THE FOLLOWING COMMENTARY SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES CONTAINED ELSEWHERE IN THIS REPORT ON FORM 10-Q. 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 REPORT ON FORM 10-Q. ISRAMCO INC. DISCLAIMS ANY OBLIGATION TO UPDATE SUCH FORWARD LOOKING STATEMENTS.

Overview

Isramco is predominately 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 and ownership of various royalty interests in oil and gas concessions located offshore Israel. The Company also operates a well service company that provides well maintenance, workover services, well completion and recompletion services. Our properties are primarily located in Texas, New Mexico and Oklahoma. We also act as the 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.

Liquidity and Capital Resources

Our primary source of cash during the six months ended June 30, 2012 was cash flow from operating activities, loans from related party lender ("Related Party Loans") and net proceeds from sale of our investment in shares of JOEL Jerusalem Oil Exploration Ltd, ("JOEL") a related party. We continuously monitor our liquidity and evaluate our development plans in light of a variety of factors, including, but not limited to, our cash flows, capital resources and drilling success.

In February 2012 the Company sold all of its shares of an investment in a company called JOEL. The net proceeds of $4,737,000 from sale were used to reduce principal amounts owed under our Senior Credit Agreement.

Our future capital resources and liquidity may depend, in part, on our success in developing the leasehold interests that we have 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 the capital resources available and our success in finding and acquiring additional reserves. Our oil well service subsidiary also requires capital resources to acquire and maintain equipment and continue growth. We expect to fund our future capital requirements through internally generated cash flows, borrowings under loans, and a future credit facility. Long-term cash flows are subject to a number of variables, including the level of production, prices, amount of work orders received, and our commodity price hedging activities, as well as various economic conditions that have historically affected the oil and natural gas industry.

Debt

Stockholders' equity 20,428 18,548

Debt to capital ratio 81.7 % 84 %

As of June 30, 2012, our total debt was $91,317,000, compared to total debt of $98,676,000 at December 31, 2011. During the six month ended June 30, 2012 the Company repaid all outstanding balance under its Senior Credit Facility.

On March 29, 2012, the Company entered into a Loan Agreement with I.O.C, pursuant to which it borrowed the sum of $3,500,000. The loan bears interest at a rate of Libor + 5.5% per annum and matures on March 29, 2013, when all accrued interest and principal is due and payable. The loan may be prepaid at any time without penalty or premium. The loan is unsecured. The purpose of the loan was to provide funds to Isramco for the payment of certain of the amounts were due under the Senior Credit Facility at maturity, which was extended to June, 2012.

On April 29, 2012 the Company entered into a Loan Agreement with I.O.C, pursuant to which it borrowed an additional $10,000,000. The loan bears interest of Libor+5.5% per annum and payable on April 30, 2013, when all accrued interest and principal is due and payable. The loan may be prepaid at any time without penalty or premium. The loan was funded by Lender in three monthly installments starting April 2012. The loan is unsecured. The purpose of the loan was to provide funds to Isramco for the payment of amounts due under the Senior Credit Facility through June, 2012.

Cash Flow

Our primary source of cash during the six months ended June 30, 2012 was cash flow from operating activities, loans from related party and proceeds from sale of marketable securities. In 2012 cash received from operations, sale of marketable securities, proceeds from loan of related party was used primarily to repay borrowings under our Senior Credit Facility and investing in equipment for well service subsidiary. In 2011 our primary source of cash during the six month ended June 30, 2011 was cash flow from operating activities and loans from related parties. In 2011 cash received from operations and from related party was offset by repayments of borrowings under our Senior Credit Agreements and payments made on settled derivatives contracts.

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. Prices for oil and natural gas have historically been subject to seasonal fluctuations 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 Operations below for a review of the impact of prices and volumes on sales.

