UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-KSB/A

              (Mark One)

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

FOR THE YEAR ENDED DECEMBER 31, 2004

OR

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

FOR THE TRANSITION PERIOD FROM ______________ TO ______________

Commission file number: 035-3634

NESS ENERGY INTERNATIONAL, INC.

(Name of small business issuer in its charter)

Washington	91-1067265
State or jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

4201 East Interstate 20, Willow Park, Texas 76087(Address

of Principal Executive Offices) (Zip Code)

Issuer’s telephone number: (817) 341-1477

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

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

Common Stock, No Par Value

Check whether the Issuer (1) 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. Yes [X] No [ ]

Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in the form, and no disclosure will be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB [X]

Issuer had revenues of $1,153,000 for the fiscal year ended December 31, 2004.

As of March 11, 2005, there were 155,308,485 outstanding shares of the issuer's Common Stock, no par value. The aggregate market value of the shares of the issuer's Common Stock held by non-affiliates was approximately $31,061,697. Such market value was calculated using the closing price of such Common Stock as of such date as quoted on the OTC Bulletin Board.

Transitional Small Business Disclosure Format (Check one): Yes [  ] No [X]

DOCUMENTS INCORPORATED BY REFERENCE

Certain exhibits hereto have been specifically incorporated by reference herein in Item 13 under Part III hereof. Certain portions of issuer’s definitive proxy statement, which will be filed with the Securities and Exchange Commission in connection with the issuer’s 2005 annual meeting of stockholders, are incorporated by reference in Items 9-12 of Part III hereof.

EXPLANATORY NOTICE

As part of its periodic review of our filings, the staff of the Securities and Exchange Commission (“SEC”) concluded that there were certain items that needed correction. The majority of these items related to Unaudited Supplemental Oil and Gas data that accordingly, we have restated (which included estimated future net cash flows and the related present value amounts for all years presented), and we have addressed all the issues presented from that certain comment letter from the SEC dated July 13, 2005, and subsequent communications. This Amendment No. 4 to our Annual Report on Form 10-KSB for the fiscal year ended December 31, 2004, as originally filed on March 30, 2005, is being filed to correct those items.

PART I	PAGE
ITEM 1. DESCRIPTION OF BUSINESS	3
ITEM 2. DESCRIPTION OF PROPERTY	13
ITEM 3. LEGAL PROCEEDINGS	16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	16
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS	16
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION	18
ITEM 7. FINANCIAL STATEMENTS	21
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE	21
ITEM 8A. CONTROLS AND PROCEDURES	21
ITEM 8B. OTHER INFORMATION	21
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT	22
ITEM 10. EXECUTIVE COMPENSATION	22
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND                      MANAGEMENT AND RELATED STOCKHOLDER MATTERS	22
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS	22
ITEM 13. EXHIBITS	22
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES	22
SIGNATURES	26

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ITEM 1. DESCRIPTION OF BUSINESS.

Business Development

Ness Energy International, Inc. (with it subsidiaries “Ness” or the “Company”), was originally incorporated under the laws of the State of Washington on March 1, 1979 as Kit Karson Corporation. Ness’s corporate offices are located at 4201 I-20 East Service Road, Willow Park, Texas, 76087.

Ness began trading January 23, 1998 on the OTC Bulletin Board under the symbol NESS. On March 6, 1998, Ness held its annual meeting to ratify the selection of auditors, elect new directors, increase the authorized shares of its common stock from 50,000,000 to 200,000,000 shares and authorize 10,000,000 preferred shares to the capitalization of Ness. The Board of Directors of Ness changed the corporation’s name to Ness Energy International, Inc. effective July 6, 1999.

Ness is engaged in the acquisition, development, exploitation, and exploration of producing and probable producing oil and gas properties, and in the production, marketing, and transportation of oil and natural gas both in Israel and domestically.

Ness has expended significant time and resources to develop business in the potential oil and gas properties in Israel completing work in the Lahava field and currently marking the gas production for potential sale to adjacent Kibbutz consumers. Ness was certified by the State of Israel as a Petroleum Works Contractor and is therefore able to develop and exploit mineral deposits in the area. The Company is actively pursuing oil and gas exploration in Israel through, but not limited to, its subsidiaries, Ness Energy of Israel, Inc. (“Ness Israel”), Lahava Oil and Gas Ltd. (“Lahava”), and Modi’in Energy Management (1192) Ltd. (“Modi’in Management”).

Domestically, the Company has interests in various properties and operations. Ness holds existing mineral rights in Texas including, the Fort Worth Basin in Parker, Hood, Shackelford, Jack, Wise and Palo Pinto counties and the coastal plains of South Texas in DeWitt, Karnes, Lavaca and Victoria counties.

The Company completed expansion of eight wells in 2004. Seven wells, two in South Texas and five in North Texas, have been reworked and are producing. One well has had engineering issues that have prevented production. The Company’s engineers believe that the engineering difficulties can be resolved. Should these issues not be resolved, the Company’s consultant on the project has offered the Company a prospective replacement well.

Current Business Plans and Pursuits

The Company is directing its efforts to the development and commercial exploitation of oil and gas wells that it presently holds an interest in, as well as developing opportunities for cooperation with companies that possess established cash flow, existing well bores with multiple zones of interest yet to be exploited. These candidates must also possess additional acreage for in-field drilling and should preferably be located in areas of the country that have a proven track record of long-lived reserves.

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Israel

The Company is dedicated to exploring in Israel and to locating untapped petroleum resources in Israel. In July 2003, the Company completed a purchase in Israel, through Ness Israel, of equipment for oil and gas exploration and production, including recovery. The equipment includes a total of approximately 29 different components and parts, including diesel engines, a drilling rig, a large truck, piping, and pumps. The purchase price was $118,000. The equipment is stored in Israel. The Company intends to utilize these items in its effort to develop and exploit the Israel properties. The Company is currently in its ramp-up to the exploitation of the Israeli interests and is engaged in completing the required engineering, and administrative work.

Israel Background

Although Israel contains much of the same type of hydrocarbon formations as the remainder of the productive Middle Eastern countries, normally present as a pre-cursor to the detection of oil reserves, geo-politics has played a major role in the non-exploration of potential oil resources in Israel. Nevertheless, there is no evidence of commercial hydrocarbon productivity in the specific geographic area of the Company’s interest, though some evidence exists in the region.

By 1980 22 wells had been drilled, by others, in this region. Of these 22 wells, only seven are considered to be geologically viable and of the seven, only two are considered to be significant, valid tests of the geological premise. Since 1980, more than 17 wells have been drilled and at least 11 of those have produced free oil. In one area alone, the Heletz Field, 18 million barrels of oil have been recovered. In the last ten years, more seismic, magnetic and gravity surveys have been run by third parties, though none conclusively confirm oil is present.

Ness has access to information collected by Israeli oil and gas concerns and consultants, including, seismic line data and analysis, engineering reports, as well as geological and geophysical surveys. Additionally, the Company has acquired data, from the drilling of test wells, well logs, drill stem tests, and well-core hole cuttings, as well as from three geological and geophysical surveys completed by Ness.

Though management is of the opinion that oil is indeed recoverable once focused exploration and drilling is undertaken, there is no assurance this belief will prove correct.

Domestic

Ness had 27 wells producing revenues in 2004, two in South Texas, and 25 in North Texas, with approximately 9,306 acres of additional land available, to pursue additional drilling operations. The Company is pursuing the approximately 14 million dollars that is believed to be necessary for the development of these wells. The potential domestic production of these wells when producing, is expected to exceed 32,323,000 MCF of natural gas.

The production and development of the Company’s wells in the Texas area are predominately in fields that already have producing wells, and significant geological support. Many of these fields were abandoned by larger oil and gas companies in a time when gas prices were significantly less than what they are today. The Company believes that with the higher prices for oil and gas, and improved technology, it can develop profitable, productive wells.

