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Isramco Inc · 10-K · For 12/31/06 · EX-99.1

Filed On 3/16/07, 8:46am ET · Accession Number 1188112-7-710 · SEC File 0-12500

  As Of                Filer                Filing    For/On/As Docs:Size              Issuer               Agent

 3/16/07  Isramco Inc                       10-K       12/31/06    6:291K                                   Tri State Fin'l Press/FA

Annual Report — Form 10-K
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10-K        Annual Report                                         54    284K 
 2: EX-10.17    Material Contract                                     13     40K 
 3: EX-10.18    Material Contract                                      2      9K 
 4: EX-31       Certification per Sarbanes-Oxley Act (Section 302)     2±     9K 
 5: EX-32       Certification per Sarbanes-Oxley Act (Section 906)     1      6K 
 6: EX-99.1     Miscellaneous Exhibit                                 38    158K

EX-99.1 — Miscellaneous Exhibit

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 "ISRAMCO - NEGEV 2"
 LIMITED PARTNERSHIP

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

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                                         "Isramco - Negev 2" Limited Partnership

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

CONTENTS                                                                        

                                                                            PAGE
                                                                            ----

Auditors' Report                                                               2

Balance Sheets                                                                 3

Statements of Earnings                                                         4

Statements of Changes in Limited Partnership's Capital                         5

Statements of Cash Flows                                                       6

Notes to the Financial Statements                                              8

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[KPMG LOGO]                                                                     

SOMEKH CHAIKIN                                  

               MAIL ADDRESS    OFFICE ADDRESS         TELEPHONE 972 3 684 8000
         PO Box 609      KPMG Millennium Tower  Fax 972 3 684 8444
Tel Aviv 61006  17 Ha'arba'a Street             
Israel          Tel Aviv 61070                  
Israel          

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM                         
TO THE PARTNERS OF "ISRAMCO - NEGEV 2" LIMITED PARTNERSHIP                      

We have audited the accompanying balance sheets of "Isramco - Negev 2" Limited  
Partnership (hereinafter - "the Limited Partnership") as at December 31, 2006   
and 2005, and the statements of earnings, changes in Limited Partnership's      
capital and cash flows, for each of the years in the three-year period ended    
December 31, 2006. These financial statements are the responsibility of the     
Board of Directors and the Management of the General Partner of the Limited     
Partnership. Our responsibility is to express an opinion on these financial     
statements based on our audits.                                                 

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

In our opinion, the financial statements referred to above present fairly, in   
all material respects, the financial position of the Limited Partnership as at  
December 31, 2006 and 2005, and the results of its operations, the changes in   
its capital and its cash flows for each of the years in the three-year period   
ended December 31, 2006, in conformity with generally accepted accounting       
principles in Israel.                                                           

Accounting principles generally accepted in Israel differ in certain significant
respects from accounting principles generally accepted in the United States.    
Application of accounting principles generally accepted in the United States    
would have affected the financial position of the Limited Partnership as at     
December 31, 2006 and 2005 and the results of its operations, the changes in its
capital and its cash flows for each of the years in the three-year period ended 
December 31, 2006, to the extent summarized in Note 12 to the financial         
statements.                                                                     

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

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

March 13, 2007                                                                  

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

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                                         "Isramco - Negev 2" Limited Partnership

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

REPORTED AMOUNTS                                                                

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

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

INVESTMENTS                                                                     

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

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

CURRENT LIABILITIES                                                             

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

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

                                                                [Download Table]
---------------------------  --------------------------  --------------------------
                                                                                   
  Pinkstone Ltd. - Director       Yossi Levy - CEO           Ami Krupik - CFO      
 Isramco Oil and Gas Ltd. -  Isramco Oil and Gas Ltd. -  Isramco Oil and Gas Ltd. -
       General Partner             General Partner            General Partner      
       Represented by                                                              
       Ya'akov Meimon                                                              

March 13, 2007                                                                  

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

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                                         "Isramco - Negev 2" Limited Partnership

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

REPORTED AMOUNTS                                                                

                                                        [Enlarge/Download Table]

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

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

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                                         "Isramco - Negev 2" Limited Partnership

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

REPORTED AMOUNTS                                                                

                                                        [Enlarge/Download Table]

                                            PARTNERSHIP    ACCUMULATED                
                                              CAPITAL          LOSS          TOTAL    
                                           -------------  -------------  -------------
                                           NIS THOUSANDS  NIS THOUSANDS  NIS THOUSANDS
                                           -------------  -------------  -------------
                                                                                      
BALANCE AS AT JANUARY 1, 2004                  856,391      (346,088)       510,303   

Net income for the year                             --        55,005         55,005   

Tax deposits paid on behalf of holders of                                             
   the participation units*                         --        (3,619)        (3,619)  
                                               -------      --------        -------   

BALANCE AS AT DECEMBER 31, 2004                856,391      (294,702)       561,689   

Net income for the year                             --        37,936         37,936   

Tax deposits paid on behalf of holders of                                             
   the participation units*                         --        (5,074)        (5,074)  
                                               -------      --------        -------   

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

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

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

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

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

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

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                                         "Isramco - Negev 2" Limited Partnership

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

REPORTED AMOUNTS                                                                

                                                        [Enlarge/Download Table]

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

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

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

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                                         "Isramco - Negev 2" Limited Partnership

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

REPORTED AMOUNTS                                                                

                                                        [Enlarge/Download Table]

                                                                2006           2005           2004    
                                                           -------------  -------------  -------------
                                                           NIS THOUSANDS  NIS THOUSANDS  NIS THOUSANDS
                                                           -------------  -------------  -------------
                                                                                                      
A. ADJUSTMENTS TO RECONCILE NET INCOME TO NET                                                         
   CASH FLOWS GENERATED BY OPERATING ACTIVITIES                                                       

