes that reserve estimates are inherently  imprecise and that
estimates  of more  recent  discoveries  and  non-producing  reserves  are  more
imprecise than those for properties with long production histories.  At December
31,  1998,  approximately  38%  of the  Company's  oil  and  gas  reserves  were
attributable to non-producing properties.  Accordingly,  the Company's estimates
are expected to change, as future information becomes available.

     As mandated under SFAS No. 121, Accounting for the Impariment of Long-Lived
Assets and for  Long-Lived  Assets to be  disposed  of, the  Company is required
under certain  circumstances to evaluate the possible impairment of the carrying
value of its long-lived assets. For proved oil and gas properties, this involves
a comparison to the estimated  future  undiscounted  cash flows, as described in
the paragraph below. In addition to the uncertainties inherent in the reserve


                                      -57-
<PAGE>

                          ISRAMCO INC. AND SUBSIDIARIES
                          NOTES TO FINANCIAL STATEMENTS


estimation  process,  these  amounts are affected by  historical  and  projected
prices for oil and  natural  gas,  which have  typically  been  volatile.  It is
reasonably  possible  that the  Company's  oil and gas  reserve  estimates  will
materially change in the forthcoming year.

     [12] Impairment of Long-Lived Assets

     The  provisions  of SFAS No. 121 require  the Company to assess  impairment
whenever events or changes in circumstances indicate that the carrying amount of
a long-lived asset may not be recoverable.  When an assessment for impairment of
oil and gas properties is performed,  the Company is required to compare the net
carrying value of oil and gas properties on a  field-by-field  basis (the lowest
level at which  cash  flows  can be  determined  on a  consistent  basis) to the
related estimates of undiscounted future net cash flows for such properties.  If
the net carrying value exceeds the net cash flows, then impairment is recognized
to reduce the carrying value to the estimated  fair value.  At December 31, 1998
the Company  recorded an  impairment  of $505,325 on the excess of the  carrying
value  of the  Company's  oil and  gas  properties  over  the  estimated  future
discounted cash flows from such properties.

     [13] Income Taxes

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

     [14] Oil and Gas Revenues

     The Company  recognizes oil and gas revenues as production occurs under the
entitlement  method.  As a result,  the  Company  accrues  revenue  relating  to
production for which the Company has not received payment.

     [15] Environmental

     The  Company is subject to  extensive  Federal,  state,  local and  foreign
environmental laws and regulations.  These laws, which are constantly  changing,
regulate the  discharge of materials  into the  environment  and may require the
Company to remove or  mitigate  the  environmental  effects of the  disposal  or
release of petroleum or chemical  substances at various sites.  Liabilities  for
expenditures  of noncapital  nature are recorded when  environmental  assessment
and/or remeditaion is probable,  and the costs can be reasonably  estimated.  No
significant  amounts for environmental  liabilities are recorded at December 31,
1998.

(NOTE B) - Transactions with Affiliates and Related Parties

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


                                      -58-
<PAGE>

                          ISRAMCO INC. AND SUBSIDIARIES
                          NOTES TO FINANCIAL STATEMENTS


Operator fees earned and related operator expenses are as follows:

                                                  Year Ended December 31,
                                               -----------------------------
                                                1998                   1997
                                               ------                 ------
                                                      (in thousands)
Operator fees:
     Negev Med Venture                         $  288                 $  288
     Shederot Venture                             360                     72
     Yam Ashdod Carveout                           72                    101
                                               ------                 ------
                                               $  720                 $  461
                                               ======                 ======
Operator expenses                              $  487                 $  507
                                               ======                 ======

     In November 1996,  Jerusalem Oil Exploration  Limited ("JOEL"),  then a 36%
holder of the Company's  issued and  outstanding  common stock and 33% holder of
the  Company's  outstanding  Class A and Class B Warrants,  sold such shares and
warrants  to Naphtha  Israel  Petroleum  Corporation  Limited  ("Naphtha"),  its
majority owned subsidiary. Naphtha subsequently transferred the investments to a
wholly  owned  subsidiary,  Naphtha  Holding  Ltd.  JOEL and Naphtha are Israeli
corporations whose shares are traded on the Tel-Aviv Stock Exchange.

     In August of 1997 the Company  entered  into a  Consulting  Agreement  with
Romulas  Investment  Ltd.  (which  Agreement  has been  assigned  to  Remarkable
Holdings  Ltd.), a company which is wholly owned and controlled by Daniel Avner,
the President of the Company. Pursuant to this Agreement which has a term of one
(1) year through July 31, 1998, the Company has agreed to pay the Consultant the
sum of $7,500  per  month  plus  expenses.  In  February  1999,  the  Consulting
Agreement was amended to increase the monthly compensation payable thereunder to
$15,000 and  pursuant  to the  amendment,  the  reimbursement  of  expenses  was
disallowed.  The  Company  has also  agreed to make  provide  a company  car and
company  furnished  apartment  to  Consultant,   if  available.  The  Consulting
Agreement is in effect through July 2000.