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Available Information

Our website is located at http://www.nessenergy.com. This Form 10-KSB and all other reports filed by the Company with the Securities and Exchange Commission (“SEC”) can be accessed, free of charge, through our website as soon as reasonably practicable after the report is electronically filed with the SEC, at http://www.nessenergy.com.

PROVED RESERVES POSITION

In Israel, the Company has the drilling rights, either directly, or indirectly, to 353,800 SKM. Ness is currently expanding efforts, via engineering and licensing requirements on the Med Ashdod, Nir-AM, Beeri, and Zohar leases. Additionally, Ness has entered into operator agreements with Modi’in Management, a Ness subsidiary.

Domestically, as of December 31, 2004, the Company’s future net cash flows has been estimated by Yeager Engineering, an independent engineer consultant in oil and gas technology, to be approximately $147,535,000. This compares to $58,911,000 as of December 31, 2003. The increase, in excess of 150% from 2003, is the result of, but not limited to, strategic acquisitions, revisions on previous quantity estimates, and higher oil and natural gas prices.

	2004	2003	Change %
Future net cash flows	147,535,000	58,911,000	150%
Standardized measure of discounted future net cash flows	69,242,000	23,283,000	197%

For the year ended December 31, 2004, the Company’s proved oil reserves increased approximately 195,000 bbls from 62,000 bbls to 257,000 bbls. The Company’s proved gas reserves increased from approximately 15,204,000 MCF to 32,323,000 MCF. The increase in reserves is primarily attributable to the previously mentioned acquired properties. These numbers are estimates, and may vary from the actual production due to many variables, (please see: Certain Factors Affecting Future Results).

Customers and Distribution Methods

The Company primarily delivers natural gas, and oil products to the market. The Company is pursuing and plans to expand in the area of offering well management services. The Company cannot, on its own, deliver products to the consumer. The Company sells it products to intermediaries, who either have, or have access to, consumer delivery systems. The Company feels that in this highly competitive industry, should circumstances require, other third party intermediaries would be readily available to acquire the Company’s products. Currently the Company sells its products to three customers, with Devon Energy Corporation being the largest one accounting for approximately 34% of such sales.

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RECENT ACCOUNTING PRONOUNCEMENTS

In June 2003, the Financial Accounting Standards Board (“FASB”) approved Statement of Financial Accounting (“SFAS”) 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity. SFAS 150 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 May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Company adopted SFAS 150 effective June 1, 2003. The adoption of SFAS 150 did not have a significant effect on the Company’s financial position.

On September 28, 2004, the SEC released Staff Accounting Bulletin ("SAB") 106 regarding the application of SFAS 143, "Accounting for Asset Retirement Obligations ("AROs")," by oil and gas producing companies following the full cost accounting method. Pursuant to SAB 106, oil and gas producing companies that have adopted SFAS 143 should exclude the future cash outflows associated with settling AROs (ARO liabilities) from the computation of the present value of estimated future net revenues for the purposes of the full cost ceiling calculation. In addition, estimated dismantlement and abandonment costs, net of estimated salvage values, that have been capitalized (ARO assets) should be included in the amortization base for computing depreciation, depletion and amortization expense. Disclosures are required to include discussion of how a company's ceiling test and depreciation, depletion and amortization calculations are impacted by the adoption of SFAS 143. SAB 106 is effective prospectively as of the beginning of the first fiscal quarter beginning after October 4, 2004. Since our adoption of SFAS 143 on January 1, 2003, we have calculated the ceiling test and our depreciation, depletion and amortization expense in accordance with the interpretations set forth in SAB 106; therefore, the adoption of SAB 106 had no effect on our financial statements.

On December 16, 2004, the FASB issued SFAS 123 (revised 2004), Share-Based Payment (“SFAS 123(R)”), which is a revision of SFAS 123, Accounting for Stock-Based Compensation. SFAS 123(R) supersedes Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, and amends SFAS 95, Statement of Cash Flows. Generally, the approach in SFAS 123(R) is similar to the approach described in SFAS 123. However, SFAS 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the statement of operations based on their fair values. Pro-forma disclosure is no longer an alternative.

SFAS 123(R) must be adopted by the Company no later than January 1, 2006. SFAS 123(R) permits public companies to adopt its requirements using one of two methods:

1. A “modified prospective” method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS 123(R) for all share-based payments granted after the effective date and (b) based on the requirements of SFAS 123 for all awards granted to employees prior to the effective date of SFAS 123(R) that remain unvested on the effective date.

2. A “modified retrospective” method which includes the requirements of the modified prospective method described above, but also permits entities to restate based on the amounts previously recognized under SFAS 123 for purposes of pro-forma disclosures either (a) all prior periods presented or (b) prior interim periods of the year of adoption.

The Company expects to adopt SFAS 123(R) on January 1, 2006, and is currently evaluating the adoption alternatives.

The Company accounts for issuances of its shares of common stock for services under the fair value method. For shares issued for services, the fair market value of the Company’s common stock on the date of stock issuance is used. The Company has adopted Statement of Financial Accounting Standard No. 123, Accounting for Stock-Based Compensation. The statement  requires stock-based compensation transactions to be accounted for based on the fair value of the services rendered, property received, or the fair value of the equity instruments issued, whichever is more reliably measurable. The fair value method generally recognizes expense to the extent of the fair market value for the shares exchanged, after taking into account various factors , such as but not limited to, the volatility, transferability, and market conditions, that existed at the grant date. The Company does not currently differentiate between employee and non-employee recipients of these stock transactions. Accordingly, the adoption of SFAS 123(R)'s fair value method may or may not have a significant impact on the consolidated results of operations, although it will have no impact on the Company’s overall financial position. The impact of adopting SFAS 123(R) in future periods will depend on levels of share-based payments granted in the future. This requirement is expected to reduce net operating cash flows and increase net financing cash flows in periods after adoption.

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OPERATIONS AND POLICIES

The Company currently is focusing its exploration, acquisition, and development opportunities in areas where it has gained historical knowledge, specifically projects in Texas and Israel. However, the acquisition, development, production, and sale of oil and gas acreage are subject to many factors outside the Company’s control. These factors include worldwide and domestic economic conditions; proximity to pipelines; existing oil and gas sales contracts on properties being evaluated; the supply and price of oil and gas as well as other energy forms; the regulation of prices, production, transportation and marketing by federal and state governmental authorities; and the availability of, and interest rates charged on, borrowed funds.

Historically, in attempting to acquire, explore, and drill wells on oil and gas leases, the Company has often been at a competitive disadvantage since it had to compete with many companies and individuals with greater capital and financial resources and larger technical staffs. The Company has, in the past, sought to mitigate some of these problems by forming cooperative groups such as acquisition or development joint ventures with other entities and individuals. These joint ventures allow the Company access to more acquisition candidates and enable the Company to share evaluation and other costs among the venture partners.

The Company’s operations are also subject to various provisions of federal, state, and local laws regarding environmental matters. The impact of these environmental laws on the Company may necessitate significant capital outlays, which may materially affect the earning potential of the Company’s oil and gas business in particular, and could cause material changes in the industry in general. The Company strongly encourages the operators of the Company’s oil and gas wells to do periodic environmental assessments of potential liabilities. To date, environmental laws have not materially hindered nor adversely affected the Company’s business.

The Company has 12 full-time and 2 part-time employees, including the Company’s President and CEO, Sha Stephens. The Company also hires outside professional consultants to handle certain additional aspects of the Company’s business. Management believes this type of contracting for professional services is the most economical and practical means for the Company to obtain such services at this time.