Income and expenses not involving cash flows:                                                         
--------------------------------------------                                                          
Gain from marketable securities, net                          (40,611)       (50,479)       (36,006)  
Gain from sale of oil and gas rights                             (812)            --             --   
Amortization of investment in oil and gas properties               --         30,370             --   

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

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

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DRAFT 

                                         "Isramco - Negev 2" Limited Partnership

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

NOTE 1 - GENERAL                                                                

 A.   Isramco - Negev 2, Limited Partnership (hereinafter - "the Limited
     Partnership" or "the Partnership") was established according to a
        limited partnership agreement that was signed on March 2 and 3, 1989
          (that has been amended from time to time), between the general partner
        - Isramco Oil and Gas Ltd. (hereinafter - "the General Partner") and
       the limited partner - Isramco Management (1988) Ltd. (hereinafter -
        "the Limited Partner" or "the Trustee"). The Limited Partnership was
         registered on March 3, 1989, under the Israeli Partnerships Ordinance
(New Version), 1975.                                        

         According to Section 61(a) of the Partnerships Ordinance, the limited
        partnership agreement constitutes the Articles of Association of the
Limited Partnership.                                        

     B.   Under the Limited Partnership agreement, as amended from time to time,
          the General Partner and the Limited Partner will bear the expenses and
       losses of the Limited Partnership and will be entitled to income in
          accordance with their proportionate share of the capital they invested
in the Limited Partnership's capital.                       

     C.   The day-to-day management of the Limited Partnership is carried out by
       the General Partner, under the supervision of the Supervisor, Yigal
         Brightman & Co., Certified Public Accountants, and Mr. David Valiano,
       CPA (Isr.). Under the Limited Partnership agreement, the Supervisor
was granted certain supervisory powers.                     

D.   The Limited Partner - Isramco Management (1988) Ltd., has various
   rights in the Limited Partnership. Under a trust agreement, the
  Limited Partner acts as trustee on behalf of the owners of the
participation units.                                        

E.   The Limited Partnership was approved by the Israeli Income Tax   
          Commissioner for purposes of the Israeli Income Tax Regulations (Rules
         for Calculating Tax for Holding and Sale of Participation Units in an
Oil Exploration Partnership), 1988. In December 2005, the   
      effectiveness of these Regulations was extended up to December 31,
 2006. As at the signing date of the financial statements, the
Regulations had not been extended.                          

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                                         "Isramco - Negev 2" Limited Partnership

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

NOTE 2 - OBJECTIVE OF THE LIMITED PARTNERSHIP                                   

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

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

                                                        [Enlarge/Download Table]

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

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

NOTE 3 - REPORTING PRINCIPLES AND ACCOUNTING POLICIES                           

A.   GENERAL                                                          

These financial statements are presented in accordance with generally 
     accepted accounting principles in Israel and the principles provided in the
Israeli Securities Regulations (Preparation of Annual Financial       
     Statements), 1993, except for items presented in the format dictated by the
nature of the Limited Partnership's business.                         

B.   DEFINITIONS                                                      

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

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

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

4.   Dollar - the United States dollar.                               
------                                                      

     5.   Adjusted Amount - the nominal historical amount adjusted in accordance
---------------                                             
         with the provisions of Opinions 23, 34, 36 and 37 of the Institute of
Certified Public Accountants in Israel.                     

6.   Reported Amount - the adjusted amount as at the transition date  
---------------                                             
          (December 31, 2003), with the addition of amounts in historical values
         that were added after the transition date and less amounts eliminated
after the transition date.                                  

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

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                                         "Isramco - Negev 2" Limited Partnership

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

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

C.   FINANCIAL STATEMENTS IN REPORTED AMOUNTS                         

(1)  In October 2001, the Israeli Accounting Standards Board published
          Accounting Standard No. 12, "Discontinuance of Adjustment of Financial
 Statements". Pursuant to this Standard and in accordance with
       Accounting Standard No. 17 that was published in December 2002, the
      adjustment of financial statements for the effect of inflation was
    discontinued as of January 1, 2004. Up to December 31, 2003, the
     Partnership continued to prepare adjusted financial statements in
       accordance with Opinion No. 36 of the Institute of Certified Public
         Accountants in Israel. The Partnership has implemented the provisions
         of the Standard and has accordingly discontinued the adjustment as of
January 1, 2004.                                            

    (2)  In the past, the Partnership prepared its financial statements on the
     basis of historical cost adjusted for the changes in the Consumer
          Price Index. The adjusted amounts as stated, included in the financial
        statements as of December 31, 2003 (the transition date) constituted
        the starting point for the nominal financial report as of January 1,
    2004. Additions subsequent to December 31, 2003, made during the
period are included according to their historical values.   

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

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

D.   REPORTING PRINCIPLES                                             

(1)  Balance sheets:                                                  

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

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

(2)  Statements of earnings:                                          

       a.   Income and expenses deriving from non-monetary items (such as,
           depreciation and amortization, prepaid revenues and expenses,
         etc.) and from provisions included in the balance sheet are
             calculated as the difference between the Reported Amount of the
             opening balance and the Reported Amount of the closing balance.

         b.   All other items included in the statement of earnings are stated
at their historical value.                        

E.   CASH AND CASH EQUIVALENTS                                        

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

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                                         "Isramco - Negev 2" Limited Partnership

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

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

F.   MARKETABLE SECURITIES                                            

  Marketable securities are stated at their market value as at the balance
 sheet date. Changes in the value of such securities are recorded in the
statement of earnings as incurred.                                    

G.   INVESTMENTS IN OIL AND GAS EXPLORATION                           

   The Limited Partnership uses the "successful efforts" method with respect
 to the accounting treatment of the recording of oil and gas exploration
expenses, as follows:                                                 

     (1)  The Limited Partnership's expenses in executing geological and seismic
  tests and surveys are expensed immediately in the statement of
earnings as incurred.                                       

   (2)  Investments in oil and gas wells which are in the drilling stage and
        in which it has not yet been proven whether they will produce oil or
        gas, or which have not yet been determined to be non-commercial, are
stated in the balance sheet at cost.                        