     On January 21,  1998,  the  Company  entered  into a  Inventory  Management
Agreement with Equital Ltd. pursuant to which the Company is obligated to pay to
Equital Ltd. $1,650 plus VAT payable December, March, June and September of each
year during the term of the Agreement.  In the case of the drilling of a well if
the total  monthly  hours of services  provided  to the Company by Equital  Ltd.
exceed 30 hours per month,  then the Company shall pay an additional  $40.00 per
hour plus VAT for services  rendered.  The  Agreement may be terminated on three
(3) month's written notice.

     During 1998 and 1997,  the Company paid JOEL $0 and $30,000,  respectively,
for rent, office,  secretarial and computer services. From January 1997 to March
1997 the Company paid JOEL $8,000 per month for such  services.  From April 1997
through  September  1997,  the  Company  paid  Naphtha  $6,000 per  month,  then
effective  October  1997  through  June 30,  1998,  $4,600  per  month  and then
effective  July  1998  through  December  31,  1998,  $6,500  per month for such
services.

          A subsidiary of the Company is the general partner of  Isramco-Negev 2
Limited


                                      -59-
<PAGE>

                          ISRAMCO INC. AND SUBSIDIARIES
                          NOTES TO FINANCIAL STATEMENTS


Partnership from which it received management fees and expense reimbursements of
$480,000  and  $480,000  for  the  year  ended   December  31,  1998  and  1997,
respectively.

     During the years ended  December  31, 1998 and 1997,  the Company  incurred
$214,000  and  $253,900,  respectively,  for  consulting  services  rendered  by
officers/directors of the Company.

     In  June  1996,  the  Company  paid  its  former   President   $200,000  in
consideration  for a five  year  covenant  not to  compete  and  entered  into a
consulting agreement with a company owned by the former President.

     The Company agreed to pay its former Chief  Executive  Officer,  $8,250 per
month through July 1997 for  consulting  services.  In April 1996, the executive
resigned from his position.  Pursuant to a  termination  agreement,  the Company
agreed to pay him $123,750  representing the balance of unpaid  consulting fees,
$270,000  in  consideration  for a three  year  covenant  not to  compete,  and,
purchased from Southern Shipping and Energy,  Inc., a company  controlled by the
former Chief Executive Officer,  29,268 shares of the Company's common stock for
$208,240.

     In May of  1996  the  Company  entered  into a  Consulting  Agreement  with
Goodrich Global L.T.D. B.V.I., a company owned and controlled by Haim Tsuff, the
Chairman  of  the  Board  of  Directors  and  Chief  Executive  Officer  of  the
Corporation.  Pursuant  to this  Consulting  Agreement  which  had a term of two
years,  the Company agreed to pay the sum of $144,000 per annum in  installments
of $12,000  per month,  in  addition  to  reimbursing  all  reasonable  business
expenses incurred during the term in connection with the performance of services
on  behalf  of the  Company.  In April  1997  the  consulting  compensation  was
increased  to  $240,000  per annum in  installments  of $20,000 per month and in
December 1997 the term was extended to May 31, 2001. The  Consulting  Agreement,
as  amended,  provides  that the term  shall be  automatically  extended  for an
additional term of three years,  commencing June 1, 2001, unless the Company has
given notice at least 90 days prior to June 1, 2001 that it does not intend that
the term be renewed.  In the event that the Company  terminates  Mr.  Tsuff,  he
shall be entitled to receive a lump sum  severance  payment equal to the balance
of the unpaid consulting fee due for the remaining term of the agreement.

     A  wholly-owned  subsidiary  of the Company is the  General  Partner in the
Negev 2 Limited Partnership. The daily managment of the Limited Partnership vest
with the General Partner,  however,  matters involving the rights of the Limited
Partnership  unit  holders,  are  subject  to  supervision  of  the  Supervisor,
appointed to supervise the Limited Partnership activities, and in some instances
the approval of the Limited  Partnership  unit holders.  The  Company's  General
Partnership  interest in the Limited Partnership is 0.01% which is accounted for
by the equity method of accounting.

     At December 31, 1998 the Company also owned 38,915,902 units of the Isramco
Negev 2  Limited  Partnership,  with a cost and  market  value of  $296,000  and
$285,000  respectively.  At December 31, 1997 the Company owned 319,529 Units of
the  Isramco  Negev 2,  Limited  Partnership  with a cost and market of value of
$22,000 and $3,000.  These  investments  are also accounted for under the equity
method of accounting.


     For additional related party transactions, see acquisitions Footnote J.



                                      -60-

<PAGE>


                          ISRAMCO INC. AND SUBSIDIARIES
                          NOTES TO FINANCIAL STATEMENTS


(NOTE C) - Marketable Securities

     Marketable securities  denominated in Israeli currency are presented herein
based on the December 31, 1998 exchange rate of $1 = NIS 4.16.

     At  December  31,  1998  and  1997  the  Company  owned  4,576,561   shares
(approximately 5%) of JOEL, a related party (see Note B), with a cost and market
value of  $2,316,000  and $770,000,  respectively,  in 1998 and  $2,316,000  and
$1,573,000, respectively, in 1997.

     At December 31, 1998 the Company owned 14,999,000  units of the I.N.O.C.  -
Dead Sea,  Limited  Partnership  a related party with a cost and market value of
$265,000 and $296,000.