Competition and Markets

The oil and gas industry is highly competitive in all of its phases, with competition for favorable prospects being particularly intense. Ness believes price, geological and geophysical skill, and familiarity within an area of operations are the primary competitive factors in the acquisition of desirable leases and suitable prospects for oil and gas drilling operations. Ness competes with independent operators and occasionally major oil and gas companies, many of which have substantially greater technical and financial resources than Ness.

States, countries, and other jurisdictions in which Ness has operations and plans to have new operations regulate the exploration, development, production, and prices on the sale of oil and gas. The United States government also regulates the price on oil. Markets for, and the value of discovered oil and gas are dependent on such factors as regulation, including well spacing and production allowable, import quota competitive fuels, and proximity of pipelines and price-fixing by governments, all of which are beyond the control of Ness.

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Foreign Taxes and United States Tax Credits

Ness’s income is also subject to taxation under the United States Internal Revenue Code of 1986, as amended (the “Code”). The Code provides that a taxpayer may obtain a tax credit for certain taxes paid to a foreign country or may take a deduction for such taxes. A tax credit is generally more favorable than a deduction. The tax credit applicable to particular foreign income generally arises when such income is included in Ness’s taxable income under the provisions of the Code. There are, however, substantial restrictions and limitations on the amount of the tax credit that can actually be claimed. As of December 31, 2004, Ness has not had any federal income tax liabilities, and does not foresee any liability in the current period. Although, Ness cannot predict the future tax regulations of either domestic or foreign governments, such changes could impact the Company both negatively, or positively, and such impact cannot be anticipated.

Other Regulations

Oil and gas operations are and will be subject to federal, state, and local laws as well as regulations and by political developments. The domestic production and sale of oil and gas are subject to federal regulation by the Department of Energy and the Federal Energy Regulatory Commission. Rates of production of oil and gas have for many years been subject to federal and state conservation laws and regulations. In addition, oil and gas operations are subject to extensive federal and state regulations concerning exploration, development, production, transportation, and pricing, and to interruption or termination by governmental authorities.

In foreign countries, Ness may be subject to governmental restrictions on production, pricing, and export controls. Furthermore, regulations existing or imposed upon Ness at the time of its acquisition of properties may change to an unpredictable extent. Ness will have little or no control over the change of regulations or imposition of new regulations and restrictions by foreign governments, ex-appropriation or nationalization by foreign governments, or the imposition of additional foreign taxes and partial foreign ownership requirements.

Definitions

Below are definitions of certain words, as may be used by us in our documents, to be helpful to our readers.

“Bbls” means barrels of oil.

“Code” or “The Code” the United States Internal Revenue Code of 1986, as amended.

“FNI” is Future Net Income. This is calculated by guidelines from the Securities and Exchange Commision (SEC) applied to engineering reports of the potential future cash flows from well production, and after, which may or may not be, significant assumptions as to price, expenses, time tables, and capital requirements.

“Gravity” is a measure of the density of oil. As defined in the petroleum industry, a higher gravity corresponds to a lower density. Gravity of crude oils range from about 12 degrees (heavy oil) to 60 degrees (distillate or gasoline-like oil). Lower gravity oils are generally worth less, and they may require unconventional technology to produce.

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“Gross production” is total production of oil, gas, or natural gas liquids from a property or group of properties for any specified period of time.

“MCF” or “MCFG” means thousand cubic feet and million cubic feet of gas, respectively.

“SKM” means Square Kilometers.

“Proved Developed Oil and Gas Reserves” are reserves that can be expected to be recovered through existing wells with existing equipment and operating methods. Additional oil and gas expected to be obtained through the application of fluid injection or other improved recovery techniques for supplementing the natural forces and mechanisms of primary recovery should be included as “proved developed reserves” only after testing by a pilot project or after the operation of an installed program has confirmed through production response that increased recovery will be achieved.

“Proved undeveloped reserves” are reserves that are expected to be recovered from new wells on undrilled acreage, or from existing wells where a relatively major expenditure is required for recompletion. Reserves on undrilled acreage shall be limited to those drilling units offsetting productive units that are reasonably certain of production when drilled.

“Probable oil and gas reserves” are the estimated quantities of crude oil, natural gas, and natural gas liquids which geological and engineering data infer to be commercially recoverable but where uncertainty as to this data preclude the classification of these reserves as “proved”.

“Spudded in” means, as to a site, drilling an oil or gas well has commenced.

“Working interest” means all or a fractional part of the ownership rights granted by a concession or lease. The working interest, or a part thereof, pays all costs of operation and is entitled to the gross production less royalties retained by the grantor or lessor and less other royalties or non-operating interests created and assigned from the working interest.

Forward-Looking Statements.

THE FOLLOWING DISCUSSION AND EXPOSITIONS SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES CONTAINED ELSEWHERE IN THIS FORM 10-KSB. CERTAIN STATEMENTS MADE IN THIS DISCUSSION ARE “FORWARD-LOOKING STATEMENTS” WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. THESE CERTAIN STATEMENTS MAY MATERIALLY DIFFER FROM RESULTS.

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, DEVELOPMENT 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, DRILLING EQUIPMENT, 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 STRATEGIES. 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.

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CERTAIN FACTORS - AFFECTING FUTURE RESULTS

WE MUST CONTINUE TO EXPAND OUR OPERATIONS

Our long-term success is ultimately dependent on our ability to expand our revenue base through the acquisition of producing properties and, to a much greater extent, by successful results in our exploration efforts. We will need to continue to raise capital to make additional acquisitions and to make further investments in our current portfolio of exploration properties. We have made significant investments in exploration properties. There is no assurance that any of these acquisitions or investments or any other acquisitions or investments in the future will be successful. All of our exploration projects are subject to failure and the loss of our investment.

PRICES OF OIL AND NATURAL GAS FLUCTUATE WIDELY BASED ON MARKET CONDITIONS AND ANY DECLINE WILL ADVERSELY AFFECT OUR FINANCIAL CONDITION

Our revenues, operating results, cash flows and future rate of growth are very dependent upon prevailing prices for oil and gas. Historically, oil and gas prices and markets have been volatile and not predictable, and they are likely to continue to be volatile in the future. Prices for oil and gas are subject to wide fluctuations in response to relatively minor changes in the supply of and demand for oil and gas, market uncertainty and a variety of additional factors that are beyond our control, including:

• Changes in international, national, regional, and local economic conditions, as well as changes in consumer confidence and preferences, can have a negative impact on our business; changes in alternative sources of energy, by either actual cost, or perceived value.;

• political conditions in the Middle East and elsewhere;

• the supply and price of foreign oil and gas;

• the level of consumer product demand;

• the price and availability of alternative fuels;

• the effect of federal and state regulation of production and transportation; and

• the proximity of our natural gas to pipelines and their capacity.

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WE MUST REPLACE THE RESERVES WE PRODUCE

A substantial portion of our oil and gas properties still contain proved undeveloped, and probable reserves. Successful development and production of those reserves cannot be assured. Additional drilling will be necessary in future years both to maintain production levels and to define the extent and recoverability of existing reserves. There is no assurance that our present oil and gas wells will continue to produce at current or anticipated rates of production, that development drilling will be successful, that production of oil and gas will commence when expected, that there will be favorable markets for oil and gas which may be produced in the future, or that production rates achieved in early periods can be maintained.

THERE ARE MANY RISKS IN DRILLING OIL AND GAS WELLS

The cost of drilling, completing, and operating wells is often uncertain. Moreover, drilling may be curtailed, delayed, or canceled as a result of many factors, including title problems, weather conditions, shortages of or delays in delivery of equipment, as well as the financial instability of well operators, major working interest owners, and well servicing companies. Our gas wells may be shut-in for lack of a market until a gas pipeline or gathering system with available capacity is extended into our area. Our oil wells may have production curtailed until production facilities and delivery arrangements are acquired or developed for them.