    (3)  Investments in oil and gas wells which were proven to be dry and were
       abandoned, or were determined to be non-commercial, or for which no
        development plans were prepared for the near future, are written off
in full to the statement of earnings.                       

H.   DECLINE IN VALUE OF ASSETS                                       

  The Limited Partnership applies Accounting Standard No. 15 - "Decline in
    the Value of Assets" (hereinafter - "the Standard") of ICPAI. The Standard
 provides procedures which the Partnership must apply in order to assure
that its assets in the balance sheet (in respect of which the Standard
applies) are not presented at an amount greater than their recoverable
 value, which is the higher of the net selling price and the realization
 value (the present value of the estimated future cash flows expected to
derive from the use of the asset and its realization).                

The Standard applies to all assets in the balance sheet, except for   
financial assets. In addition, the Standard provides presentation and 
disclosure rules regarding assets whose value has decreased. Where the
value of an asset in the balance sheet is greater than its recoverable
   value, the Limited Partnership recognizes a loss from decline in value in
   an amount equal to the difference between the book value of the asset and
   its recoverable value. The loss recognized, as stated, will be eliminated
  only if there have been changes in the estimates used in determining the
     asset's recoverable value from the date on which the last loss from decline
in value was recognized.                                              

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                                         "Isramco - Negev 2" Limited Partnership

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

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

I.   INCOME PER PARTICIPATION UNIT                                    

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

J.   USE OF ESTIMATES                                                 

The preparation of financial statements in conformity with generally  
  accepted accounting principles requires management to make estimates and
    assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities as at the date of the 
financial statements and the reported amounts of revenues and expenses
  during the periods reported. It is clarified that the actual results may
differ from these estimates.                                          

K.   DERIVATIVE FINANCIAL INSTRUMENTS                                 

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

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

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

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

L.   REVENUE RECOGNITION                                              

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

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                                         "Isramco - Negev 2" Limited Partnership

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

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

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

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

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

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

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

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

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

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AND 2004                                                                        
--------------------------------------------------------------------------------

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

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

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

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

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

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

N.   RATES OF EXCHANGE AND LINKAGE BASIS                              

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

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

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

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

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AND 2004                                                                        
--------------------------------------------------------------------------------

NOTE 4 - MARKETABLE SECURITIES                                                  

                                                        [Enlarge/Download Table]

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

                                                                [Download Table]

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

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

NOTE 5 - JOINT VENTURE FOR OIL AND GAS EXPLORATION                              

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

ADDITIONAL INFORMATION:                                                         

GENERAL                                                                         
-------                                                                         

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

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

The balances shown in the balance sheet and relating to the joint ventures      
constitute the amount of the actual investment of the Limited Partnership in    
each joint venture less its share in the losses of that venture.                

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AND 2004                                                                        
--------------------------------------------------------------------------------

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

A.   "MED YAVNE" LEASE                                                

1.   General                                                          
-------                                                     

In June 2000, the Petroleum Commissioner (hereinafter - "the
        Commissioner") granted the partners in the Offshore License 239/"Med
    Yavne" (hereinafter - "Med Yavne License"), in which the Limited
       Partnership had oil rights, a lease for a period of 30 years for an
 area of 250 sq. km. out of the area of the aforesaid license,
following the results of the "Or 1" drilling.               

          The lease conditions provide, among other things, that the leaseholder
         shall act diligently to develop the lease and to produce gas from the
        lease, and at the end of 5 years from the date the lease was granted
     the leaseholder shall submit a plan for continued activity in the
      lease area. In June 2005, the Commissioner approved the operator's
        request for a change in the terms of the lease in such a manner that
       the work plan for development of the lease will be submitted to the
        Commissioner at the time applicable to development of the "Noa" well
(see Section 3, below).                                     

        The lease is limited in the entire area thereof, to the subterranean
         space as far as the roof of messenian ophorites or to the base of the
        Pliocene in absence of the ophorites. In 2001, an area of 105 square
         kilometers of the northern area of the lease was returned in which no
      drilling prospects were located. In 2002, an additional area of 92
  square kilometers out of the northern portion of the lease was
         returned in light of the operator's recommendation not to execute any
         drillings in accordance with the conditions of the lease since, based
         on the existing data, the prospects currently indicated are at a high
    level of risk. The remaining lease area after return of the said
portions is 53 square kilometers.                           

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

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

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

        In October 1999, the "Or 1" drilling was executed in the "Med Yavne"
     License. The results of the production test performed at the well
     indicated that the rate of production in the area examined was 21
          million cubic feet per day. Nonetheless, in the operator's estimation,
        the well is capable of producing gas at a higher rate, once the well
          is completed for regular production, with appropriate equipment and by
opening up additional areas in the target layer.            

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

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AND 2004                                                                        
--------------------------------------------------------------------------------

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

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

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

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

In November 2002, the Partnership received an opinion from a
    consulting firm in the United States, the object of which was to
        perform a techno-economic examination for the development of the "Or
        1" well. The said opinion indicates that, under certain assumptions,
  development of the reserve, by connecting it to the production
          platform in the adjacent "Meri" well (at a distance of 12 km) and from
        there via a transportation pipe to Ashdod, is economically feasible.
In January 2007, the Partnership received an updated opinion
       (including an update of the development costs and the sales prices)
     that also indicates that development in the "Or 1" well, assuming
        connection of the well to the production platform in the "Meri" well
as stated, is economically feasible.                        