     Sales of  marketable  securities  resulted  in realized  (losses)  gains of
$(83,000)  and  $193,000  for the  years  ended  December  31,  1998 and  1997,
respectively.

     At December  31, 1998 and 1997,  the Company had net  unrealized  losses on
marketable securities of $1,756,00 and $866,000, respectively. The change in the
net unrealized  holdings gain or loss included in earnings is a loss of $890,000
and $466,000 in 1998 and 1997, respectively.

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

<TABLE>
<CAPTION>
                                                                         December 31,
                                        ----------------------------------------------------------------------------
                                                       1998                                       1997
                                        --------------------------------            --------------------------------
                                                      Market                                     Market
                                           Cost                 Value                  Cost                 Value
                                        ----------            ----------            ----------            ----------
<S>                                     <C>                   <C>                   <C>                   <C>
Debentures                              $2,959,000            $2,728,000            $5,152,000            $5,068,000
Equity securities                        2,643,000             1,118,000             2,827,000             2,045,000
                                        ----------            ----------            ----------            ----------
Total                                   $5,602,000            $3,846,000            $7,979,000            $7,113,000
                                        ==========            ==========            ==========            ==========
</TABLE>

                                      -61-

<PAGE>


                          ISRAMCO INC. AND SUBSIDIARIES
                          NOTES TO FINANCIAL STATEMENTS


(NOTE D) - Oil and Gas Properties

<TABLE>
<CAPTION>
                                                                                                    Total
                                                                                                 Capitalized
                                                  Unproved                 Proved                   Costs
                                                 -----------            -----------              -----------

<S>                                              <C>                    <C>                      <C>
Balance--December 31, 1997                       $2,700,000             $ 4,731,000              $ 7,431,000


Acquisition costs                                        --                 260,000                  260,000
Sale of oil and gas properties                           --                (644,000)                (644,000)
                                                 ----------             -----------              -----------
Balance--December 31, 1998                       $2,700,000             $ 4,347,000              $ 7,047,000
                                                 ==========             ===========              ===========
</TABLE>


(NOTE E) -- Equipment

                                                                    December, 31
                                                                        1998
                                                                     ----------
Cost:
Balance--beginning of year                                           $ 251,000
Purchases                                                               60,000
Sales and dispositions                                                 (45,000)
                                                                     ---------
Balance--end of year                                                   266,000
                                                                     ---------
Accumulated depreciation:
Balance--beginning of year                                             130,000
Depreciation expense                                                    48,000
Depreciation of equipment that was sold or retired                     (34,000)
                                                                     ---------
Balance--end of year                                                   144,000
                                                                     ---------
Balance--cost less accumulated depreciation                          $ 122,000
                                                                     =========

Annual rates of depreciation are as follows:

     Office equipment and furniture                                     7%--20%
     Motor vehicles                                                    15%--30%



                                      -62-
<PAGE>


                          ISRAMCO INC. AND SUBSIDIARIES
                          NOTES TO FINANCIAL STATEMENTS


A summary of property and equipment is as follows:

                                                               December 31, 1998
                                                               -----------------

Unproved properties                                                $2,700,000
Oil and gas properties                                              4,347,000
Transportation equipment                                              135,000
Office equipment                                                      131,000
                                                                   ----------
                                                                    7,313,000
Less accumulated depletion, depreciation,
amortization and provision for impairment                           1,863,000
                                                                   ----------
                                                                   $5,450,000
                                                                   ==========




                                      -63-

<PAGE>

                          ISRAMCO INC. AND SUBSIDIARIES
                          NOTES TO FINANCIAL STATEMENTS


(NOTE F) - Shareholders' Equity

     The Company  declared a one-for-ten  reverse  stock split during 1998.  The
effect of the reverse stock split has been  reflected in all share and per share
amounts in the accompanying consolidated financial statements.

     The  Company's  1983 stock  option plan which  expired on January 31, 1993,
provided for both incentive stock options and nonqualified stock options.

     The 1993  stock  option  plan (the 1993  Plan) was  approved  at the Annual
General Meeting of  Shareholders  held on August 13, 1993. At December 31, 1998,
50,000 shares of common stock are reserved under the 1993 Plan.  Options granted
under the 1993 Plan might be either  incentive  stock options under the Internal
Revenue Code or options which do not qualify as incentive stock options. Options
are granted for a period of up to ten years from the grant  date.  The  exercise
price for an incentive stock option may not be less than 100% of the fair market
value of the Company's  common stock on the date of grant.  The options  granted
under this plan were fully vested at grant date. The  administrator  may set the
exercise price for a nonqualified stock option.

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

<TABLE>
<CAPTION>
                                                          Year Ended December 31,
                                                     ---------------------------------
                                                       1998                    1997
                                                     ---------------------------------
                                                     Weighted-               Weighted-
                                                      Average                 Average
                                                     Exercise                Exercise
                                          Shares       Price      Shares       Price
                                          ------       -----      ------       -----
<S>                                       <C>         <C>         <C>         <C>
1993 Plan:
Outstanding at beginning of year          29,750      $21.00      29,750      $21.00
Granted                                       --          --          --          --
Expired                                       --          --          --          --
Outstanding at end of year                29,750      $21.00      29,750      $21.00
Options exercisable at end of year        29,750      $21.00      29,750      $21.00
</TABLE>

As of December 31, 1998,  29,750 options were outstanding and exercisable with a
price of $21.00 and a weighted-average remaining contractual life of 5.3 years.