WE FACE INTENSE COMPETITION

The oil and natural gas industry is highly competitive. We compete with others for property acquisitions and for opportunities to explore or to develop and produce oil and natural gas. We face strong competition from many companies and individuals with greater capital, financial resources, and larger technical staffs. We also face strong competition in procuring services from a limited pool of laborers, drilling service contractors, and equipment vendors.

THE AMOUNT OF INSURANCE WE CARRY MAY NOT BE SUFFICIENT TO PROTECT US

We, our partners, co-venturers, and well operators maintain general liability insurance but it may not cover all future claims. If a large claim is successfully asserted against us, we might not be covered by insurance, or it might be covered but cause us to pay much higher insurance premiums or a large deductible or co-payment. Furthermore, regardless of the outcome, litigation involving our operations or even insurance companies disputing coverage could divert management’s attentions and energies away from operations. The nature of the oil and gas business involves a variety of operating hazards such as fires, explosions, cratering, blow-outs, adverse weather conditions, pollution and environmental risks, encountering formations with abnormal pressures, and, in horizontal wellbores, the increased risk of mechanical failure and collapsed holes, the occurrence of any of which could result in substantial losses to us.

OUR SUCCESS IS DEPENDENT ON OUR ABILITY TO RETAIN KEY PERSONNEL

We believe that the oil and gas exploration and development and related management experience of our key personnel is important to our success. The active participation in the Company of our President, Sha Stephens, and certain key executives is a necessity for our continued operations. We do not carry key person life insurance on any of our key personnel. We compete with bigger and better financed oil and gas exploration companies for these individuals. Our future success may depend on whether we can attract, retain and motivate highly qualified personnel. The Company has plans to continue to provide employment contracts with these key executives, and provide other benefits that may be in the best interest of the Company. We cannot assure that we will be able to continue to do so.

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OUR ESTIMATED RESERVES HAVE RISKS

Estimating our proved reserves involves many uncertainties, including factors beyond our control. Our annual report on Form 10-KSB for 2004 contains estimates of our oil and natural gas reserves and the future cash flow to be realized from those reserves for years 2004 and 2003, as prepared by our independent engineer consultant in oil and gas technology. There are uncertainties inherent in estimating quantities of proved oil and natural gas reserves since petroleum engineering is not an exact science. Estimates of commercially recoverable oil and gas reserves and of the future net cash flows from them are based upon a number of variable factors and assumptions including:

• historical production from the properties compared with production from other producing properties;

• the effects of regulation by governmental agencies;

• future oil and gas prices; and

• future operating costs, severance and excise taxes, abandonment costs, development costs and workover and remedial costs.

GOVERNMENTAL REGULATION, ENVIRONMENTAL RISKS AND TAXES COULD ADVERSELY AFFECT OUR OIL AND GAS OPERATIONS IN THE UNITED STATES

Our oil and natural gas operations in the United States are subject to regulation by federal and state governments, including environmental laws. To date, we have not had to expend significant resources in order to satisfy environmental laws and regulations presently in effect. However, compliance costs under any new laws and regulations that might be enacted could adversely affect our business and increase the costs of planning, designing, drilling, installing, operating, and abandoning our oil and gas wells and other facilities. Additional matters that are, or have been from time to time, subject to governmental regulation include land tenure, royalties, production rates, spacing, completion procedures, water injections, utilization, the maximum price at which products could be sold, energy taxes, and the discharge of materials into the environment.

Capital is available under certain conduits that would lend themselves to tax preference items under the Code. This may, to some degree, effect, or affect the capital costs of the Company. Changes, in the Code could have either a positive or negative impact on the Company.

THE COMPANY IS SUBJECT TO RISKS ASSOCIATED WITH OPERATIONS IN ISRAEL

The Company maintains a presence and is involved in oil and gas exploration activities in Israel. Accordingly, a significant portion of the Company’s business plan 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 MARKET FOR OUR STOCK IS HIGHLY VOLATILE

Our stock is currently traded on the OTC Bulletin Board. Consequently, the price at which the shares trade may be highly volatile. Under current rules our stock may continue to be listed on the OTC Bulletin Board as long as we continue to file our reports with the SEC. Investor interest in the Company’s common stock may not maintain an active or liquid trading market. The market price of the Company’s common stock has fluctuated in the past and may continue to be volatile. 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 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.

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ITEM 2. DESCRIPTION OF PROPERTY.

Corporate Offices

The Company owns one office building on one-half acre of land in Willow Park, Texas. In addition, the Company owns one office building and storage facility on 11.4 acres of land in Willow Park, Texas The mortgage balance on this property as of December 31, 2004 was, $98,593. The Company also owns one office unit in a building in Netanya Israel.

Oil and Gas Lease Interests

Ness does not own the land on which it has the working interests. The Company has the rights to the minerals contained in the land, primarily potential oil and gas. (See Below; “Schedules of Oil and Gas Operations”).

During 2004, Ness received no royalties from any lease rights or working interests.

Ness owns the following Working Interests:

·Poolville Production Field, primarily in North Texas

·Mills Production, primarily in Clay, Jack, Palo Pinto and Parker Counties of Texas

·Barnett Shale, primarily in Parker, Palo Pinto and Erath Counties of Texas

·   South Texas re-entry wells, primarily in Dewitt and Lavaca Counties of Texas.

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Production

(2) Production	2003		2004
Natural Gas Per MCF
Coffey/Greenwood Field	Price	Production	Price	Production
A) Average sales price	$4.44	6,955	$5.02	744
B) Average production cost	$2.10		$3.76
Moby Dick Field
A) Average sales price	$4.57	15,480	$4.27	24,954
B) Average production cost	$0.96		$3.76
Graford South Field
A) Average sales price	$3.85	1,594	$4.64	7,625
B) Average production cost	$1.96		$3.76
Oldworld
A) Average sales price	--	--	$5.17	15,037
B)Average production cost	--	--	$3.76
Oil per Barrel
Moby Dick Field
A) Average sales price	--	--	$43.56	360
B) Average production cost (1)	--	--	--	--
Oldworld
A) Average sales price	--	--	$43.67	78
B) Average production cost (1)	--	--	--	--
(1) Oil production is a derivative product and therefore, production costs are assigned to gas production only.

Reserves Reported to Other Agencies

No reserves were reported to other federal agencies.

Internationally (exclusively Israel):

The Company either directly, or indirectly has the following rights in Israel:

Are	a	Type of Right (1000,s of square KM)	Name
250		Lease	Med Ashdod
50		Preliminary Permit	Nir-AM
20		License	Beeri
33	.8	License	Zohar

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Domestically (exclusively Texas):

Schedule of Oil and Gas Properties at December 31, 2004

	Wells		Acreage
	Gross	Net	Gross	Net	Average Sales Price	Standardized measure of discounted future net cash flows	Projected Additional Investment
Proved Producing
North Texas	34	25	2,459	1,869	$                           5.56	$                   858,000	$                               --
South Texas Reentry	2	2	125	125	$                           5.56	$                     37,000	$                         8,000
Subtotal	36	27	2,584	1,994	$                           5.56	$                   895,000	$                         8,000
Proved Nonproducing
North Texas	--	--	4,676	4,676	--	$               51,660,000	$                  2,623,000
South Texas Reentry	--	--	1,263	1,263	--	$               16,687,000	$                  1,695,000
Subtotal	--	--	5,939	5,939	--	$               68,347,000	$                  4,318,000
Company Total	36	27	11,890	11,300	$                           5.56	$               69,242,000	$                  4,326,000

The reserve data represents only estimates that are based on subjective determinations. Accordingly, the estimates are expected to change, as additional information becomes available. Further, estimates of gas reserves, of necessity, are projections based on engineering and economic data. There are uncertainties inherent in the interpretation of such data, and there can be no assurance that the proved reserves set forth herein will ultimately be produced. Proved developed producing reserves are those expected to be recovered from currently producing zones under continuation of present operating methods.