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

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

  In the estimation of the General Partner, based on the opinion
  received, as stated, and based on the price of the gas and the
         development costs, the fair value of the "Or 1" well is not less than
its value as recorded.                                      

B.   THE "MED ASHDOD" LEASE                                           

1.   General                                                          
-------                                                     
          In January 2002, the Commissioner granted the partners in the Offshore
       License 242/"Med Ashdod", a lease (hereinafter - "the Lease") in an
          area of 250 square kilometers out of the "Med Ashdod" License area for
         a period of 30 years (commencing from June 2000), this being based on
       the findings of the "Nir 1" well, which was executed in the license
area. The Partnership's share in the Lease is 19.1369%.     

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

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

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AND 2004                                                                        
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NOTE 5 - JOINT VENTURE FOR OIL AND GAS EXPLORATION (CONT'D)                     

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

1.   General (cont'd)                                                 
-------                                                     

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

          In February 2004, Isramco Inc., the operator of the lease (hereinafter
        - "the Operator") presented to the Partners the "Yam 3" prospect - a
    drilling for oil prospects (hereinafter - "the Drilling") in the
    Jurassic layer at a depth of 5,900 meters, and with an estimated
budget of $40 million.                                      

       Execution of the Drilling is subject to approval of the Ministry of
     Defense and signing of an agreement with an owner of the drilling
equipment (Semi or Jack Up).                                

       In meetings held in 2004 and 2005, the Operator and the Ministry of
      Defense discussed the conditions for execution of the Drilling. In
      August 2005, upon submission of the summation with the Ministry of
      Defense, the Operator contacted drilling companies for purposes of
        receiving its proposal for execution of the Drilling. If and subject
         to acceptance of the proposals and an agreement in-principle with the
    drilling contractor (who will comply with the limitations of the
     Ministry of Defense), the Operator will update the budget for the
          Drilling and will bring its execution for the approval of the partners
       in the lease as well as the approval of the Ministry of Defense. At
    this stage, and as long as proposals have not been received from
    drilling companies and approvals have not been received from the
       Ministry of Defense and the partners in the lease, as stated, it is
          not possible to estimate if and when the Drilling of "Yam 3" well will
be executed.                                                

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

     In February 2005, the operator recommended to the partners in the
    Lease to execute a drilling for gas prospects - the "Gad 1" Well
         (hereinafter - "the Well"). In the absence of a unanimous decision of
        all the partners with respect to execution of the Well, the operator
       issued a "Sole Risk" notification in the name of the Partnership to
  the other partners in the Well. The meaning of the "Sole Risk"
        notification is that every partner in the Lease is given a period of
       30 days from the date of receipt of the "Sole Risk" notification to
        notify the operator of his interest in participating in the Well, at
        the full rate of his rights or a part thereof, or not to participate
in the Well at all.                                         

   In response to the "Sole Risk" notification, in addition to the
         Partnership, other partners holding approximately 14.9% of the rights
      in the Lease gave notice of their interest in participating in the
         Well. Accordingly, the rights of those partners not responding to the
 "Sole Risk" notification were transferred to the Partnership.

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AND 2004                                                                        
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NOTE 5 - JOINT VENTURE FOR OIL AND GAS EXPLORATION (CONT'D)                     

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

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

   Pursuant to the decision made on August 25, 2005 by the General
         Meeting of the holders of the Participation Units in the Partnership:

      1.   On August 29, 2005, the Partnership entered into an agreement
          with the U.S. company, Palace Petroleum Crop. (hereinafter -
           "Palace"), pursuant to which the Partnership will transfer to
           Palace participation rights in the Well at the rate of 30% in
             exchange for Palace investing in the Well 34.2% of the drilling
              costs and 30% of the production tests (if any). In addition, the
              Partnership will grant Palace an option to acquire participation
        rights at the rate of 30% of every additional drilling, if
             executed in the future in the Med Ashdod Lease site, this being
      only in a case where the Partnership receives additional
          participation rights (in addition to the present rate of its
               rights in the Lease) as part of the "Sole Risk" process, and at a
             rate that will not be less than the rights to be transferred to
Palace as part of the option as stated above.     

      2.   On August 28, 2005, the Partnership transferred participation
      rights in the Well at the rate of 1% to Petroleum Fields
        Exploration (1992) Limited Partnership, in exchange for it
bearing its relative share of the drilling costs. 

      3.   On September 13, 2005 and September 26, 2005, the Partnership
            transferred participation rights in the Well at the rate of 4%
             and 5%, respectively, to Delek Drilling Limited Partnership, in
               exchange for it bearing its relative share of the drilling costs.

        After transfer of the rights as stated, the Partnership remains with
45.103% of the rights in the Well.                          

     On September 25, 2005, execution of the Well was commenced by the
          offshore drilling rig, Atwood Southern Cross. The Well was planned for
          a depth of approximately 2,600 meters and has a budget (after updates)
    of $16.4 million (not including production tests). When the Well
    reached its final depth, electrical examinations were made which
         indicated that the target layers are saturated with water. Therefore,
       on November 16, 2005, the Partners decided to abandon the Well. The
Well costs amounted to roughly $16.4 million.               

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

C.   MICHAL AND MATAN MARINE LICENSES                                 

  In March 2005, the operator (BG) notified the partners in the Michal and
    Matan licenses (hereinafter - "the Licenses") and the Commissioner that it
     relinquishes its rights in the Licenses and resigns it position as operator
     of the Licenses. As a result of that notification and pursuant to the joint
    operating agreement, BG's rights were transferred to the other partners in
    the Licenses based on their proportionate shares therein. Accordingly, the
participation rate of the rights in the Licenses transferred to the   
Partnership was 20.510%.                                              

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AND 2004                                                                        
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NOTE 5 - JOINT VENTURE FOR OIL AND GAS EXPLORATION (CONT'D)                     

