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 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

We are an independent oil and natural gas company engaged in the exploration, development and production of oil and natural gas properties located onshore in the United States. Our properties are primarily located in Texas, New Mexico and Oklahoma. We act as an operator of certain of these properties. Historically, we have grown through acquisitions, with a focus on properties within our core operating areas that we believe have significant development and exploration opportunities and where we can apply our technical experience and economies of scale to increase production and proved reserves while lowering lease operating costs.

Our financial results depend upon many factors, but are largely driven by the volume of our oil and natural gas production and the price that we receive for that production. Our production volumes will decline as reserves are depleted unless we expend capital in successful development and exploration activities or acquire additional properties with existing production. The amount we realize for our production depends predominantly upon commodity prices, which are affected by changes in market demand and supply, as impacted by overall economic activity, weather, pipeline capacity constraints, inventory storage levels, basis differentials and other factors, and secondarily upon our commodity price hedging activities. Accordingly, finding and developing oil and natural gas reserves at economical costs is critical to our long-term success. Our future drilling plans are subject to change based upon various factors, some of which are beyond our control, including drilling results, oil and natural gas prices, the availability and cost of capital, drilling and production costs, availability of drilling services and equipment, gathering system and pipeline transportation constraints and regulatory approvals. To the extent these factors lead to reductions in our drilling plans and associated capital budgets in future periods, our financial position, cash flows and operating results could be adversely impacted.

At December 31, 2008, our estimated total proved oil, natural gas reserves and natural gas liquids, as prepared by our independent reserve engineering firm, Cawley, Gillespie & Associates, Inc., were approximately 8,213 thousand barrels of oil equivalent (MBOE), consisting of 2,679 thousand barrels (Bbls) of oil, and 25,696 million cubic feet (MMcf) of natural gas and 1,252 thousand barrels (Bbls) natural gas liquids. Approximately 97.6% of our proved reserves were classified as proved developed.

Critical accounting policies

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of our consolidated financial statements requires us to make estimates and assumptions that affect our reported results of operations and the amount of reported assets, liabilities and proved oil and natural gas reserves. Some accounting policies involve judgments and uncertainties to such an extent that there is reasonable likelihood that materially different amounts could have been reported under different conditions, or if different assumptions had been used. Actual results may differ from the estimates and assumptions used in the preparation of our consolidated financial statements. Described below are the most significant policies we apply in preparing our consolidated financial statements, some of which are subject to alternative treatments under accounting principles generally accepted in the United States. We also describe the most significant estimates and assumptions we make in applying these policies.

Oil and Natural Gas Activities

Accounting for oil and natural gas activities is subject to unique rules. Two generally accepted methods of accounting for oil and natural gas activities are available - successful efforts and full cost. The most significant differences between these two methods are the treatment of unsuccessful exploration costs and the manner in which the carrying value of oil and natural gas properties are amortized and evaluated for impairment. The successful efforts method requires unsuccessful exploration costs to be expensed as they are incurred upon a determination that the well is uneconomical while the full cost method provides for the capitalization of these costs. Both methods generally provide for the periodic amortization of capitalized costs based on proved reserve quantities. Impairment of oil and natural gas properties under the successful efforts method is based on an evaluation of the carrying value of individual oil and natural gas properties against their estimated fair value, while impairment under the full cost method requires an evaluation of the carrying value of oil and natural gas properties included in a cost center against the net present value of future cash flows from the related proved reserves, using period-end prices and costs and a 10% discount rate. We account for our natural gas and crude oil exploration and production activities under the successful efforts method of accounting.

Proved Oil and Natural Gas Reserves

Estimates of our proved reserves included in this report are prepared in accordance with accounting principles generally accepted in the United States and SEC guidelines. Our engineering estimates of proved oil and natural gas reserves directly impact financial accounting estimates, including depreciation, depletion and amortization and impairment expense. Proved oil and natural gas reserves are the estimated quantities of oil and natural gas reserves that geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under period-end economic and operating conditions. The process of estimating quantities of proved reserves is very complex, requiring significant subjective decisions in the evaluation of all geological, engineering and economic data for each reservoir. The accuracy of a reserve estimate is a function of: (i) the quality and quantity of available data; (ii) the interpretation of that data; (iii) the accuracy of various mandated economic assumptions and (iv) the judgment of the persons preparing the estimate. The data for a given reservoir may change substantially over time as a result of numerous factors, including additional development activity, evolving production history and continual reassessment of the viability of production under varying economic conditions. Changes in oil and natural gas prices, operating costs and expected performance from a given reservoir also will result in revisions to the amount of our estimated proved reserves.