                                                    Six months Ended June 30,
                                                      2012               2011
                                                          (In thousands)
    Cash flows provided by operating activities   $      9,377        $      692
    Cash flows used in investing activities             (2,703 )          (3,655 )
    Cash flows used in financing activities             (7,323 )            (987 )
    Net decrease in cash                          $      (649)        $  (3,950)

Operating Activities, During the first six months of 2012, compared to the first six months of 2011, net cash flow provided by operating activities increased by $8,685,000 to $9,377,000 This increase was primarily attributable to a net cash onetime payment in 2011 on settled derivatives contracts of $7,007,000, lower lease operating expenses which were partially offset by decrease in natural gas and natural gas liquids ("NGLs) revenues. The decrease in natural gas and NGLs revenues was caused by both decrease in natural gas and NGLs prices and as well as decrease in production volumes of natural gas and NGLs. The decrease in revenues was primarily attributable to lower average gas prices for the quarter ended June 30, 2012 of $3.51/Mcf, compared to $4.93/Mcf and natural gas liquids average prices for the six month ended June 30, 2012 of $40.03/Bbl, compared to $45.41/ Bbl to the corresponding period in 2011.

Investing Activities, Net cash flows used in investing activities for the six months ended June 30, 2012 and 2011 were $2,703,000 and $3,655,000, respectively. During the first six month of 2012 the Company invested in equipment for its well service subsidiary and oil and gas properties in the amount of $7,669,000 which were partially offset by proceeds from sale of investment in marketable securities in the amount of $4,373,000.

Financing Activities, Net cash flows used in financing activities were $7,323,000 and $987,000 for the six months ended June 30, 2012 and 2011, respectively. The Company has fully repaid the outstanding debt under Senior Credit Facility in the amount of $20,000,000 which was partially offset by new borrowings of $13,500,000 from a related party.

Results of Operations

Three Months Ended June 30, 2012 Compared to Three Months Ended June 30, 2011

                                 Selected Data


                                                 Three Months Ended June 30,
                                                   2012                 2011
                                               (In thousands except per share
                                                      and MBOE amounts)
     Financial Results
     Oil and Gas sales                       $          10,282       $    11,571
     Production Services                                 2,368                 -
     Other                                                 178               176
     Total revenues and other                           12,828            11,747

     Cost and expenses                                  10,563            10,727
     Other income                                       (1,669 )            (981 )
     Income tax expenses                                 1,342               700
     Net income attributable to common
     shareholders                                        2,592             1,301
     Net income attributable to common
     non-controlling interests                             102                 -
     Net income attributable to Isramco                  2,490             1,301
     Earnings per common share - basic       $            0.92       $      0.48
     Earnings per common share - diluted     $            0.92       $      0.48

     Weighted average number of shares
     outstanding- basic                              2,717,691         2,717,691
     Weighted average number of shares
     outstanding- diluted                            2,717,691         2,717,691

     Operating Results
     Adjusted EBITDAX (1)                    $           5,322       $     4,309
     Sales volumes (MMBOE)                                 205               200

     Average cost per MBOE:
     Production (excluding transportation
     and taxes)                              $           18.78       $     26.46
     General and administrative              $            4.34       $      4.63
     Depletion                               $           14.51       $     14.60

(1) See Adjusted EBITDAX 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 operations before income taxes, which is presented in accordance with GAAP.

Financial Results

Net Income, in the second quarter of 2012, our net income was $2,490,000 or $0.92 per share. This compares to net income of $1,301,000 or $0.48 per share, for the second quarter of 2011.

This increase was primarily due to an increase in revenues from well service activities, a decrease in lease operating expenses and a decrease in interest expenses which were partially offset by a decrease of natural gas and natural gas liquids ("NGLs") sales compared to the second quarter of 2011

Revenues, Volumes and Average Prices

                                 Sales Revenues

                                                Three Months Ended June 30,
      In thousands except percentages      2012             2011        D vs. 2011
      Gas sales                         $     1,853       $  3,008              (38 )%
      Oil sales                               7,357          6,894                7
      Natural gas liquid sales                1,072          1,669              (36 )
      Total                             $    10,282       $ 11,571              (11 )%

Our sales revenues for the second quarter of 2012 decreased by 11% when compared to same period in 2011, due to lower prices received for oil, gas, and NGLs and decrease in volume produced for natural gas and NGLs. That was partially offset by increase in crude oil production volume.