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

    In May 2005, an agreement was reached pursuant to which Dor Chemicals Ltd.
and the Dor Gas Explorations, Limited Partnership transferred, for no 
consideration, to the Partnership and to the limited partnership Delek
Drillings (hereinafter - "Delek") and Avner Petroleum Exploration     
     (hereinafter - "Avner") participation rights in the Licenses, such that the
 Partnership was transferred 4.885% and Delek and Avner were transferred
     15.197% each. In January 2006, additional participation rights, at the rate
of 11.55%, were transferred to the Partnership by STX (2000) Limited  
Partnership.                                                          

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

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

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

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

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

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

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

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

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

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

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AND 2004                                                                        
--------------------------------------------------------------------------------

NOTE 6 - SUNDRY PAYABLES                                                        

                                                                [Download Table]

                                                    DECEMBER 31     DECEMBER 31 
                                                        2006            2005    
                                                   -------------   -------------
                                                   NIS THOUSANDS   NIS THOUSANDS
                                                   -------------   -------------
                                                                                
Payables in respect of financial instruments (1)       3,560             --     
Accrued expenses                                         474            501     
                                                       -----            ---     
                                                       4,034            501     
                                                       =====            ===     

(1)  See Note 11B(2).                                                 

NOTE 7 - CONTINGENT LIABILITIES AND COMMITMENTS                                 

A.   In the event of discovery of oil and/or gas and/or other valuable
         material that can be produced within the licenses and leases in which
         the Partnership is active at present and other licenses and leases in
        which the Partnership will participate, the Partnership is obligated
          to pay royalties from the revenues generated from the first 10% of its
share in the license/lease, as follows:                     

                                                        [Enlarge/Download Table]

                           ONSHORE LICENSES                      OFFSHORE LICENSES          
                -------------------------------------  -------------------------------------
                UP TO THE DATE OF     FOLLOWING THE     UP TO THE DATE       FOLLOWING THE  
                  RETURN OF THE     DATE OF RETURN OF  OF RETURN OF THE    DATE OF RETURN OF
                   INVESTMENT        THE INVESTMENT       INVESTMENT         THE INVESTMENT 
                -----------------   -----------------  -----------------   -----------------
                                                                                            
To Isramco Inc.       5.00%               13.00%             1.00%              13.00%      

     In addition, in the event of a discovery of oil and/or gas and/or
        other valuable material that will be extracted and realized from the
         Med Ashdod Lease and the Med Yavneh Lease, the Limited Partnership is
         obligated to pay royalties from the revenues generated from the first
10% of its share in the lease as specified below:           

                                                                [Download Table]

                                                     THE MED ASHDOD LEASE AND      
                                                         MED YAVNEH LEASE          
                                              -------------------------------------
                                              UP TO THE DATE OF     FOLLOWING THE  
                                                RETURN OF THE     DATE OF RETURN OF
                                                 INVESTMENT        THE INVESTMENT  
                                              -----------------   -----------------
                                                                                   
To J. O. E. L. Jerusalem Oil Exploration Ltd.       0.51%               6.58%      
To Equital Ltd.                                     0.38%               4.93%      
To Isramco Inc.                                     0.06%               0.83%      

    Isramco Inc. is entitled to an overriding royalty of 2% from the
        Partnership's share in the oil and/or gas, that is produced from the
      Med Ashdod and Med Yavneh lease and/or of any petroleum right that
          comes in their place, which is in addition to any other royalty and/or
consideration to which Isramco Inc. is entitled at present. 

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

 B.   The Partnership has an obligation for the payment of an overriding
          royalty to the General Partner of 5% of the Partnership's share of the
  revenues from oil and/or gas (gross, before expenses and other
      payments including a royalty to the State according to the Israeli
   Petroleum Law, 1952) that is produced from the Matan and Michal
         Licenses, including any petroleum asset that may come in their place.

C.   According to an agreement dated February 1997, the Partnership   
     acquired the full rights of Equital Ltd., a related party, in the
        Shikma Carveout in the Ashdod Lease (10%) to a depth of 1,500 meters
and below.                                                  

        The Partnership has an obligation to pay Equital Ltd. if the well is
      found to be commercial, the amount of $84.5 thousand, as well as a
royalty at the rate of 6% before and after the return of the
investment.                                                 

 D.   The Partnership has an obligation to pay royalties to the State of
Israel in accordance with the Petroleum Law, 1952           

    E.   According to an amendment to the Limited Partnership agreement, dated
        August 6, 1993, that is valid from June 1993, it was determined that
        the Limited Partnership shall pay the General Partner an amount that
        is the equivalent of $35,000 a month for placing the services of the
       employees of the General Partner, as needed, at the disposal of the
       Limited Partnership and for rent and regular maintenance of part of
          the offices of Isramco Inc. in Israel that is also used by the Limited
Partnership.                                                

         At the General Meeting of owners of the participation units, that was
     held in February 1997, it was decided to approve an update of the
     payment to the General Partner to a sum that is the equivalent of
        $42,000 (plus Value Added Tax) from January 1997. At that meeting, a
      commitment was given by the General Partner according to which the
         General Partner would collect a monthly payment of only $40,000 (plus
Value Added Tax).                                           

  F.   According to an agreement (hereinafter - "the Marketing Agreement")
     signed in March 1989 between the Limited Partnership and the East
       Mediterranean Oil and Gas Company Ltd. (hereinafter - "EMOG"), EMOG
          was granted the right to be appointed the exclusive marketing agent of
         the Limited Partnership in Israel and areas under its control for the
       wholesale marketing of crude oil from the oil fields of the Negev 2
         Venture to which the Limited Partnership is entitled. In an agreement
  signed in March 1992 between the Limited Partnership and other
          companies some of whom at that time were parties having an interest in
     the General Partner (J O.E.L. Jerusalem Oil Explorations Ltd. and
     Isramco Inc.), various oil rights were transferred to the Limited
          Partnership, including the "Negev Med" preliminary permit on the basis
      of which the Med Ashdod and Med Yavneh leases were issued later on
  (hereinafter - "the Rights Transfer Agreement"). In the Rights
         Transfer Agreement, it was determined that the marketing of the crude
          oil produced from the petroleum assets that had been transferred to it
      from the above interested parties according to the Rights Transfer
 Agreement would be carried out by EMOG in accordance with the
Marketing Agreement.                                        