Depreciation, Depletion and Amortization

Our rate of recording depreciation, depletion and amortization expense (DD&A) is primarily dependent upon our estimate of proved reserves, which is utilized in our unit-of-production method calculation. If the estimates of proved reserves were to be reduced, the rate at which we record DD&A expense would increase, reducing net income. Such a reduction in reserves may result from lower market prices, which may make it non-economic to drill for and produce higher cost reserves.

Impairment

We review our property and equipment in accordance with Statements of Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144). SFAS 144 requires us to evaluate property and equipment as an event occurs or circumstances change that would more likely than not reduce the fair value of the property and equipment below the carrying amount. If the carrying amount of property and equipment is not recoverable from its undiscounted cash flows, then we would recognize an impairment loss for the difference between the carrying amount and the current fair value. Further, we evaluate the remaining useful lives of property and equipment at each reporting period to determine whether events and circumstances warrant a revision to the remaining depreciation periods.

Asset Retirement Obligations

We have significant obligations to remove tangible equipment and facilities associated with our oil and gas wells and to restore land at the end of oil and gas production operations. Our removal and restoration obligations are most often associated with plugging and abandoning wells. Estimating the future restoration and removal costs is difficult and requires us to make estimates and judgments because most of the removal obligations we have will be take effect in the future. Additionally, these operations are subject to private contracts and government regulations that often have vague descriptions of what is required. Asset removal technologies and costs are constantly changing, as are regulatory, political, environmental, safety and public relations considerations. Inherent in the present value calculations are numerous assumptions and judgments including the ultimate removal cost amounts, inflation factors, credit adjusted discount rates, timing of obligations and changes in the legal, regulatory, environmental and political environments.

Accounting for Derivative Instruments and Hedging Activities

We utilize derivative contracts to hedge against the variability in cash flows associated with the forecasted sale of our anticipated future oil and natural gas production. We generally hedge a substantial, but varying, portion of our anticipated oil and natural gas production for the next 39 months. We do not use derivative instruments for trading purposes. We have elected not to apply hedge accounting to our derivative contracts, which would potentially allow us to not record the change in fair value of our derivative contracts in the statement of operations. We carry our derivatives at fair value on our consolidated balance sheets, with the changes in the fair value included in our statements of operations in the period in which the change occurs. Our results of operations would potentially have been significantly different had we elected and qualified for hedge accounting on our derivative contracts.

Income Taxes

The Company follows SFAS No. 109, Accounting for Income Taxes, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements or tax returns. Under this method, deferred tax assets and liabilities are computed using the liability method based on the differences between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.

A valuation allowance is provided, if necessary, to reserve the amount of net operating loss and net deferred tax assets which the Company may not be able to use because of the expiration of maximum carryover periods allowed under applicable tax codes.

Liquidity and Capital Resources

Our primary sources of cash during 2008 were cash flows from operating activities, availability under our Senior Credit Agreement, and loans from related parties. The capital markets, as they relate to us, have been adversely impacted by the current financial crisis, concerns about overall deflation and its effect on commodity prices, the possibility of a deepening world recession that may extend for a long period into the future, a lack of liquidity in the banking system and the unavailability and cost of credit. Continued volatility in the capital markets could adversely impact our ability to replace our reserves, and eventually, our production levels.

Our future capital resources and liquidity may depend, in part, on our success in developing the leasehold interests that we acquired. Cash is required to fund capital expenditures necessary to offset inherent declines in production and proven reserves, which is typical in the capital-intensive oil and gas industry. Future success in growing reserves and production will be highly dependent on capital resources available and the success of finding and acquiring additional reserves. We expect to fund our future capital requirements through internally generated cash flows and borrowings under our Senior Credit Agreements. Long-term cash flows are subject to a number of variables including the level of production and prices, our commodity price hedging activities as well as various economic conditions that have historically affected the oil and natural gas industry. Oil and natural gas prices have continued to fall after December 31, 2008. If these prices hold for a prolonged period of time or continue to fall, our ability to fund capital expenditures, reduce debt, meet financial obligations and become profitable may be materially impacted.

Debt

                                                                 As of December 31,
                                                         2008              2007          2006
                                                          (In thousands except percentage)
Revolving Credit Facility                            $     43,200       $   24,000     $       -
Long - term debt - related party                           80,354           36,581             -
Short - term debt - related party                               -                -        17,000
Current maturities of long-term debt, short-term
debt and bank overdraft                                    22,544            3,706           347
Total debt                                                146,098           64,287        17,347

Stockholders' equity                                       25,034           25,471        34,744

Debt to capital ratio                                          85 %             72 %          33 %

At year-end 2008, our total debt was $146,098 thousand compared to total debt of $64,287 thousand at year-end 2007 and $17,347 thousand at year-end 2006. As of December 31, 2008, current debt included $21,000 thousand as current maturities of the Revolving Credit Facility. However, the Company is not obligated to repay this facility prior to the due date, except for such payments as may be required under the Credit Agreement in the event of a redetermination and reduction of the borrowing base. As of December 31, 2008, $19,750 thousand of the $21,000 thousand was due to the decision of management to continue reducing the debt below the borrowing base. As of December 31, 2007, current debt included $3,000 thousand as current maturities, which again was due to management's decision to continue payments to reduce debt below the borrowing base.

