Isramco Inc – ‘10-K’ for 12/31/04

On:  Wednesday, 3/30/05, at 5:32pm ET   ·   As of:  3/31/05   ·   For:  12/31/04   ·   Accession #:  1188112-5-575   ·   File #:  0-12500

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Annual Report   —   Form 10-K
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Document/Exhibit                   Description                      Pages   Size 

 1: 10-K        Annual Report                                         54    315K 
 2: EX-31       Certification per Sarbanes-Oxley Act (Section 302)     2±     9K 
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10-K   —   Annual Report
Document Table of Contents

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

 FORM 10-K

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

FISCAL YEAR ENDED DECEMBER 31, 2004                                             

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

 COMMISSION FILE NUMBER: 0-12500

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

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

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

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

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

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

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

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

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

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

 DOCUMENTS INCORPORATED BY REFERENCE

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

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 ISRAMCO, INC.
2004 FORM 10-K ANNUAL REPORT

 TABLE OF CONTENTS

PART I

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

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

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

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

 PART II

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

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

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

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

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

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

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

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

PART III

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

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

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

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

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

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

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FORWARD LOOKING STATEMENTS

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

PART I
ITEM 1. BUSINESS                                                                

GENERAL                                                                         

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

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

THE OPERATOR OF THE ISRAELI LEASES/LICENSES                                     

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

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

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

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

GENERAL PARTNER FOR THE ISRAMCO NEGEV 2 LIMITED PARTNERSHIP                     

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

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

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

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

NON-OIL AND GAS PROPERTIES                                                      

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

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

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

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 OIL AND GAS VENTURES AND PETROLEUM ASSETS

 OIL AND GAS VENTURES AND PETROLEUM ASSETS LOCATED IN ISRAEL

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

                                                        [Enlarge/Download Table]


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

Name of Participant                       Med Yavne Lease*      Med Ashdod Lease**(2)
                                                                                     
The Company                                    0.4584                  0.3625        

Affiliates                                                                           

Isramco Negev 2, Limited                       32.411                 19.1370        
Partnership                                                                          

I.O.C.                                          7.800                   7.800        

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

Naphtha                                        1.8033                      --        

Naphtha Explorations                           2.2826                  1.8411        
Limited Partnership                                                                  

JOEL                                           2.8807                      --        

Equital                                        2.1639                      --        

Non-affiliated entities                                                              

Delek Drilling LP                                  --                 21.7658        

GRANIT - SONOL LP                                  --                  35.000        

BG International Ltd.                          35.000                      --        

Middle East Energy (MEE) LP                     5.400                   5.400        

DOR - Gas LP                                    1.800                  1.8000        

Other                                                                  1.8411        

Total                                         100.000                 100.000        

Area (acres)                                   13,100                  61,800        

Expiration Date                             6/10/2030               6/15/2030        

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

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

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

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

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

OVERRIDING ROYALTIES HELD BY THE COMPANY

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

 TABLE OF OVERRIDING ROYALTIES

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

                                                                [Download Table]

                                                                            
                                               Before Payout    After Payout

 Med Yavne Lease*                                    1%             13%     

 Med Ashdod Lease**                                  1%             13%     

 From JOEL                                        On 8% of JOEL's Interest  

                                               Before Payout    After Payout
 Med Ashdod Lease                                  2.5%           12.5%     

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

                                               Before Payout    After Payout

Med Ashdod Lease                                   2.5%           12.5%     

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

To IOC On Certain petroleum rights held by                                  
Limited Partnership                                          5%             

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

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

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

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

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

SUMMARY OF EXPLORATION EFFORTS IN ISRAEL

MED YAVNE LEASE                                                                 

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

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

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

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

MED ASHDOD LEASE                                                                

GENERAL                                                         

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

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

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

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 SUMMARY OF EXPLORATION EFFORTS IN THE UNITED STATES

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

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

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

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

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

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

NON-OIL AND GAS PROPERTIES                                                      

       MIRAGE 1 CRUISE LINER

OVERVIEW                                                                        

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

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

CRUISE LINE BUSINESS                                                            

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

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

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

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

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

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

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

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

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REGULATORY                                                                      

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

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

REAL ESTATE IN ISRAEL                                                           

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

EMPLOYEES                                                                       

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

RISK FACTORS

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

RISKS RELATED THE COMPANY'S OIL AND GAS BUSINESS

OIL AND GAS DRILLING IS A SPECULATIVE ACTIVITY AND risky        

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

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

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

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

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

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

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

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

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

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

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

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

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

THE COMPANY IS SUBJECT TO RISKS ASSOCIATED WITH INTERNATIONAL   
OPERATIONS.                                                                     