          The period of the agreement is fifteen years from the first commercial
    production. EMOG may assign its rights and obligations under the
agreement.                                                  

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AND 2004                                                                        
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NOTE 7 - CONTINGENT LIABILITIES AND COMMITMENTS (CONT'D)                        

G.   The oil rights in which the Limited Partnership has a share are  
         allocated for a fixed term and on certain conditions. An extension of
         the validity of a petroleum asset is usually at the discretion of the
   authorities in accordance with the Petroleum Law as well as the
renewal of any part thereof or the stipulating of additional
conditions. In the event of failure to fully comply with the
     conditions, the right may be cancelled or reduced. The ability to
     exploit the petroleum assets in accordance with the lease and the
          licenses is contingent, among other things, on the Limited Partnership
          and the partners therein being willing and able to finance the various
 operations therein as well as the availability of appropriate
         equipment and personnel in Israel. The lack of equipment or personnel
        could increase the costs or totally prevent fulfillment of the terms
      of the lease or the license or the permit or prevent or reduce the
 period of their extension or even lead to their cancellation.

          In addition, in accordance with the Petroleum Law, if within the first
          three years of the granting of the lease, oil/gas is not produced from
      the lease site in commercial quantities, the appointed Minister is
   permitted to send the lease owner a notification demanding that
          production of oil/gas in commercial quantities be commenced within the
          time period determined by the Minister in the notification - which may
         not be less than 60 days. If production, as stated, is not commenced,
       the lease will expire. In the estimation of the General Partner and
      based on discussions with the Commissioner of Petroleum Matters, a
          notification as stated will not be sent with respect to the Med Ashdod
  lease - up to the end of the time allocated for execution of a
          drilling for oil prospects (that is, July 1, 2007) and with respect to
          the Med Yavneh lease - so long as development from the "Noa" gas field
         has not been started, which is nearby and subject to development from
the "Or 1" gas field having been started at the same time.  

    H.   According to the trust agreement referred to in Note 1D, in the event
     of termination of the trust, the cash received as a result of the
  realization of the trust assets less the costs involved in the
       realization and termination of the trust, will be divided among the
         owners of the participation units and the holders of options (if any)
less the exercise premium.                                  

I.   The Supervisor is entitled to receive wages from the Limited     
        Partnership in an amount in shekels that is equivalent to $3,500 per
          month, as long as the trust agreement, referred to in Note 1D, remains
        in effect. Similarly, the Supervisor is entitled to receive from the
         Limited Partnership expenses that were duly incurred in the discharge
    of his duties and that were approved by the General Meeting. The
   Supervisor received approval for a budget for purposes of legal
consultation, in the amount of $10,000 per year.            

          In addition, the Supervisor is entitled to additional compensation for
     his work in connection with issuance of additional rights, in the
         amount of $20,000 in respect of every issuance, or such higher amount
that will be approved by the General Meeting.               

    J.   According to the trust agreement, referred to in Note 1D, the Limited
       Partner (the trustee) is entitled to receive annual wage of $1,000.

K.   The Limited Partnership has undertaken to indemnify the General  
   Partner and any of its employees and/or directors for any loss,
        expenses or damage that they or their agents bear or are required to
   bear, whether directly or indirectly, as a result of any act or
         omission in accordance with the provisions of the Limited Partnership
agreement or in accordance with law.                        

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AND 2004                                                                        
--------------------------------------------------------------------------------

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

L.   Some of the offshore drillings in which the Partnership may be a 
partner, are subject to the conditions and restrictions that
         determined or that may be determined in future by the Defense System.
       These conditions and restrictions could cause a change and delay in
      the time schedules and, as a result, could generate an increase in
expected costs and a failure to comply with the lease.      

     M.   (1)  The Limited Partnership shall be dissolved upon the occurrence of
any of the following instances:                   

            a.   At the end of the period in which the Limited Partnership
                 holds, directly or indirectly, a valid petroleum asset or
          rights therein or in the petroleum to be produced.

              b.   If the General Partner should cease to fulfill its position
               and no other partner is appointed in its place within 6
     months from the date on which it left office.

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

       (2)  According to the directives of the Israeli Stock Exchange, the
             Board of Directors of the Stock Exchange may remove the Limited
              Partnership's securities from trading in the following instances
             (this being in addition to the causes of action included in the
               Stock Exchange's Articles of Association in respect of suspending
            of trade and cancellation of the registration of securities of
companies):                                       

              a.   If the Limited Partnership ceases to operate in the area of
         the activities that were specified by the Limited
              Partnership before the registration for trading, for a
              period of nine consecutive months in which most of the
                   Partnership's expenses are not expenses for exploration and
         development, within the meaning of the Income Tax
             Regulations (Deductions from Income of Holders of Oil
Rights), 1956.                          

      b.   The Limited Partnership commences to also engage in
                 activities in areas that are not within the limits of its
exclusive area of occupation.           

               c.   The Limited Partnership commences to also engage in projects
           other than those that were specified by the Limited
                Partnership before the first registration for trading or
           other than those that were specified in the Limited
              Partnership agreement after the first registration for
                  trading and that an amendment of the partnership agreement
                was approved by the General Meeting of the owners of the
participation units.                    