                                      -64-

<PAGE>

                          ISRAMCO INC. AND SUBSIDIARIES
                          NOTES TO FINANCIAL STATEMENTS


<TABLE>
<CAPTION>
                                                          Year Ended December 31,
                                           -----------------------------------------------------
                                                    1998                         1997
                                           -----------------------------------------------------
                                                          Weighted-                    Weighted-
                                                           Average                      Average
                                                          Exercise                     Exercise
                                           Shares           Price         Shares         Price
                                           ------           -----         ------         -----
<S>                                         <C>            <C>             <C>          <C>
Consultants and others:
Outstanding at beginning of year            2,000          $23.00          2,000        $23.00
Granted                                        --              --             --            --
Expired                                        --              --             --            --
Outstanding at end of year                  2,000          $23.00          2,000        $23.00
Options exercisable at year-end             2,000          $23.00          2,000        $23.00
</TABLE>

     As of December 31, 1998,  2,000 options were outstanding and exercisable at
a price of $23.00  and a  weighted  average  remaining  contractual  life of 4.7
years.

     The  Company  has  outstanding  Class A  Redeemable  Warrants  and  Class B
Redeemable  Warrants  which it issued  pursuant to a public  offering in 1993. A
Class A Redeemable  Warrant  entitles the holder to purchase one share of common
stock at a price of $20.00 at any time after the date of  issuance  until  April
16, 1999 (extended from April 16, 1998). A Class B Redeemable  Warrant  entitles
the  holder to  purchase  one share of common  stock at a price of $40.00 at any
time after  issuance  until April 16, 1999  (extended  from April 15, 1998).  At
December  31, 1997,  749,889  Class A  Redeemable  Warrants and 767,500  Class B
Redeemable  Warrants  are  outstanding.  The  Class A and Class B  warrants  are
subject to  redemption  by the Company at a price of $0.01 per warrant on thirty
days' notice after the price of the Company's  common shares  exceeds $21.00 and
$42.00, respectively.

     In  connection  with the offering the Company  issued to the  Underwriter a
warrant to purchase  22,500 units (the  "Underwriter  Warrant")  exercisable one
year after issuance but not later than five years at a price of $66.00 per unit.
Each unit is  identical  to those sold to the public  except  that the  exercise
prices of the Class A Redeemable  Warrants  and Class B Redeemable  Warrants are
$32.00  and  $64.00,  respectively.  Each unit  consists  of .4 shares of common
stock, .2 Class A Redeemable Warrants and .2 Class B Redeemable Warrants.



                                      -65-

<PAGE>

                          ISRAMCO INC. AND SUBSIDIARIES
                          NOTES TO FINANCIAL STATEMENTS


Shares of common stock reserved for future issuance are:

Options granted under the 1993 Plan                                       29,750
Options available for grant under the 1993 Plan                           20,250
Class A Redeemable Warrants                                              749,889
Class B Redeemable Warrants                                              767,500
Shares underlying the Underwriter Warrant                                 18,000
Other                                                                      2,000
                                                                       ---------
Total                                                                  1,587,389
                                                                       =========

     The  Company  applies  Accounting  Principles  Bulletin  Opinion No. 25 and
related  interpretations  in  accounting  for  its  options.   Accordingly,   no
compensation  cost  has been  recognized  for its  stock  option  grants  to its
employees.  Had  compensation  cost for the  Company's  stock option grants been
determined based on the fair value at the grant dates for awards consistent with
the  method  of SFAS No.  123,  Accounting  for  Stock-based  Compensation,  the
Company's  net loss and loss per share would have been  reduced to the pro forma
amounts indicated below.

                                                        Year Ended December 31,
                                                      -------------------------
                                                          1998           1997
                                                      -----------    ----------
Net loss -- as reported                               $  (851,000)   $  (14,000)
                                                      ===========    ==========
         -- pro forma                                 $  (851,000)   $  (14,000)
                                                      ===========    ==========
Loss per share -- as reported (basic and diluted)     $     (0.32)   $    (0.01)
                                                      ===========    ==========
         -- pro forma (basic and diluted)             $     (0.32)   $    (0.01)
                                                      ===========    ==========

(NOTE G) -- Income Taxes

     Loss  before  income  taxes and  minority  interest  from U.S.  and foreign
results of operations is as follows:

                                                   1998                  1997
                                                 ---------             --------

U.S.                                             $(938,400)            $(29,000)
Foreign                                            108,400               10,000
                                                 ---------             --------
        Total                                    $(830,000)            $(19,000)
                                                 =========             ========



                                      -66-

<PAGE>

                          ISRAMCO INC. AND SUBSIDIARIES
                          NOTES TO FINANCIAL STATEMENTS


     The provision for income taxes is as follows:

                                                1998                 1997
                                               -------              -------
     Current:
                 State                         $38,000              $    --
                 Foreign                            --                   --

     Deferred                                       --                   --
                                               -------              -------
             Total                             $38,000              $    --
                                               =======              =======

     Deferred   taxes  are  provided   principally   in  relation  to  temporary
differences in unrealized  appreciation  (depreciation) in marketable securities
and net operating losses.