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

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

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

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

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

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

 RISKS RELATED TO THE VESSEL

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

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

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

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

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

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

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

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

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

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

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

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

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

   PROBLEMS ENCOUNTERED AT PORTS COULD REDUCE COMPANY'S PROFITABILITY.

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

 RISKS RELATED TO OPERATIONS GENERALLY

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

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

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

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

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

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

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

ITEM 2. PROPERTIES                                                              

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

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

ITEM 3. LEGAL PROCEEDING                                                        

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

RECENT DEVELOPMENT                                                              

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

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

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

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

 PART II

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

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

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

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                                                  Common Stock

Quarter Ended                                             High       Low        

2004                                                                            

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

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

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

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

                                                        [Enlarge/Download Table]

                                               EQUITY COMPENSATION PLAN INFORMATION       

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

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

ITEM 6. SELECTED FINANCIAL DATA (CONSOLIDATED)                                  

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

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

                                                        [Enlarge/Download Table]

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

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

Weighted average number of                                                                             
Common shares outstanding - diluted          2,639,853   2,639,853   2,639,853   2,639,853   2,706,731 

                                December 31,

                               2004         2003        2002          2001

Balance Sheet Data                                                    

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

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

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

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

OVERVIEW                                                                        

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

CRITICAL ACCOUNTING POLICIES                                                    

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

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

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

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

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

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

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

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

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

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

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

LIQUIDITY AND CAPITAL RESOURCES                                                 

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

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

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

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

RESULTS OF OPERATIONS                                                           

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

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

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

United States                                                             

Oil and Gas Volume and Revenues (in thousands)                            

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

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

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

THE OFFSHORE LICENSES (ISRAEL)                                                  

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

OIL AND GAS EXPLORATION COSTS                                                   

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

OPERATOR'S FEES                                                                 

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

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

OIL AND GAS REVENUES                                                            

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

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LEASE OPERATING EXPENSES AND SEVERANCE TAXES                                    

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

INTEREST AND DIVIDEND INCOME                                                    

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

GAIN ON MARKETABLE SECURITIES                                                   

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

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

OPERATOR EXPENSES                                                               

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

GENERAL AND ADMINISTRATIVE EXPENSES                                             

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

EQUITY IN NET INCOME OF INVESTEE                                                

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

CRUISE LINE VESSEL INCOME AND EXPENSES                                          

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

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

DEPRECIATION, DEPLETION AND AMORTIZATION                                        

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

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

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

OTHER INCOME                                                                    

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

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

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

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

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

United States                                                             

Oil and Gas Volume and Revenues (in thousands)                            

                       2003           2002
Oil Volume Sold (Bbl)                    19             21                

Gas Volume Sold (MCF)                   600            720                

Oil Sales ($)                           542            470                

Gas Sales ($)                         2,897          1,953                

Average Unit Price                                                        

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

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

** MCF - 1,000 Cubic Feet                                                       

THE OFFSHORE LICENSES (ISRAEL)                                                  

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

OIL AND GAS EXPLORATION COSTS                                                   

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

OPERATOR'S FEES                                                                 

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

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OIL AND GAS REVENUES                                                            

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

LEASE OPERATING EXPENSES AND SEVERANCE TAXES                                    

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

INTEREST AND DIVIDEND INCOME                                                    

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

GAIN ON MARKETABLE SECURITIES                                                   

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

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

OPERATOR EXPENSES                                                               

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

GENERAL AND ADMINISTRATIVE EXPENSES                                             

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

CONTRACTUAL OBLIGATIONS                                                         

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

                                                                [Download Table]

                   TOTAL    2004    2005    2006   2007  2008  Thereafter
                   -----    ----    ----    ----   ----  ----  ----------
                                                                         
Operating Leases:                                                        
         Texas:    83,000  28,000  29,000  26,000   --     --         -- 
                       --      --      --      --   --     --         -- 