                           Volumes and Average Prices

                                             Three Months Ended June 30,
                                       2012              2011         D vs. 2011
       Natural Gas
       Sales volumes Mmcf                552.44           564.27               (2 )%
       Average Price per Mcf (1)    $      3.35       $     5.33              (37 )
       Total gas sales revenues
       (thousands)                  $     1,853       $    3,008              (38 )%

       Crude Oil
       Sales volumes MBbl                 80.83            68.40               18 %
       Average Price per Bbl (1)    $     91.02       $   100.80              (10 )
       Total oil sales revenues
       (thousands)                  $     7,357       $    6,894                7 %

       Natural gas liquids
       Sales volumes MBbl                 32.60            37.71              (14 )%
       Average Price per Bbl (1)    $     32.89       $    44.25              (26 )
       Total natural gas liquids
       sales revenues (thousands)   $     1,072       $    1,669              (36 )%

(1) Amounts exclude the impact of cash paid/received on settled contracts as we did not elect to apply hedge accounting

The company's natural gas sales volumes decreased by 2%, crude oil sales volumes increased by 18% and natural gas liquids sales volumes decreased by 14% for the second quarter of 2012 compared to the same period of 2011.

Our average natural gas price received for the second quarter of 2011 decreased by 37%, or $1.98 per Mcf, when compared to the same period of 2011. Our average crude oil price for the second quarter of 2011 decreased by 10%, or $9.78 per Bbl, when compared to the same period of 2011. Our average natural gas liquids price for the second quarter of 2012 decreased by 26%, or $11.36 per Bbl, when compared to the same period of 2011.

               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 three months ended June 30, 2012
compared to the same period of 2011.

                                                                       Natural gas
      In thousands                  Natural Gas          Oil             liquids
      2011 sales revenues          $       3,008      $    6,894      $       1,669
      Changes associated with
      sales volumes                         (201 )           655               (339 )
      Changes in prices                     (954 )          (192 )             (258 )
      2012 sales revenues          $       1,853      $    7,357      $       1,072



Operating Expenses

                                               Three Months Ended June 30,
       In thousands except
       percentages                     2012              2011           D vs. 2011
       Lease operating expense,
       transportation and taxes     $     4,841       $    6,610             (27 %)
       Depreciation, depletion
       and amortization                   2,981            2,923               2
       Accretion expense                    217              210               3
       Loss from plugging and
       abandonment of wells                 149               57             161
       General and administrative           892              927              (4 )
                                    $     9,080       $   10,727             (15 )%

During three months ended June 30, 2012, our operating expenses decreased by 15% when compared to the same period of 2011 due to the following factors:

· Lease operating expense, transportation cost and taxes decreased by 27%, or $1,769,000, in 2012 when compared to 2011. This decrease was the result of lower number of workovers performed on our operated properties than in the first half of 2011. On a per unit basis, lease operating expenses (excluding transportation and taxes) decreased by $7.68 per MBOE to $18.78 per MBOE in 2012 from $26.46 per MBOE in 2011.

· Depreciation, Depletion & Amortization ("DD&A") of the cost of proved oil and gas properties is calculated using the unit-of-production method. Our DD&A rate and expense are the composite of numerous individual field calculations. There are several factors that can impact our composite DD&A rate and expense, including but not limited to field production profiles, drilling or acquisition of new wells, disposition of existing wells, and reserve revisions (upward or downward) primarily related to well performance, commodity prices, and impairments. Changes in these factors may cause our composite DD&A rate and expense to fluctuate from period to period. DD&A increased by 2%, or $58,000 in 2012 when compared to 2011, primarily due to higher production (MBOE) which was partially offset by higher prices in 2011 (per MBOE) that impacted our estimated total reserves, which are the basis for the depletion calculation, and the impact of a 2011 impairment of $4,034,000 on the depletable base used to calculate DD&A. On a per unit basis, depletion expense decreased by $(0.09) per MBOE to $14.51 per MBOE in 2012 from $14.60 per MBOE in 2011.