     The deferred tax assets as of December 31, 1998 and 1997 are as follows:

                                                       Assets / (Liabilities)
                                                     --------------------------
                                                         1998           1997
                                                     -----------    -----------
Unrealized depreciation of marketable securities     $   614,600    $   303,100
U.S. federal net operating losses                        294,000        499,200
U.S. federal alternative minimum tax credits              94,700         88,600
Basis differences in property and equipment              310,800        115,600
U.S. state taxes                                          45,000             --
                                                     -----------    -----------
                                                       1,359,100      1,006,500

Valuation allowance                                   (1,359,100)    (1,006,500)
                                                     -----------    -----------

                                                     $        --    $        --
                                                     ===========    ===========

     The change in the  valuation  allowance  from December 31, 1997 to December
31, 1998  amounted to $352,600 and was caused  primarily by the reduction of the
net  operating   loss   carryforward   offset  by  the  increase  in  unrealized
depreciation  of marketable  securities  and basis  differences  in property and
equipment.




                                      -67-

<PAGE>

                          ISRAMCO INC. AND SUBSIDIARIES
                          NOTES TO FINANCIAL STATEMENTS


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

                                                        Year Ended December 31,
                                                        -----------------------
                                                           1998          1997
                                                          -----         -----

Computed at U.S. statutory rates                           35.0%         35.0%

State income taxes, net of federal benefit                  2.9            --
Adjustment to valuation allowance                         (42.5)        (35.0)
                                                          -----         -----

                                                           (4.6)%        0.00%
                                                          =====         =====

     At December 31, 1998, net operating loss carryforwards  available to reduce
future federal taxable income amounted to  approximately  $840,000,  expiring at
various dates through 2007. Due to certain  changes in ownership by shareholders
owning  greater  than 5% of the  Company's  outstanding  common  stock,  the net
operating loss carryforward may be subject to annual limitations.

     The Company also has significant net operating loss carryforwards available
to reduce future  Israeli  taxable income from its Israel Branch and its Israeli
subsidiaries.  These net  operating  loss  carryforwards  are not  limited by an
expiration date.

(NOTE H) -- Concentration of Credit Risk

     Financial   instruments,   which   potentially   expose   the   Company  to
concentrations of credit risk,  consist primarily of trade accounts  receivable.
The Company's  customer base includes several of the major United States oil and
gas  operating  and  production  companies.  Although  the  Company is  directly
affected by the  well-being of the oil and gas production  industry,  management
does not believe a significant credit risk exists at December 31, 1998.

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

     A  significant  portion  of the  Company's  cash  and cash  equivalents  is
invested in money-market funds.

     Substantially  all marketable  securities  owned by the Company are held by
banks in Israel.


                                      -68-


<PAGE>

                          ISRAMCO INC. AND SUBSIDIARIES
                          NOTES TO FINANCIAL STATEMENTS


(NOTE I) -- Commitments and Contingencies

     Commitments:  The  Company  leases  corporate  office  facilities  under  a
three-year  operating  lease  expiring  September  2000 at a  monthly  rental of
$2,718.  The Company  shares  office space with Jay  Petroleum,  L.L.C.  and Jay
Management L.L.C., affiliates, under an informal sublease agreement.

     The  Company  leases a  corporate  apartment  in the city of  Houston  on a
month-to-month  basis at a monthly rental of $1,100.  This apartment was used by
the  Company's  officers,  directors  and  employees  in  connection  with their
activities relating to the operations of the Company.

     At December 31, 1998,  future minimum lease  payments under  noncancellable
operating leases are approximately:

  Years Ending December 31,
---------------------------
            1999                              $32,616
            2000                               24,462
                                              -------
                                              $57,078
                                              =======

     Rent expense for the years ended December 31, 1998 and 1997 was immaterial.

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

(NOTE J) -- Acquisitions

     On February 5, 1997 the Company  acquired an 82.9%  membership  interest in
Jay at an aggregate  cost of $1.2  million;  $677,500  for a 50%  interest  from
N.I.R.  Resources,  Inc.  (NIR),  $363,750  for a 25%  interest  from  Stonewall
Resources,  LLC,  and  $132,650  as a  capital  contribution  to Jay  for a 7.9%
interest.  The Company assumed long-term bank debt of approximately  $1,065,000,
resulting in a total  purchase price of $2,141,000  substantially,  all of which
was allocated to oil and gas  properties.  The  acquisition was accounted for on
the purchase method of accounting.  NIR is a wholly owned subsidiary of Naphtha.
The Branch  Manager of the  Company's  Israel  Branch is the General  Manager of
Naphtha and the Company's  President is also a director of Naphtha. In addition,
officers and  directors of the Company are  associates of officers and directors
of Naphtha.