Cash Flow

Our primary sources of cash in 2008, 2007 and 2006 were from operating and financing activities. Proceeds from loans obtained from related parties, proceeds from Senior Credit Agreement and cash received from operations were offset by repayments of our Senior Credit Agreement, repayments of loans from related parties and cash used in investing activities to fund acquisition activities. Operating cash flow fluctuations were substantially driven by changes in commodity prices and changes in our production volumes. Working capital was substantially influenced by these variables. Fluctuation in commodity prices and our overall cash flow may result in an increase or decrease in our future capital expenditures or influence our ability to reduce our long-term loans. Prices for oil and natural gas have historically been subject to seasonal influences characterized by peak demand and higher prices in the winter heating season; however, the impact of other risks and uncertainties have influenced prices throughout recent years. See "Results of Continuing Operations" below for a review of the impact of prices and volumes on sales.

                                                       Years Ended December 31,
                                                   2008          2007          2006
                                                            (In thousands)
   Cash flows provided by operating activities   $  17,001     $    (662 )   $   7,233
   Cash flows used in investing activities         (97,753 )     (63,656 )     (24,041 )
   Cash flows provided by financing activities      82,681        64,957        16,181
   Net increase (decrease) in cash               $   1,929     $     639     $    (627 )

Operating Activities, Net cash flows provided by (used in) operating activities were $17,001 thousands, ($662) thousands and $7,233 thousands for the years ended December 31, 2008, 2007 and 2006, respectively. Key drivers of net operating cash flows are commodity prices, increasing of production volumes primarily due to the two acquisitions we had during 2007 and 2008 and operating costs.

Because of significant declines in oil and natural gas prices, net cash flows provided by operating activities declined significantly in the fourth quarter 2008 compared to the third quarter.

Investing Activities, The primary component of cash used in investing activities is capital spending for the acquisitions in 2008 and 2007. Cash used in investing activities was $97,753 thousand, $63,656 thousand and $24,041 thousand for the years ended December 31, 2008, 2007 and 2006, respectively.

In 2008, we spent $98,673 thousand on acquisition of oil and gas properties and capital expenditures. We participated in the drilling of 3 gross wells in 2008. We spent an additional $369 thousand on other property and equipment during 2008.

In 2007, we spent $86,056 thousands on acquisition of oil and gas properties and capital expenditures. Our acquisitions were partially funded by the remaining restricted cash that we had deposited in 2006. We participated in the drilling of 2 gross wells in 2007. We spent an additional $67 thousand on other property and equipment during 2007.

In 2006, we spent $9,737 thousand on capital expenditures. We participated with XTO Energy, Inc, the operator, in drilling of 16 gross wells in 2006, mainly to the Barnett shale formation in Parker County, Texas.

Financing Activities, The primary component of cash provided by financing activities is proceeds from long-term loans obtained from related parties ($45,658) and Senior Credit

Agreements ($54,000) and offset by repayments of long-term loans and repayments of Senior Credit Agreements ($16,800). Net cash flows provided by financing activities were $82,681 thousands, $64,957 thousands and $16,181 thousands for the years ended December 31, 2008, 2007 and 2006, respectively.

Results of Continuing Operations

                                                 Selected Data

                                                                      Years Ended December 31,
                                                           2008                   2007               2006
                                                          (In thousands except per share and MBOE amounts)
Financial Results
Oil and Gas sales                                    $         51,832       $         20,827      $     2,167
Equity in earnings of unconsolidated affiliates                     -                  1,201            2,570
Other                                                             365                    728              825
Total revenues and other                                       52,197                 22,756            5,562

Cost and expenses                                              63,619                 21,183            4,777
Other expense (income)                                        (15,028 )               13,176           (6,510 )
Income tax expense (benefit)                                      377                 (5,192 )            726
Income (loss) from continuing operations                        3,229                 (6,411 )          6,569
Earnings per common share - basic and diluted        $           1.19       $          (2.36 )    $      2.42
Weighted average number of shares
outstanding-basic and diluted                               2,717,691              2,717,691        2,717,691
Operating Results
Adjusted EBITDAX (*)                                 $         53,277       $          5,303      $     8,389
Total proved reserves (MBOE)                                    8,213                  8,329              257
Annual sales volumes (MBOE)                                       821                  455.5               48