· Accretion expense for asset retirement obligations slightly increased by 3%, or $7,000, in 2012 when compared to 2011.

· Loss from plugging and abandonment expenses increased by 161%, or $92,000 in 2012 when compared to 2011 primarily due to work resulting from plugging operations in compliance with requirements of state and federal regulations governing our wells.

· General and administrative expenses decreased by 4%, or $35,000 in 2012 when compared to 2011.

Other expenses

Three Months Ended June 30, In thousands except percentages 2012 2011 D vs. 2011 Interest expense, net $ 1,553 $ 1,950 (20 )% Net gain on derivative contracts (3,222 ) (2,931 ) 10 $ (1,669 ) $ (981 ) 70 %

Interest expense. Isramco's interest expense decreased by 20%, or $397,000, for the three months ended June 30, 2012 compared to the same period of 2011. This decrease was primarily due to lower average outstanding loans balance during the second quarter of 2012 comparing to 2011.

Net gain on derivative contracts. We enter into derivative commodity instruments to economically hedge our exposure to price fluctuations on our anticipated oil and natural gas production. Consistent with the prior year, we have elected not to designate any positions as cash flow hedges for accounting purposes. Accordingly, we recorded the net change in the mark-to-market value of these derivative contracts in our consolidated statement of operations.

At June 30, 2012, the Company had a $3.37 million commodity derivative asset, of which $1.6 million was classified as current. For the three months ended June 30, 2012, the Company recorded a net derivative gain of $3.22 million ($3.35 million unrealized gain and a $0.13 million loss from net cash paid on settled contracts).

At June 30, 2011, the Company had a $2.2 million commodity derivative asset, of which $1.7 million was classified as current. For the three months ended June 30, 2011, the Company recorded a net derivative gain of $2.9 million ($2.8 million unrealized gain and a $0.1 million gain from net cash received on settled contracts).

Adjusted EBITDAX.

To assess the operating results of Isramco, management analyzes income from operations before income taxes, interest expense, exploration expense, unrealized gain (loss) on derivative contracts and DD&A expense and impairments ("Adjusted EBITDAX"). Adjusted EBITDAX is not a GAAP measure. Isramco's definition of Adjusted EBITDAX excludes exploration expense because exploration expense is not an indicator of operating efficiency for a given reporting period, but rather is monitored by management as a part of the costs incurred in exploration and development activities. Similarly, Isramco excludes DD&A expense and impairments from Adjusted EBITDAX as a measure of segment operating performance because capital expenditures are evaluated at the time capital costs are incurred. The Company's definition of Adjusted EBITDAX also excludes interest expense to allow for assessment of segment operating results without regard to Isramco's financing methods or capital structure. Adjusted EBITDAX is a widely accepted financial indicator of a company's ability to incur and service debt, fund capital expenditures and make payments on its long term loans. Management believes that the presentation of Adjusted EBITDAX provides information useful in assessing the Company's financial condition and results of operations.

However, Adjusted EBITDAX, as defined by Isramco, may not be comparable to similarly titled measures used by other companies. Therefore, Isramco's consolidated Adjusted EBITDAX should be considered in conjunction with income
(loss) from operations and other performance measures prepared in accordance with GAAP, such as operating income or cash flow from operating activities. Adjusted EBITDAX has important limitations as an analytical tool because it excludes certain items that affect income from continuing operations and net cash provided by operating activities. Adjusted EBITDAX should not be considered in isolation or as a substitute for an analysis of Isramco's results as reported under GAAP. Below is a reconciliation of consolidated Adjusted EBITDAX to income
(loss) from operations before income taxes.