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ITEM 3. LEGAL PROCEEDINGS.

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 disputes and legal actions is expected to have a material impact on the Company’s consolidated financial position or results of operations.

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

There were no matters submitted to a vote of the Shareholders in the fourth quarter of 2004.

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

Market Information:

Ness’s common stock is traded on the OTC Bulletin Board, under the symbol of “Ness”. The range of closing prices shown below covers the last two years of Ness. The quotations shown reflect inter-dealer prices, without retail mark-up, mark-down, or commission and may not necessarily represent actual transactions.

Per Share Common Stock Bid Prices by Quarter For the Year Ended December 31, 2004:

	High		Low
Quarter Ended December 31, 2004	$     0	.41	$     0	.16
Quarter Ended September 30, 2004	$     0	.35	$     0	.19
Quarter Ended June 30, 2004	$     0	.45	$     0	.28
Quarter Ended March 31, 2004	$     0	.50	$     0	.35

Per Share Common Stock Bid Prices by Quarter For the Year Ended December 31, 2003:

	High		Low
Quarter Ended December 31, 2003	$     0	.51	$     0	.36
Quarter Ended September 30, 2003	$     0	.69	$     0	.22
Quarter Ended June 30, 2003	$     0	.58	$     0	.13
Quarter Ended March 31, 2003	$     0	.42	$     0	.25

Holders of Common Equity

As of March 11, 2005, Ness had approximately 3,643 shareholders of record of its common stock.

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Dividends

Ness has not declared or paid a cash dividend to stockholders since it was originally organized. The Board of Directors presently intends to retain any earnings to finance Ness' operations and does not expect to authorize cash dividends in the foreseeable future. Any payment of cash dividends in the future will depend upon Ness’s earnings, capital requirements, and other factors.

Equity Securities Sold Without Registration

Set forth below is a listing of all sales by the Company of unregistered equity securities during 2004, excluding sales that were previously reported on Quarterly Reports on Form 10-QSB.

        In October 2004, the Company sold 69,551 shares of its common stock to a third party at a purchase price formula that discounted the per share closing price of the Company’s common stock on the date of the agreement by 50% and increased that product by $.07.

        In November 2004, the Company sold 14,922 restricted shares of its common stock to a third party at a purchase price formula that discounted the per share closing price of the Company’s common stock by 50% on the date of the agreement and increased that product by $.07.

        In November 2004, the Company issued 2,180,102 restricted shares for the purchase of oil and gas property based on the average trading price of shares of common stock of the Company on the date of the agreement, discounted by 10%.

        In December 2004, the Company issued 315,000 restricted shares of its common stock to employees, and or consultants for consulting, and services received over a period of time based on the average trading price of the shares of common stock of the Company on the date of issue.

        In December 2004, the Company sold 21,102 restricted shares of its common stock to a third party at a purchase price formula that discounted the per share closing price of the Company’s common stock by 50% on the date of the agreement and increased that product by $.07.

General Information.

                All of the above noted shares were issued directly by the Company, and no commissions or fees were paid in connection with any of these transactions. The Company gave the purchasers the opportunity to ask questions and receive answers concerning the terms and conditions of the transactions and to obtain any additional information which the Company possessed or could acquire without unreasonable effort or expense that is necessary to verify the accuracy of information furnished; the Company advised the purchasers of the limitations on resale, and neither the Company nor any person acting on its behalf sold the securities by any form of general solicitation or general advertising; and/or the Company exercised reasonable care to assure that the purchasers of the securities are not underwriters within the meaning of section 2(11) of the Act in compliance with Rule 502(d). Unless otherwise indicated, such sales were exempt from registration under the Securities Act of 1933, as amended (the “Act”), pursuant to Section 4(2) of the Act, as they were transactions not involving a public offering.

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ITEM 6. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.

THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH OUR CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES RELATED TO THOSE STATEMENTS INCLUDED IN THIS FORM 10-KSB. SOME OF OUR DISCUSSION IS FORWARD-LOOKING AND INVOLVES RISKS AND UNCERTAINTIES. FOR INFORMATION REGARDING RISK FACTORS THAT COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, REFER TO THE RISK FACTORS SECTION OF THIS ANNUAL REPORT.

Critical Accounting Issues

Oil and Gas Property and Equipment

The Company uses the full cost method of accounting for its oil and gas producing activities, which are located in Texas. Accordingly, all costs associated with the acquisition, exploration and development of oil and gas reserves, including directly related overhead costs, are capitalized. Under the rules of the Securities and Exchange Commission ("SEC") for the full cost method of accounting, the net carrying value of oil and natural gas properties, reduced by the asset retirement obligation, is limited to the sum of the present value (10% discount rate) of the estimated future net cash flows from proved reserves, based on the current prices and costs as adjusted for the Company's cash flow hedge positions, plus the lower of cost or estimated fair market value of unproved properties adjusted for related income tax effects..

All capitalized costs of oil and gas properties, including the estimated future costs to develop proved reserves and estimated dismantlement and abandonment costs, net of salvage values, are amortized on the unit-of-production method using estimates of proved reserves. Costs directly associated with the acquisition and evaluation of unproved properties are excluded from the amortization base until the related properties are evaluated. Such unproved properties are assessed for impairment quarterly and any provision for impairment is transferred to the full-cost amortization base. Sales of oil and gas properties, including consideration received from sales or transfers of properties in connection with partnerships, joint venture operations or drilling arrangements, are credited to the full-cost pool unless the sale would have a significant effect on the amortization rate. Abandonment of properties is accounted for as an adjustment to capitalized costs with no loss recognized. No impairment was required in 2004 and 2003.

In addition, the capitalized costs are subject to a “ceiling test,” For purposes of the ceiling test, we remove the discounted present value included in our future development costs on our reserve report for which we have already booked an obligation under SFAS 143. For purposes of our depletion calculation, we include in future development costs the estimated plugging and abandonment costs, net of estimated salvage values, for proved undeveloped wells. For purposes of both of these calculations, we do not include plugging and abandonment costs in our future development costs on developed proportions for which we have booked an obligation under SFAS 143.

Sales of proved and unproved properties are accounted for as adjustments of capitalized costs with no gain or loss recognized, unless such adjustments would significantly alter the relationship between capitalized costs and proved reserves of oil and gas, in which case the gain or loss is recognized in income.

Abandonment of properties is recognized as an expense in the period of abandonment and accounted for as an adjustment of costs.

Asset Retirement Obligation

Pursuant to SFAS No. 143, Accounting for Asset Retirement Obligations. Our asset retirement obligation primarily represents the estimated present value of the amount we will incur to plug, abandon and remediate our producing properties at the end of their productive lives, in accordance with applicable state laws. We determine our asset retirement obligation by calculating the present value of estimated cash flows related to the liability. The retirement obligation is recorded as a liability at its estimated present value as of the asset’s inception, with an offsetting increase to producing properties. Periodic accretion of the discount of the estimated liability is recorded as an expense in the income statement.

In accordance with SFAS 143, “Accounting for Asset Retirement Obligations,” we carry a liability for any legal retirement obligations on our oil and gas properties. The associated asset retirement costs are capitalized as part of the full cost pool.

Our liability is determined using significant assumptions, including current estimates of plugging and abandonment costs, annual inflation of these costs, the productive lives of wells and our risk-adjusted interest rate. Changes in any of these assumptions can result in significant revisions to the estimated asset retirement obligation. For example, as we analyze actual plugging and abandonment information, we may revise our estimates of current costs, the assumed annual inflation of these costs and/or the assumed productive lives of our wells. Revisions to the asset retirement obligation are recorded with an offsetting change to producing properties, resulting in prospective changes to depreciation, depletion and amortization expense and accretion of discount. Because of the subjectivity of assumptions and the relatively long lives of most of our wells, the costs to ultimately retire our wells may vary significantly from prior estimates. During 2004, and 2003 the Company recognized $6,000 and $2,000, respectively of accretion.