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

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AND 2004                                                                        
--------------------------------------------------------------------------------

NOTE 8 - LIMITED PARTNERSHIP'S CAPITAL                                          

                                                                [Download Table]

                                                          DECEMBER 31  DECEMBER 31
                                                              2006         2005   
                                                          -----------  -----------
                                                                                  
Participation units of NIS 0.01 par value (in thousands)   4,250,908    4,250,908 
                                                           =========    ========= 

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

   Up to December 31, 2006, the General Partner invested NIS 389 thousand in
    the capital of the Limited Partnership, and it participates in the Limited
   Partnership's expenses and losses and is entitled to its income according
    to the share of the General Partner in the capital invested in the Limited
Partnership's capital.                                                

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

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

     As at December 31, 2006, the Limited Partner invested in the capital of the
    Limited Partnership, NIS 856,002 thousand (after deduction of the issuance
     costs) and it participates in the Limited Partnership's expenses and losses
and is entitled to its income according to its share in the capital   
     invested in the Limited Partnership's capital. As at December 31, 2006, the
    share of the Limited Partner in the capital is 99.95% and is progressively
     increased with every increase in capital, in which the General Partner does
not participate.                                                      

C.   THE CAPITAL OF THE LIMITED PARTNERSHIP                           

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

                                                        [Enlarge/Download Table]

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

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AND 2004                                                                        
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NOTE 8 - LIMITED PARTNERSHIP'S CAPITAL (CONT'D)                                 

D.   In accordance with a legal opinion received by the Limited       
    Partnership, it was recommended that when the partners will have
    accrued profits, the Limited Partner and/or the Supervisor would
    request the Court to issue instructions in respect of the doubts
        raised in the opinion regarding the distributable profits and if and
          when distribution of profits by the Limited Partnership will be deemed
       to be a withdrawal of part of the investment of the Limited Partner
      within the meaning of Section 63(B) of the Partnerships Ordinance.

E.   Further to the demand of the Israeli Tax Authorities that the tax
       deriving from the taxable income attributable to the holders of the
         participation units shall be paid by the Partnership on behalf of the
       holders of the participation units, an agreement was signed between
      the Partnership and the Tax Authorities, according to which it was
 provided that the Partnership shall be entitled to receive an
          exemption from withholding of tax at the source on its income, subject
          to the condition that beginning from 2004, the Partnership will pay to
         the Tax Authorities, at the end of every tax year, an advance deposit
       on account of the tax liability of the holders of the participation
units, which shall be calculated based on the amount of the 
     Partnership's income for tax purposes in the relevant tax year by
        category (interest, dividends, gains/losses from sale of securities)
     less the Partnership's allowable deductions for tax purposes in a
        manner proportionate to the income, multiplied by the rates fixed in
       the agreement. The said payment will be attributed to the credit of
       every certificate holder (as defined in the Income Tax Regulations)
         based on his proportionate share, as an advance deposit on account of
the tax.                                                    

       Pursuant to the agreement, in the current year the Partnership paid
      NIS 8,823 thousand (in 2005 - NIS 5,074 thousand and in 2004 - NIS
          3,615 thousand), which was recorded to the credit of every certificate
       holder based on his proportionate share, as a deposit on account of
    the tax and that will be included as part of the certificate for
         purposes of calculating the deduction to which the holder is entitled
due to the holding of participation units.                  

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

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

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

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AND 2004                                                                        
--------------------------------------------------------------------------------

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

F.   (CONT'D)                                                         

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

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

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

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

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

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

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

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

NOTE 9 - DETAILS TO STATEMENT OF EARNINGS CATEGORIES                            

A.   FINANCING INCOME, NET                                            

                                                        [Enlarge/Download Table]

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

B.   PARTICIPATION IN OIL AND GAS EXPLORATION, NET                    

                                                        [Enlarge/Download Table]

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

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AND 2004                                                                        
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NOTE 9 - DETAILS TO STATEMENT OF EARNINGS CATEGORIES (CONT'D)                   

C.   GENERAL AND ADMINISTRATIVE EXPENSES                              

                                                        [Enlarge/Download Table]

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

D.   INCOME PER PARTICIPATION UNIT                                    

                                                        [Enlarge/Download Table]

                                                       FOR THE YEAR ENDED 31 DECEMBER       
                                               ---------------------------------------------
                                                   2006             2005            2004    
                                               -------------   -------------   -------------
                                               NIS THOUSANDS   NIS THOUSANDS   NIS THOUSANDS
                                               -------------   -------------   -------------
                                                                                            
Number of participation units used to compute                                               
   the basic income per participation unit                                                  
   (in thousands)                                4,250,908       4,250,908       4,250,908  
Income used in computing basic income                                                       
   (in NIS 000) per participation unit              61,851          37,919         54,977   

NOTE 10 - INTERESTED PARTIES AND RELATED PARTIES                                

    A.   The limited partnerships, Naphtha Explorations, I.N.O.C. Dead Sea and
         the Partnership, are managed by related companies that are controlled
         by the same controlling interest. The said partnerships together with
         Isramco Inc., which is also under the control of the same controlling
        interest, are partners, in full or in part, in different gas and oil
exploration rights.                                         

      The joint ventures for oil and gas explorations, in which the said
       partnerships and the Partnership participate, receive services from
     companies that are related parties and are controlled by the same
       controlling interest. Also, in most of the joint ventures, in which
          the Partnership participates, some of the partners are related parties
         and interested parties that also act in part as venture operators who
     are entitled to venture operator fees at a set rate of the direct
          expenses or venture operator fees at a fixed monthly amount, according
to the joint venture agreements.                            