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS                                       

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

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

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

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

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK             

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

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

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                             

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

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

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

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

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

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

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

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

ITEM 9A. CONTROLS AND PROCEDURES                                                

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

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

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

ITEM 9B. OTHER INFORMATION                                                      

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

PART III

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

GLOSSARY                                                                        

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

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

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

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

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

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

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

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

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

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

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

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

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

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

"Israel Petroleum Law"                                                          

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

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

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

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

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

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

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

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

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

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

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

* Attached hereto as an exhibit                                                 

(b) Reports on Form 8-K                                                         

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

(c) Financial Statements                                                        

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SIGNATURES

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

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

Date: March 30, 2005                                                            

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

Signature                      Title                         Date               

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

Jackob Maimon                                                                   

/s/ Amir Eskandari             Director                      March 30, 2005     

Amir Eskandari                                                                  

/s/ Max Pridgeon               Director                      March 30, 2005     

Max Pridgeon                                                                    

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

Donald D. Lovell                                                                

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INDEX TO FINANCIAL STATEMENTS                                                   

                                                                          Page
                                                                          ----

Independent Auditors' Reports                                              F-1,2

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

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

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

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

Notes to Consolidated Financial Statements                                 F-7  

(i) 

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 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

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

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

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

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

March 15, 2005                                                                  

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM                         

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

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

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

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

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

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

HOUSTON, TEXAS                                                                  
MARCH 5, 2004                                                                   

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

                                                                                     DECEMBER 31        
                                                                            --------------------------- 
                                                                                   2004          2003   
                                                                            ------------   ------------ 
                                                                                                        
            ASSETS                                                                                      

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

     TOTAL CURRENT ASSETS                                                          9,260          8,209 

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

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

            LIABILITIES AND SHAREHOLDERS' EQUITY                                                        

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

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

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

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

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

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

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

See notes to the consolidated financial statements.                                                     

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

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

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

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

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

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

See notes to the consolidated financial statements.                                                        

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

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

Comprehensive income:                                                                                                               

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

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

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

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

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

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

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

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

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

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

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

CASH FLOWS FROM FINANCING ACTIVITIES:                                                                                   

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

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

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

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

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:                                                                      

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

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

See notes to the consolidated financial statements.                             

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 ISRAMCO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

[1] The Company                                                                 

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

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

[2] Consolidation                                                               

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

[3] Method of Accounting for Oil and Gas Operations                             

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

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

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

[4] Marketable Securities                                                       

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

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

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[5] Investment in Affiliates                                                    

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

[6] Equipment                                                                   

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

[7] Translation of Foreign Currencies                                           

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

[8] Earnings Per Share (EPS)                                                    

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

[9] Cash Equivalents                                                            

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

[10] Non-compete Agreements                                                     

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

[11] Use of Estimates                                                           

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

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

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

[12] Impairment of Long-Lived Assets                                            

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

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

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

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

There were no such impairments recognized in 2002.                              

[13] Income Taxes                                                               

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

[14] Oil and Gas Revenues                                                       

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

[15] Environmental                                                              

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

[16] Stock-Based Compensation                                                   

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

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

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

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                                                        [Enlarge/Download Table]

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

[17] Accounting Changes                                                         

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

[18] Reclassifications                                                          

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

[19] New Pronouncements                                                         

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

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

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

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

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

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

(NOTE B) - Transactions with Affiliates and Related Parties                     

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

Operator fees earned and related operator expenses are as follows:              

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

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

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

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

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

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

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

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

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term of the agreement.                                                          

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

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

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

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

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

(NOTE C) - Investments in Affiliate                                             

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

(NOTE D) - Marketable Securities                                                

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

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

                                                        [Enlarge/Download Table]

                                             DECEMBER 31, 2004             DECEMBER 31, 2003     
                                             -----------------             -----------------     

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

                                       $ 4,837,000      $ 5,284,000  $3,781,000       $ 4,064,000
                                       -----------      -----------  ----------       -----------

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

                                                                [Download Table]

      DECEMBER 31, 2004                          DECEMBER 31, 2003     
      -----------------                          -----------------     

COST            MARKET VALUE               COST            MARKET VALUE
----            ------------               ----            ------------
                                                                       