Full Cost Method

We use the full cost method of accounting for our oil and gas activities. Under this method, all costs incurred in the acquisition, exploration and development of oil and gas properties are capitalized into the cost centers (the amortization base) that are established on a country-by-country basis. Such amounts include the cost of drilling and equipping productive wells, dry hole costs, lease acquisition costs and delay rentals. Costs associated with production and general corporate activities are expensed in the period incurred. The capitalized costs of our oil and gas properties, plus an estimate of our future development and abandonment costs, are amortized on a unit-of-production method based on our estimate of total proved reserves. Our financial position and results of operations would have been significantly different had we used the successful efforts method of accounting for our oil and gas activities.

Proved Oil and Gas Reserves

Our engineering estimates of proved oil and gas reserves directly impact financial accounting estimates, including depreciation, depletion and amortization expense and the full cost ceiling limitation. Proved oil and gas reserves are the estimated quantities of natural gas and crude oil 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 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 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

The quantities of estimated proved oil and gas reserves are a significant component of our calculation of depletion expense and revisions in such estimates may alter the rate of future expense. Holding all other factors constant, if reserves are revised upward, earnings would increase due to lower depletion expense. Likewise, if reserves are revised downward, earnings would decrease due to higher depletion expense or due to a ceiling test write-down.

Full Cost Ceiling Limitation

Under the full cost method, we are subject to quarterly calculations of a ceiling or limitation on the amount of our oil and gas properties that can be capitalized on our balance sheet. If the net capitalized costs of our oil and gas properties exceed the cost center ceiling, we are subject to a ceiling test write-down to the extent of such excess. If required, it would reduce earnings and impact stockholders’ equity in the period of occurrence and result in lower amortization expense in future periods. The discounted present value of our proved reserves is a major component of the ceiling calculation and represents the component that requires the most subjective judgments. However, the associated prices of oil and natural gas reserves that are included in the discounted present value of the reserves do not require judgment. The ceiling calculation dictates that prices and costs in effect as of the last day of the quarter are held constant. However, we may not be subject to a write-down if prices increase subsequent to the end of a quarter in which a write-down might otherwise be required. If natural gas and oil prices decline, even if for only a short period of time, or if we have downward revisions to our estimated proved reserves, it is possible that write-downs of our oil and gas properties could occur in the future.

Costs Withheld From Amortization

Unevaluated costs are excluded from our amortization base until we have evaluated the properties associated with these costs. The costs associated with unevaluated leasehold acreage and seismic data and wells currently drilling are initially excluded from our amortization base. Leasehold costs are either transferred to our amortization base with the costs of drilling a well on the lease or are assessed quarterly for possible impairment or reduction in value. Leasehold costs are transferred to our amortization base to the extent a reduction in value has occurred

In addition, a portion of incurred (if not previously included in the amortization base) and future development costs associated with qualifying major development projects may be temporarily excluded from amortization. To qualify, a project must require significant costs to ascertain the quantities of proved reserves attributable to the properties under development (e.g., the installation of an offshore production platform from which development wells are to be drilled). Incurred and future costs are allocated between completed and future work. Any temporarily excluded costs are included in the amortization base upon the earlier of when the associated reserves are determined to be proved or impairment is indicated.

Future Development and Abandonment Costs

Future development costs include costs incurred to obtain access to proved reserves such as drilling costs and the installation of production equipment. Future abandonment costs include costs to dismantle and relocate or dispose of our production platforms, gathering systems and related structures and restoration costs of land and seabed. We develop estimates of these costs for each of our properties based upon their geographic location, type of production structure, well depth, currently available procedures and ongoing consultations with construction and engineering consultants. Because these costs typically extend many years into the future, estimating these future costs is difficult and requires management to make judgments that are subject to future revisions based upon numerous factors, including changing technology and the political and regulatory environment. We review our assumptions and estimates of future development and future abandonment costs on an annual basis.

The accounting for future abandonment costs changed on January 1, 2003 with the adoption of SFAS No. 143. This new standard requires that a liability for the discounted fair value of an asset retirement obligation be recorded in the period in which it is incurred and the corresponding cost capitalized by increasing the carrying amount of the related long-lived asset. The liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. If the liability is settled for an amount other than the recorded amount, a gain or loss is recognized. 

Holding all other factors constant, if our estimate of future abandonment and development costs is revised upward, earnings would decrease due to higher DD&A expense. Likewise, if these estimates are revised downward, earnings would increase due to lower DD&A expense.

Results of Operations

(a) Revenues

The Company accomplished the following financial and operating results from 2003 to 2004:

1.     Grew the standardized measure of discounted future net cash flows by over $45,959,000, or 197% primarily through development and acquisition.

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2.     Grew gross revenues by $1,045,000 or 968% primarily through the sale of deep mineral rights.

3.     Grew MCF sold by 24,331 MCF or 101% primarily through development of existing wells.

4.     Reduced general and administrative expenses by $529,000 or 23% primarily through tighter management controls.

Operating revenues increased by $1,045,000 from the prior year of $108,000, generating 2004 revenues of $1,153,000. This increase was the result of, consideration received for deep mineral rights on leased land in zones that the Company did not intend to explore as well as, increased production in 2004 of approximately 48,360 MCF from 24,029 in 2003 representing an increase of 24,331 MCF of 101%.

The Company maintained certain participation rights on the same lands in which the sale of deep mineral rights were sold, and management believes that these lands will generate revenues in 2005.

(b) Costs and Expenses

General and administrative costs were reduced by 23% to $1,727,000 for 2004 from $2,256,000 for 2003. These reductions were primarily the result of, tighter management controls, that generated reduced professional fees, travel, and administrative expenses.

(c) Depreciation and Depletion

Depreciation and depletion increased from $109,000 in 2003 to $160,000 in 2004. This increase is predominately due to increased production, generating increased depletion costs. Depletion rates were $1.34 per MCF for 2003, and $0.00038 per mcf for 2004.  

(d) Net Loss

Although the Company still has a loss of $1,300,000 for the year ended December 31, 2004, this reflects an improvement of 45% from the 2003 loss of $2,346,000. The change is due primarily from management’s decisions with respect to the choice of wells to be developed, sales of deep mineral rights that the Company was not intending to develop, and tighter costs controls and to a much lesser extent an increase in sale prices. The Company continues to evaluate all possible avenues to improve results, this includes, but is not limited to, continued well expansion, sales of certain mineral rights, continued well management services, and tighter management controls.

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Liquidity and Capital Resources

The Company must acquire capital in order to undertake the continued expansion of its current well base. To that end, the Company is currently carrying on conversations with potential investors. The Company plans to continue to raise capital through the private placement of its common stock, debt, and, possibly through the public sale of its securities. Management intends to use the proceeds from the issuance of debt or any equity sales to further develop oil and gas reserves in the United States and in Israel. Ness believes that these actions will enable Ness to carry out its business plan.

As of December 31, 2004, the Company’s current liabilities exceed its current assets by $2,002,000 and the Company has experienced net losses of $1,300,000 and $2,346,000 for the years ended December 31, 2004 and 2003, respectively. Although the Company has an accumulated deficit of $16,816,000 at December 31, 2004, total stockholders’ equity is $17,376,000. The Company, through one of its subsidiaries, has entered into an agreement to complete three wells in South Texas for $2,550,000. Additionally, the Company is currently in negotiations with certain lending institutions to secure additional funding for the expansion of wells. Also, $1,322,000 of current liabilities at December 31, 2004 is with related parties, who have a vested interest in the continuation of the Company. Current operational cash flow continues to grow as the wells improve production, and due to increases in the price per MCF received by the Company. To a lesser extent, management is continuing to improve on efficiencies to be gained in the general and administrative expense items. In conjunction with these efforts, management believes that the Company will be able to reverse the negative trends mentioned above.