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AND 2004                                                                        
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NOTE 10 - INTERESTED PARTIES AND RELATED PARTIES (CONT'D)                       

B.   MARKETABLE SECURITIES OF RELATED PARTIES                         

                                                        [Enlarge/Download Table]

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

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

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

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

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

NOTE 11 - FINANCIAL INSTRUMENTS AND RISK MANAGEMENT                             

GENERAL                                                               

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

A.   INTEREST RISKS                                                   

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

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

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

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

B.   EXCHANGE RATE RISKS                                              

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

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

C.   RISKS RELATING TO OIL AND GAS PRICES                             

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

D.   MARKET RISKS RELATING TO MARKETABLE SECURITIES                   

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

E.   FAIR VALUE OF FINANCIAL INSTRUMENTS                              

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

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

F.   LINKAGE BASES OF MONETARY ITEMS                                  

                                                        [Enlarge/Download Table]

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

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

                                                        [Enlarge/Download Table]

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

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

33

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                                         "Isramco - Negev 2" Limited Partnership

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

NOTE 12 - DIFFERENCES BETWEEN ISRAELI GAAP AND U.S. GAAP                        

A.   GENERAL                                                          

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

1.   Effect of inflation                                              
-------------------                                         

       Up to December 2003, the Limited Partnership included the effect of
    price level changes in the accompanying financial statements, as
   required under Israeli GAAP and as discussed in Note 3 to these
financial statements.                                       

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

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

         a.   The Limited Partnership owns 13.5% of the participation units of
            a related limited partnership, which is engaged in oil and gas
               exploration. Under Israeli GAAP, these participation units, which
               are designated for sale in the short term, are recorded at market
              value as at the balance sheet date with unrealized income/losses
            being recorded in the statements of earnings. Under U.S. GAAP,
             the participation units are recorded using the equity method in
            accordance with EITF D-46, "Accounting for Limited Partnership
        investments" which requires implementation of Statement of
       Position 78-9, "Accounting for Investments in Real Estate
  Ventures" for the Limited Partnership's investments.

         The effect of reversing the unrealized income/losses on the
          participation units for Israeli GAAP, and application of the
     equity method of accounting for U.S. GAAP purposes, are
presented below as separate adjustments.          

       b.   The Limited Partnership invests in marketable securities which
               are classified as trading securities, both under Israeli GAAP and
U.S. GAAP.                                        

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

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

B.   THE EFFECT OF MATERIAL DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP 
          DERIVING FROM THE AFOREMENTIONED ITEMS ON THE FINANCIAL STATEMENTS, IS
SHOWN BELOW:                                                

1.   On the statements of earnings:                                   
-----------------------------                               

                                                                [Download Table]

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

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                                         "Isramco - Negev 2" Limited Partnership

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

NOTE 12 - DIFFERENCES BETWEEN ISRAELI GAAP AND U.S. GAAP (CONT'D)               

B.   THE EFFECT OF MATERIAL DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP 
          DERIVING FROM THE AFOREMENTIONED ITEMS ON THE FINANCIAL STATEMENTS, IS
SHOWN BELOW: (CONT'D)                                       

1.   On the statements of earnings: (cont'd)                          
-----------------------------                               

                                                        [Enlarge/Download Table]

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

Net income                                     61,941          37,229          55,017  
                                            =========       =========       =========  
General partner's share in the net                                                     
   income                                          31              19              28  
                                            =========       =========       =========  
Net income attributable to                                                             
   participation unit holder                   61,910          37,210          54,989  
                                            =========       =========       =========  
Basic net income per participation                                                     
   unit (NIS)                                  0.0146          0.0088          0.0129  
                                            =========       =========       =========  
Weighted-average number of participation                                               
   units used in calculation of basic                                                  
   income per unit (in thousands)           4,250,908       4,250,908       4,250,908  
                                            =========       =========       =========  

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

                                                        [Enlarge/Download Table]

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

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

(2)  Partnership equity in earnings of a partnership.                           

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                                         "Isramco - Negev 2" Limited Partnership

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

NOTE 12 - DIFFERENCES BETWEEN ISRAELI GAAP AND U.S. GAAP (CONT'D)               

B.   THE EFFECT OF MATERIAL DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP 
          DERIVING FROM THE AFOREMENTIONED ITEMS ON THE FINANCIAL STATEMENTS, IS
SHOWN BELOW: (CONT'D)                                       

3.   On the statement of cash flows:                                  
------------------------------                              

                                                        [Enlarge/Download Table]

                                                       YEAR ENDED DECEMBER 31        
                                        ---------------------------------------------
                                             2006            2005           2004     
                                        -------------   -------------   -------------
                                        NIS THOUSANDS   NIS THOUSANDS   NIS THOUSANDS
                                        -------------   -------------   -------------
                                                                                     
Net cash inflow generated by                                                         
   operating activities - Israeli GAAP       24,384          17,933          22,339  

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

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

36

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KPMG

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Dates Referenced Herein and Documents Incorporated By Reference

		Referenced-On Page
This 10-K Filing	Date	First	Last	Other Filings

	8/6/93	24
	12/31/03	10	11	10-K, 10-K/A
	1/1/04	11
	12/31/04	9	37	10-K
	8/25/05	21
	8/28/05	21
	8/29/05	21		8-K
	9/13/05	21
	9/25/05	21
	9/26/05	21
	11/16/05	21
	12/31/05	1	37	10-K, 10-K/A
	1/1/06	13
	4/25/06	28
	7/24/06	22
	7/31/06	14
	9/4/06	29
	9/18/06	29
	12/14/06	22
For The Period Ended	12/31/06	1	37	8-K
	1/1/07	15
	3/13/07	3	4
Filed On / Filed As Of	3/16/07
	5/1/07	20
	6/30/07	22		10-Q, 10-Q/A, NT 10-Q
	7/1/07	25
	12/31/07	14		10-K, 8-K, 8-K/A
	1/1/08	14
	5/1/08	20
	12/31/08	10		10-K
	4/1/09	10
	6/10/30	10
	6/15/30	10

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Isramco Inc · 10-K · For 12/31/06 · EX-99.1

Filed On 3/16/07, 8:46am ET · Accession Number 1188112-7-710 · SEC File 0-12500

﻿Annual Report — Form 10-KFiling Table of Contents

EX-99.1 — Miscellaneous Exhibit

Dates Referenced Herein and Documents Incorporated By Reference

Annual Report — Form 10-K
Filing Table of Contents