     Jay  entered  into a  Management  Agreement  with Jay  Management,  a Texas
limited  liability  company formed in February 1997 for the purpose of operating
certain oil and gas interests and managing  certain oil and gas interests  owned
or to be  acquired  by Jay.  For a  capital  contribution  of $350  the  Company
acquired a 35% interest in Jay Management. Pursuant to the Management Agreement,
Jay paid to Jay  Management  a  management  fee of $12,500 per month.  Effective
March 1, 1998 the management fees to be paid under the Management Agreement were



                                      -69-

<PAGE>

                          ISRAMCO INC. AND SUBSIDIARIES
                          NOTES TO FINANCIAL STATEMENTS


terminated.  Jay  Management  also receives all  operating  fees pursuant to the
Operating Agreement for the contract wells. The term of the Management Agreement
is for ten years, unless terminated by either party on not less than one hundred
eighty  days  notice.  The  designated  manager  of Jay  Management  receives  a
management fee of $5,000 per month.

     In March 1998, the Company purchased the remaining 17.1% ownership interest
in Jay Petroleum held by Jay Resources  Corporation  and Jay Natural  Resources,
Inc.  as a  result  of  arbitration.  In  March  1998 the  Company  acquired  an
additional 30% interest in Jay Management from Jay Natural Resources,  Inc. as a
result of  arbitration.  The  transfer of  ownership  of both  transactions  was
effective on December 31, 1997.  At December 31, 1998 the Company  purchased the
remaining 35% in Jay Management held by N.I.R. Resources, Inc.

     On February  13, 1997 Jay  acquired  from  Snyder Oil  Corporation  of Fort
Worth, Texas, various operated and nonoperated interests in oil and gas wells in
Louisiana,  Texas and Wyoming for a cost of $2,669,000 million.  The acquisition
was financed primarily with bank financing obtained by Jay through a $10 million
Master Note Facility with Comerica Bank--Texas,  Houston,  Texas. The Company is
not a borrower or guarantor under this Master Note Facility.

     On September 4, 1997 the Company  acquired  from Equital Ltd. an affiliated
company  formerly known as Pass-port  Ltd.,  which controls JOEL (see Note B)--a
50%  participation  in a joint  venture  that holds two permits  offshore of the
Republic  of  Congo,   the  Marine  III  Exploration   permit  and  the  Tilapia
Exploitation  permit to develop the Tilapia  Field.  The purchase price was $2.7
million, all of which was paid in cash. In addition, the Company granted Equital
an  8%   carried   interest   after   payout  in  its   rights   regarding   the
production-sharing  contract on the Tilapia  permit.  "Payout" as defined in the
agreement  means recovery of all of the investments to be done by the Company in
the Tilapia permit,  excluding the purchase price paid by the Company to Equital
Ltd.  for  Tilapia  of $2.55  million.  The other 50%  participant  in the joint
venture is Naphtha Israel Petroleum Corp. Ltd., which controls the Company.  The
operator for this project is Naphtha  Congo Ltd., a wholly owned  subsidiary  of
Naphtha Israel Petroleum Corp. Ltd. Naphtha Congo is paid $14,000 annually which
costs  are  shared  equally   between  the  Company  and  Naphtha   annually  in
consideration for office services, accounting and overhead. It will also receive
from these parties fees as to be detailed in a joint  operating  agreement.  The
Company  received a fair market valuation of the two permits from an independent
petroleum-engineering consultant.

     During 1997, a new  government was  established in the Congo.  Although the
political  situation in the Congo has not to date had a material  adverse effect
on the  Company's  50%  investment  in the joint  venture that holds two permits
offshore of the  Republic of Congo,  no  assurances  can be made that  continued
political  unrest in West Africa will not have a material  adverse effect on the
Company and the joint venture's operation in the Congo in the future.

(NOTE K) - Long-term Debt

     Jay has a $10  million  bank line of credit  facility  in place to  finance
acquisitions of oil and gas prospects.  The loan bears interest at the base rate
of the bank plus 1.5% (8.75% at December 31, 1998) and matures in February 2000.
Advances  outstanding under the bank loan facility are collateralized by the oil
and gas properties acquired and are limited to the "Borrowing Base", as



                                      -70-

<PAGE>

                          ISRAMCO INC. AND SUBSIDIARIES
                          NOTES TO FINANCIAL STATEMENTS


defined, which is subject to an annual redetermination.  Payments of $31,208 per
month, plus interest, are required until the April 1, 1999 redetermination date.
The borrowing base at December 31, 1998 was $3,235,000.

     Under the terms of the  financing  agreement  with the bank,  Jay must meet
certain  covenant   requirements.   The  most  restrictive   covenants   include
maintenance of a positive working capital ratio, exclusive of current maturities
of amounts  outstanding  under the bank loan  facility.  Jay was in violation of
certain of its debt  covenants as of December 31, 1998.  These  violations  were
waived by the bank for the period  ended  December 31,  1998.  Future  principal
payments  on the bank loan  facility as of December  31, 1998 are  $374,496  and
$1,404,395 in 1999 and 2000, respectively.

(NOTE L) - Geographical Segment Information

     The   Company's   operations   involve  a  single   industry   segment--the
exploration,  development, production and transportation of oil and natural gas.
Its  current  oil and gas  activities  are  concentrated  in the United  States,
Israel,  and the  Republic  of Congo,  Africa.  Operating  in foreign  countries
subjects the Company to inherent risks such as a loss of revenues,  property and
equipment  from such  hazards  as  exploration,  nationalization,  war and other
political  risks,  risks of  increases  of  taxes  and  governmental  royalties,
renegotiation  of  contracts  with  government  entities and changes in laws and
policies governing operations of foreign-based companies.