Average cost per MBOE:
Production (including transportation and taxes)      $          24.66       $          16.47      $     23.31
General and administrative                           $           3.31       $           6.37      $     41.85
Depletion                                            $          21.59       $          13.48      $      9.48

(*)Adjusted EBITDAX (earnings before interest, taxes, depreciation and amortization) for a description of Adjusted EBITDAX, which is not a Generally Accepted Accounting Principles (GAAP) measure, and a reconciliation of Adjusted EBITDAX to income from continuing operations before income taxes, which is presented in accordance with GAAP.

Financial Results

Income from continuing operations our net income from continuing operations for 2008 totaled $3,229 thousand, or $1.19 per share, compared to net loss from continuing operations for 2007 of $(6,411) thousands, or $(2.36) per share. We had income from continuing operations for 2006 of $6,569, or $2.42 per share. The increase in income from continuing operations for 2008 compared to 2007 was primarily due to GFB acquisition which result in an increase of natural gas, oil and natural gas liquids sales, higher commodity prices and gain on derivative contracts, partially offset by higher cost and expenses including impairment of oil and gas properties, higher interest expenses and income tax. The decrease in the net income in 2007 compared to 2006 is primarily attributable to an increase in net loss on derivative contracts ,an impairment as results of the sale of the land in Israel, increase of impairment of oil and gas assets due to low production of gas wells drilled to the Barnett Shale, an increase in interest expenses and compensation for legal settlement recorded in 2006, all of which partially offset by increasing of oil and gas operating income due to Five States acquisition, realized gain on sale of investment in High -Tech company and income tax benefit.

Revenues, Volumes and Average Prices

                                 Sales Revenues

                                                        Years Ended December 31,
In thousands except percentages    2008          2007          D vs. 2008       2006          D vs. 2007
Gas sales                         $  20,747     $  10,030              107 %   $   1,371              632 %
Oil sales                            25,049         6,874              264           796              764
Natural gas liquid sales              6,036         3,923               54
Total                             $  51,832     $  20,827              149 %   $   2,167              861 %

Our sales revenues for 2008 increased by 149% when compared to 2007 due to the GFB acquisition which resulted in higher sales volumes of natural gas, oil and natural gas liquids and due to higher oil, natural gas and natural gas liquids prices. The increase in 2007 compared to 2006 was primarily due to Five States acquisition and was additionally due to higher commodity prices.

                           Volumes and Average Prices

                                                         Years Ended December 31,
                                    2008          2007         D vs. 2008        2006         D vs. 2007
Natural Gas
Sales volumes Mmcf                    2,507         1,551               62 %         213              628 %
Price per Mcf                     $    8.28     $    6.47               28     $    6.44              0.5
Total gas sales revenues
(thousands)                       $  20,747     $  10,030              107 %   $   1,371              632

Crude Oil
Sales volumes MBbl                      258          96.7              167 %          13              644 %
Price per Bbl                     $    97.1     $    71.1               37     $    61.2               16
Total oil sales revenues
(thousands)                       $  25,049     $   6,874              264 %   $     796              764 %

Natural gas liquids
Sales volumes MBbl                      145           101               44 %           -
Price per Bbl                     $    41.6     $      39                7     $       -
Total natural gas liquids sales
revenues (thousands)              $   6,036     $   3,923               54 %   $       -

The company's natural gas sales volumes increased by 62%, crude oil sales volumes by 167% and natural gas liquids sales volumes by 44% in 2008 compared to 2007 primarily due to GFB acquisition. The company's natural gas sales volumes increased by 628%, crude oil sales volumes by 644% in 2007 compared to 2006 primarily due to Five States acquisition.

Our average natural gas price for 2008 increased by 28% or $1.81 per Mcf when compared to 2007 and increased by 0.5% or $0.03 when compared 2007 to 2006. Our average crude oil price for 2008 increased by 37% or $26 per Bbl when compared to 2007 and increased by 16% or $9.9 when compared 2007 to 2006. Our average natural gas liquids price for 2008 increased by 7% or $2.6 per Bbl when compared to 2007.

               Analysis of Oil and Gas Operations Sales Revenues

The following table provides a summary of the effects of changes in volumes and
prices on Isramco's sales revenues for the year ended December 31, 2008 compared
to 2007 and 2006.

                                                                                     Natural gas
In thousands                                          Natural Gas         Oil          liquids
2006 sales revenues                                  $       1,371     $     796     $          -
. . .