Income Tax Matters

Ness has loss carryforwards totaling approximately $11,717,000 as of December 31, 2004. At the time of the filing of this form 10-KSB the Company has not yet filed its 2004 Federal Income Tax Return to determine the amount of the loss carryforward as of December 31, 2004. There can be no assurance that the Company will be profitable in the future and the Company may, or may not be able to utilize any of this carryforward. Accordingly, the Company has recorded a valuation allowance against the asset for the carryforward. The net operating loss carryforwards expire as follows:

Year Expiring	(000 omitted)
2011	$           1
2012	2
2018	104
2019	1,991
2020	2,532
2021	1,390
2022	2,071
2023	2,331
2004	1,295
Total	$ 11,717

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ITEM 7. FINANCIAL STATEMENTS.

Consolidated Statements of Operations, Changes in Stockholders' Equity, and Cash Flows for the years ended December 31, 2004 and 2003 are presented in a separate section of this report following Item 14. The Consolidated Balance Sheet as of December 31, 2004 is also presented in a separate section of this report following Item 14.

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

The Company appointed Whitley Penn as its new independent registered public accounting firm in January 2005. The change was reported on Form 8-K and 8-KA in January 2005. There were no disagreements with the predecessor auditors.

ITEM 8a CONTROLS AND PROCEDURES

We performed an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rules 13a-15 and 15d-15 as of the date of the original filing of this report, March 30, 2005. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information relating to the Company required to be included in our periodic filings with the SEC.

Since March 31, 2005, there have been no changes in our internal controls over financial reporting that occurred subsequent to the date of their last evaluation that materially affected, or are reasonably likely to materially affect the Company’s internal control over financial reporting.

ITEM 8b OTHER INFORMATION.

In February 2005, a subsidiary of the Company, entered into an agreement with a company under which the Company sold a working interest to re-enter three of the Company’s leased wells. Under the terms of the agreement, the participant has to pay an aggregate sum of, $2,550,000 in exchange for 75% of the net revenues from the sales of the oil and gas produced by these wells. The agreement allows for the purchase of the payment to be completed no later than August 2005. If not completed by this date, the agreement terminates. As of the date of fling this Form 10-KSB, the Company has received an aggregate of $1,252,500 from the investors.

Employment Agreements: The Company entered into employment agreements with Sha Stephens, President and CEO and Judson F. Hoover, CFO, on, February 28, 2005. Each agreement is for a term of one year, and is renewable on the calendar year. Mr. Stephen’s aggregate annual salary is, $175,000 and Mr. Hoover’s is, $105,000. In addition, each receives annually shares of common stock of the Company currently valued at, $24,000.

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The information called for by Items 9, 10, 11, and 12 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 year ended December 31, 2004 and such information is incorporated herein by reference.

The Company adopted a new Code of Ethics applicable to its senior executive officers and senior financial officers, including the principal executive officer, principal financial officer and principal accounting officer. A copy of such Code of Ethics is filed as Exhibit 14 to this Annual Report on Form 10-KSB.

You can find our Code of Ethics for the Chief Executive Officer and Senior Financial Officers on our web site at http://www.nessenergy.com, as well as our Code of Business Conduct for all employees  

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.

ITEM 10. EXECUTIVE COMPENSATION.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

ITEM 13. EXHIBITS.

Exhibits.

EXHIBIT INDEX

     Number              Description

3.1  Articles of Incorporation, dated January 30, 1979, filed as exhibit 3.1 to Form SB-2, filed July 18, 2000 and incorporated herein by reference.

3.2  Articles of Amendment of the Articles of Incorporation, dated April 22, 1981, filed as exhibit 3.1 to Form SB-2, filed July 18, 2000 and incorporated herein by reference.

3.3  Articles of Amendment of the Articles of Incorporation, dated June 26, 1998, filed as exhibit 3.1 to Form SB-2, filed July 18, 2000 and incorporated herein by reference.

3.4   Articles of Amendment of the Articles of Incorporation, dated June 22, 1999, filed as exhibit 3.1 to Form SB-2, filed July 18, 2000 and incorporated herein by reference.

3.5   Bylaws, dated May 15, 2000, filed as exhibit 3.5 to the registrant’s Form 10-KSB for the year ended December 31, 2000 and  incorporated herein by reference.

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4.1   Consulting Agreement between Ness and Curtis A. Swanson, dated March 21, 2000 incorporated by reference to Exhibit 4.1 of the Form S-8 filed on March 22, 2000).

4.2    Non-Employee Directors and Consultants Retainer Stock Plan, dated August 15, 2001, filed as exhibit 4 of Form S-8, filed on August 16, 2001 and incorporated herein by reference.

4.3    Investment Agreement between Ness and Dutchess Private Equities Fund, L.P., dated April 23 2002, files as exhibit 4.3 to Form SB-2, filed on July 12, 2002, and incorporated herein by reference.

10.1  Amendment of Promissory Note to Hayseed Stephens Oil, Inc., dated March 21, 2001, filed as exhibit 10.8 to Form 10-KSB/A filed on November 13, 2001 and incorporated herein by reference.

10.2  Amendment of Promissory Note to Hayseed Stephens, dated May 8, 2001, filed as exhibit 10.9 to Form 10-KSB/A filed on November 13, 2001 and incorporated herein by reference.

10.3  Amendment of Promissory Note to Hayseed Stephens Oil, Inc., dated May 8, 2001, filed as exhibit 10.10 to Form 10-KSB/A filed on November 13, 2001 and incorporated herein by reference.

10.4  Oil and Gas Lease dates May 11, 2001 and amended on January 10, 2002 with AMD Property Company Ltd., filed as exhibit 10.1 to Form 8-K filed on, February 11, 2002, and incorporated herein by reference.

10.5  Oil and Gas Lease dated May 11, 2001 and amended on January 10, 2002 with Doss Property Company, Ltd., filed as exhibit 10.2 to Form 8-K filed on February 11, 2002 and incorporated herein by reference.

10.6  Oil and Gas Lease dated May 27, 2001 with Roy William Baker, Jr. et al., filed as exhibit 10.1 to Form 8-K, filed on February 11, 2002, and incorporated herein by reference.

10.7  Amendment to Oil and Gas Lease dated May 27, 2001 with Roy William Baker, Jr. et al., filed as exhibit 10.2 to Form 8-K, filed on February 11, 2002, and incorporated herein by reference.

10.8  Assignment of Oil and Gas Lease dated May 27, 2001 to Fairway Links Energy, Inc., filed as exhibit 10.3 to Form 8-K, filed on February 11, 2002, and incorporated herein by reference.

10.9  Amendment of Promissory Noted to Hayseed Stephens dated December 17, 2001, filed as exhibit 10.1 to Form 10-KSB, filed  on April 1, 2002 and incorporated herein by reference.

10.10 Amendment of Promissory Note to Hayseed Stephens Oil, Inc., dated December 17, 2001, filed as exhibit 10.2 to Form 10-KSB, filed on April 1, 2002 and incorporated herein by reference.

10.11 Amendment of Promissory Note to Hayseed Stephens dated March 28, 2002, filed as exhibit 10.2 to Form 10-QSB, filed on May 20, 2002, and incorporated herein by reference.

10.12 Amendment of Promissory Note to Hayseed Stephens Oil, Inc., dated March 28, 2002, filed as exhibit 10.19 to Form 10-QSB, filed on May 20, 2002, and incorporated herein by reference.