     The Company's oil and gas business is subject to operating risks associated
with  the  exploration,  and  production  of oil and  gas,  including  blowouts,
pollution  and acts of nature that could  result in damage to oil and gas wells,
production  facilities  or  formations.  In  addition,  oil and gas prices  have
fluctuated  substantially  in recent  years as a result of  events,  which  were
outside  of  the  Company's  control.   Financial  information,   summarized  by
geographic area, is as follows (in thousands):




                                      -71-

<PAGE>

                          ISRAMCO INC. AND SUBSIDIARIES
                          NOTES TO FINANCIAL STATEMENTS


<TABLE>
<CAPTION>
                                                                                  Geographic Segment
                                                          ---------------------------------------------------------------
                                                           United                                            Consolidated
       1998                                                States            Israel            Africa           Total
       ----                                               --------           -------           ------          -------
<S>                                                       <C>                <C>               <C>             <C>
Sales and other operating revenue                         $  1,543           $ 1,455           $   --          $ 2,998
Costs and operating expense                                 (2,244)             (512)              --           (2,756)
                                                          --------           -------           ------          -------
Operating profit (loss)                                   $   (701)          $   943           $   --          $   242
                                                          ========           =======           ======          =======
Interest income                             
   and other corporate revenues                                                                                  1,504
General corporate expenses                                                                                      (1,277)
Interest expense, loss on marketable securities and other                                                       (1,299)
Minority interest                                                                                                   17
Income taxes                                                                                                       (38)
                                                                                                               -------
Net loss                                                                                                       $  (851)
                                                                                                               =======

Identifiable assets at December 31, 1998                  $  2,686           $    64           $2,700          $ 5,450
Cash and corporate assets                                                                                       19,036
                                                                                                               -------
Total assets at December 31, 1998                                                                              $24,486
                                                                                                               =======
</TABLE>



                                      -72-

<PAGE>

                          ISRAMCO INC. AND SUBSIDIARIES
                          NOTES TO FINANCIAL STATEMENTS


<TABLE>
<CAPTION>
                                                                                Geographic Segment
                                                          --------------------------------------------------------------
                                                           United                                           Consolidated
       1997                                                States            Israel            Africa           Total
       ----                                               --------           -------           ------          -------
<S>                                                       <C>                <C>               <C>             <C>
Sales and other operating revenue                         $  2,001           $   944           $   --          $ 2,945
Total revenue
Costs and operating expense                                 (1,668)             (518)              --           (2,186)
                                                          --------           --------          ------          -------
Operating profit (loss)                                   $    333           $   426           $   --          $   759
                                                          =======            =======           ======          =======
Interest income, loss on marketable securities and other
  corporate revenues                                                                                               852
General corporate expenses                                                                                      (1,289)
Interest expense                                                                                                  (341)
Minority interest                                                                                                    5
                                                                                                               -------
Net loss                                                                                                           (14)
                                                                                                               =======

Identifiable assets at December 31, 1997                  $  4,107           $    83           $2,700          $ 6,890
Cash and corporate assets                                                                                       19,893
                                                                                                               -------
Total assets at December 31, 1997                                                                              $26,783
                                                                                                               =======
</TABLE>




                                      -73-

<PAGE>

                      SUPPLEMENTARY OIL AND GAS INFORMATION
           FOR THE YEARS ENDED DECEMBER 31, 1998 and 1997 (unaudited)

     The following supplemental information regarding the oil and gas activities
of the Company is presented pursuant to the disclosure requirements  promolgated
by the Securities and Exchange Commission and SFAS No. 69, Disclosures About Oil
and  Gas  Producing  Activities.  Capitalized  costs  relating  to oil  and  gas
activities and costs incurred in oil and gas property  acquisition,  exploration
and development activities for each year are shown below. The Company had no oil
and gas assets or operations prior to 1997.

Capitalized Cost of Oil and Gas Producing Activities (in thousands)

                                                                   1998
                                                           ---------------------
                                                            United
                                                            States        Congo
                                                           -------        ------

Unproved property not being amortized                      $    --        $2,700
Proved property being amortized                              4,347            --
Accumulated depreciation, depletion,
  amortization and provision for impairment                 (1,719)           --
                                                           -------        ------

Net capitalized costs                                      $ 2,628        $2,700
                                                           =======        ======

Costs Incurred in Oil and Gas Property Acquisition,  Exploration and Development
Activities
     (in thousands)

<TABLE>
<CAPTION>
                                                                                        United                   United
                                                                                        States        Congo      States       Congo
                                                                                        -------      -------     -------      ------
                                                                                                1998                        1997
                                                                                        --------------------------------------------
<S>                                                                                     <C>          <C>         <C>          <C>
Property acquisition costs--proved and unproved properties                              $   260      $    --     $ 4,347      $2,700
Exploration Costs                                                                            --           --          --          --
Development costs                                                                            --           --          --          --
(Israel exploration costs in 1998-$81)