$ 4,955,000      $ 6,225,000               $8,068,000       $ 8,572,000
---------        ---------                 ----------       -----------

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

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

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

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(NOTE F) - Oil and Gas Properties and Equipment                                 

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

                                                    2004            2003
                                                    ----            ----

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

A summary of property and equipment is as follows:                              

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

(NOTE G) Debt                                                                   

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

                                                        [Enlarge/Download Table]

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

(NOTE H) EPS Computation                                                        

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

                                                        [Enlarge/Download Table]

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

(NOTE I) Stock Options                                                          

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

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,

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

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

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

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

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

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

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

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

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

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

(NOTE J) -- Income Taxes                                                        

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

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

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

                                                                [Download Table]

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

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

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

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

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

                                                        [Enlarge/Download Table]

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

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

                                                                [Download Table]

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

(NOTE K) -- Concentrations of Credit Risk                                       

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

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

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

(NOTE L) -- Luxury Cruise Liner                                                 

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

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

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

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

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

(NOTE M) -- Commitments and Contingencies                                       

COMMITMENTS:                                                                    

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

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

                             Year Ending
                            December 31,

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

CONTINGENCIES:                                                                  

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

(NOTE N) - Geographical Segment Information                                     

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

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

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                                                        [Enlarge/Download Table]

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

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

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

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

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

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                                                        [Enlarge/Download Table]

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

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

(NOTE O) - Asset Retirement Obligations                                         

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

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

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

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

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

(NOTE P) - Subsequent Event                                                     

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

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

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

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 SUPPLEMENTARY OIL AND GAS INFORMATION

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

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

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

                                                        [Enlarge/Download Table]

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

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

                                                        [Enlarge/Download Table]

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

(Israel exploration costs in 2004-$0; 2003-$88;                                                                        
2002-$27)                                                                                                              

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

                                                        [Enlarge/Download Table]

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

OIL AND GAS RESERVES                                                            

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

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

F-22

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

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

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

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

The Company's proved developed reserves are as follows:                         

                                                                [Download Table]

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

Interest in proved reserves of unconsolidated affiliates                        

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

STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOW                         

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

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

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

                                  F-23

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                                                        [Enlarge/Download Table]

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

CHANGES IN STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS             

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

                                                        [Enlarge/Download Table]

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

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

                                                        [Enlarge/Download Table]

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

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

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

                                  F-24

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                                                        [Enlarge/Download Table]

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

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

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

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

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

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

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

                                  F-25

Dates Referenced Herein   and   Documents Incorporated by Reference

				Referenced-On Page
This ‘10-K’ Filing		Date		First		Last			Other Filings
		5/31/06		40		41
		12/31/05		10					10-K,  10-K/A
		12/15/05		40
		12/1/05		7
		10/31/05		4		49
		6/20/05		43
		5/25/05		15
		4/14/05		4		49
Filed as of:		3/31/05							10-Q,  NT 10-Q
Filed on:		3/30/05		1		28			8-K
		3/29/05		43
		3/24/05		24
		3/15/05		30					8-K
		3/9/05		9		49			8-K
		2/28/05		7
		1/13/05		23		24
For Period End:		12/31/04		1		53
		12/1/04		10
		11/19/04		27					8-K
		10/17/04		8		46
		9/30/04		27					10-Q
		7/27/04		7
		7/25/04		7
		7/1/04		8		46			4
		3/15/04		22		39
		3/5/04		31
		2/15/04		7
		2/10/04		15
		1/1/04		4
		12/31/03		10		53			10-K,  10-K/A
		12/9/03		40					8-K
		6/30/03		39					10-Q,  10-Q/A
		6/15/03		23		40
		5/31/03		23		40
		1/1/03		31		48
		12/31/02		18		53			10-K
		6/30/02		27					10-Q
		6/12/02		27
		1/1/02		23		39
		12/31/01		37					10-K405
		9/11/01		13
		6/30/01		23		36			10-Q
		1/1/01		41
		3/25/00		49
		3/24/00		24		44
		11/1/99		27					8-K
		12/31/97		27					10KSB
		9/4/97		26
		1/26/94		7
		8/13/93		44
		3/17/93		26
		1/21/93		26
		6/11/92		25
		3/5/92		25
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