Results of Operations for Oil and Gas Producing Activities (in thousands)

Oil and gas sales                                                                       $ 1,410      $    --     $ 2,001      $   --
Lease operating expense and severance taxes                                                 883           --         972          --
Depreciation, depletion, amortization
  and provision for impairment                                                            1,386           --         502          --
Explorations costs                                                                           --           --          --          --
                                                                                        -------      -------     -------      ------

(Loss) Income before tax provision                                                         (859)          --         527          --
Provision for income taxes                                                                  (38)          --          --          --
                                                                                        -------      -------     -------      ------

Results of operations                                                                   $  (897)     $    --     $   527          --
                                                                                        =======      =======     =======      ======
</TABLE>




                                      -74-

<PAGE>


                      SUPPLEMENTARY OIL AND GAS INFORMATION
           FOR THE YEARS ENDED DECEMBER 31, 1998 and 1997 (unaudited)

Oil and Gas Reserves

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

The  following  table   represents  the  Company's  net  interest  in  estimated
quantities of proved developed and undeveloped  reserves of crude oil, condense,
natural gas liquids and natural gas and changes in such  quantities  at December
31, 1997,  and for the year then ended.  Net proved  reserves are the  estimated
quantities of crude oil and natural gas which  geological and  engineering  data
demonstrate  with  reasonable  certainty to be  recoverable in future years from
known  reservoirs  under  existing  economic and  operating  conditions.  Proved
developed  reserve  are  proved  reserve  volumes  that  can be  expected  to be
recovered through existing wells with existing  equipment and operating methods.
Proved  undeveloped  reserves are proved reserve volumes that are expected to be
recovered  from new wells on undrilled  acreage or from  existing  wells where a
significant  expenditure  is required  for  recompletion.  All of the  Company's
proved  reserves are in the United  States.  The Company had no proved  reserves
prior to 1997. The Company's oil and gas reserves are priced at $9.48 per barrel
and $1.59 per Mcf, respectively, at December 31, 1998.

                                                          OIL BBLS     GAS MCF
                                                          --------   ----------
January 1, 1997                                                 --           --
Acquisition of minerals in place                           155,879    5,392,558
Production                                                  40,483     (604,010)
                                                          --------   ----------
December 31, 1997                                          115,396    4,788,548

Revisions of previous estimates                             67,584      945,551
Acquisition of minerals in place                                --       56,961
Sales of minerals in place                                      --     (984,600)
Production                                                 (31,000)    (523,000)
                                                          --------   ----------
December 31, 1998                                          151,980    4,283,460

The Company's proved developed reserves are as follows:

                                                          Oil BBls     Gas Mcf
                                                          --------     -------
December 31, 1998                                          151,435    3,384,986
December 31, 1997                                          115,396    4,788,548





                                      -75-

<PAGE>

                      SUPPLEMENTARY OIL AND GAS INFORMATION
           FOR THE YEARS ENDED DECEMBER 31, 1998 and 1997 (unaudited)

Standardized Measure of Discounted Future Net Cash Flow

The  standardized  measure of discounted  future net cash flows  relating to the
Company's  proved oil and gas reserves is calculated and presented in accordance
with Statement of Financial  Accounting  Standards No. 69.  Accordingly,  future
cash  inflows  were  determined  by applying  year-end oil and gas prices to the
Company's  estimated  share of the  future  production  from  proved oil and gas
reserves.  Future  production  and  development  costs were computed by applying
year-end  costs to future years.  Applying  year-end  statutory tax rates to the
estimated net future cash flows derived  future income taxes.  A prescribed  10%
discount factor was applied to the future net cash flows.

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

<TABLE>
<CAPTION>
                                                           1998            1997
                                                        -----------    ------------
<S>                                                     <C>            <C>
Future cash inflows                                     $ 8,247,017    $ 15,410,237
Future development costs                                   (289,517)       (541,678)
Future production costs                                  (3,081,781)     (5,905,863)
                                                        -----------    ------------

Future net cash flows                                     4,875,719       8,962,696
Annual discount 10% rate                                 (2,125,207)     (3,625,706)
                                                        -----------    ------------

Standardized measure discounted future net cash flows   $ 2,750,512    $  5,336,990
                                                        ===========    ============
</TABLE>

Estimated  future  income taxes were  eliminated  because  estimated  future tax
deductions  related  to oil and gas  properties  exceeded  estimated  future net
revenues based on oil and gas prices and related costs at December 31, 1998.

Changes in Standardized Measure of Discounted Future Net Cash Flows

The principal sources of change in the standardized measure of discounted future
net cash flows for the year ended December 31, 1997 were as follows:

                                                        1998            1997
                                                    -----------     -----------
Beginning of year                                   $ 5,336,990     $        --
Sales and transfer of oil and gas produced,
  net of production costs                              (527,500)     (1,029,853)
Sales of reserves in place                           (1,609,800)             --
Net changes in prices and production costs           (1,050,678)       (329,000)
Acquisition of minerals in place                         67,500       6,125,843
Accretion of discount                                   534,000         570,000
                                                    -----------     -----------
End of year                                         $ 2,750,512     $ 5,336,990
                                                    ===========     ===========


                                      -76-