23

10.13 Amendment of Promissory Note to Hayseed Stephens dated September 27, 2002, filed as exhibit 10.22 to Form 10-QSB, filed on November 14, 2002, and incorporated herein by reference.

10.14 Amendment of Promissory Note to Hayseed Stephens Oil, Inc. dated September 27, 2002, filed as exhibit 10.23 to Form 10-QSB, filed on November 14, 2002, and incorporated herein by reference.

10.15 Amendment of Promissory Note to Hayseed Stephens dated December 30, 2002, filed as exhibit 10.24 to the registrant’s 10-KSB for the year ended December 31, 2002 and incorporated herein by reference.

10.16 Amendment of Promissory Note to Hayseed Stephens Oil, Inc. dated December 30, 2002, filed as exhibit 10.25 to the registrant’s 10-KSB for the year ended December 31, 2002 and incorporated herein by reference.

10.17 Agreement between the Company and Sha Stephens, President, in respect of the acquisition of certain oil and gas mineral rights dated March 31, 2003, effective December 31, 2003.

10.18 Employment Agreement between the Company and Sha Stephens, president and CEO, dated February 28, 2005 *

10.19 Employment Agreement between the Company and Judson F. Hoover, CFO dated February 28, 2005 *

10.20 Agreement between the Company and a certain company, in respect of the acquisition by the investors of certain oil and gas rights, dated February 28, 2005 +

14 Code of Ethics *

21.1   List of Subsidiaries *

23.3   Robert Glenn, Petroleum Engineer, Lindon Exploration Company, The Woodlands, Texas, incorporated by reference to Ness’s Form 10-KSB    and Amendment, on file with the SEC, for the year ended December 31, 2001.

23.4  Oil and Gas Property Evaluation as of October 1, 2003 by Richard Yeager, Petroleum Engineer, Yeager Engineering Company, Fort Worth, Texas  and John C. Weaver, P.E. Arlington, Texas, incorporated by reference to Ness's Form 10KSB for the year ended December 31, 2003

23.5  Proved Oil and Gas Reserve Report by Richard Yeager, Yeager Engineering of Fort Worth, Texas and John C. Weaver, P.E. Arlington, Texas,  incorporated by reference to Ness’s Form 10-KSB for the year ended December 31, 2003 on file with the SEC.

23.6  Oil and Gas Property Evaluation as of December 31, 2004 by Richard Yeager, Petroleum Engineer, Yeager Engineering Company, Fort Worth   Texas and John C Weaver, P.E. Arlington, Texas, incorporated by reference to Ness’s Form 10KSB for the year ended December 31, 2004.+

31.1  Certification of Chief Executive Officer, pursuant to Section 302 of the Sarbanes -Oxley Act of 2002. *

24

31.2   Certification of Chief Financial Officer, pursuant to Section 302 of the Sarbanes —Oxley Act of 2002. *

32.1   Certification of Chief Executive Officer, pursuant to 18USC and 1350, section 906 of the Sarbanes - Oxley Act of 2002 *

32.2   Certification of Chief Financial Officer, pursuant to 18USC and 1350, section 906 of the Sarbanes - Oxley Act of 2002 *

* Filed Herewith

+ All schedules and similar attachments have been omitted. The Company agrees to furnish supplementally a copy of the omitted schedules and similar attachments to the Securities and Exchange Commission upon request.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Audit Fees

The aggregate fees, for the years ended December 31, 2004 and 2003, respectively, for professional services of our principal accountant for the audits of our financial statements and reviews of our quarterly reports on Forms 10-QSB, are: $63,000 and $26,000 respectively. The Company has replaced our former accountants with Whitley Penn. No fees were paid to Whitley Penn during 2004.

Audit-Related Fees

None.

Tax Fees

None.

All Other Fees

None.

Audit Committee

None.

25

Hours By Others

None.

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

Ness Energy International, Inc.

June 30, 2006	By: /s/ Sha Stephens
	Sha Stephens
	President and Chief Executive Officer
June 30, 2006	By: /s/ Judson F. Hoover
	Judson F. Hoover,
	Chief Financial Officer

26

Ness Energy International, Inc. and Subsidiaries

Index to Consolidated Financial Statements

December 31, 2004 and 2003

	Page
Report of Independent Registered Public Accounting Firm	F-1
Report of Independent Registered Public Accounting Firm	F-1
Consolidated Financial Statements
Consolidated Balance Sheet	F-2
Consolidated Statements of Operations	F-3
Consolidated Statements of Changes in Stockholders' Equity	F-4
Consolidated Statements of Cash Flows	F-5
Notes to Consolidated Financial Statements	F-6 -20
Supplemental Oil and Gas Data (Unaudited)	F-20

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders

Ness Energy International, Inc. and Subsidiaries

We have audited the accompanying consolidated balance sheet of Ness Energy International, Inc. and subsidiaries as of December 31, 2004 and the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

Financial Statements Index

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Ness Energy International, Inc. and subsidiaries at December 31, 2004 and the consolidated results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

BY: /S/ Whitley Penn

——————————————

Whitley Penn

Fort Worth, Texas

February 24, 2005

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and StockholdersNess

Energy International, Inc. and Subsidiaries

We have audited the accompanying consolidated statements of operations, changes in stockholders’ equity, and cash flows of Ness Energy International Inc. and subsidiaries (a development stage company) for the year ended December 31, 2003. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

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

In our opinion, the financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of Ness Energy International, Inc. and subsidiaries (a development stage company) for the year ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America.

Rosenberg Rich Baker Berman & Company

BY: /S/ Rosenberg Rich Baker Berman & Company

——————————————

Rosenberg Rich Baker Berman & Company

Bridgewater, New Jersey March 6, 2004

F-1

Financial Statements Index

Ness Energy International, Inc. and Subsidiaries

Consolidated Balance Sheet

(Rounded to thousands, except share amounts)

December 31, 2004

Assets
Current Assets:
Cash	$                                                                          103
Accounts receivable - trade	94
Accounts receivable - related parties	92
Investments - available for sale	10
Other current assets	13
Total Current Assets	312
Property and Equipment:
Property and equipment, net	1,838
Oil and gas properties - full cost method:
Oil and gas properties, unproved	1,134
Oil and gas properties, proved	13,038
Total Oil and Gas Properties	14,172
Less accumulated depreciation and depletion	(139)
Net oil and gas properties	14,033
Total Property and Equipment	15,871
Goodwill	3,760
Total Assets	$                                                                     19,943
Liabilities and Stockholders' Equity
Accounts payable and accrued expenses	$                                                                          948
Accounts payable - related parties	1,322
Current portion - long-term debt	44
Total Current Liabilities	2,314
Asset retirement obligations, non-current	88
Long-term debt	165
Contingencies	--
Stockholders' Equity
Preferred stock, $0.10 par value 10,000,000 shares authorized, none issued	--
Common stock, no par value, 200,000,000 shares authorized,
150,420,374 shares issued and outstanding	34,182
Accumulated deficit	(16,816)
Accumulated other comprehensive income	10
Total Stockholders' Equity	17,376
Total Liabilities and Stockholders' Equity	$                                                                     19,943

See notes to consolidated financial statements.

F-2

Financial Statements Index

Ness Energy International, Inc. and Subsidiaries

Consolidated Statements of Operations

(Rounded to thousands, except share amounts)

Years Ended December 31, 2004 and 2003

	2004		2003
Revenues
Oil and gas revenues		$                                                                  1,153		$                                                                     108
Expenses
Lease operating expenses		513		31
Production taxes		25		8
Compression expenses		7		4
Depletion and depreciation		160		109
General and administrative expenses		1,727		2,256
Total Operating Expenses		2,432		2,408
Operating loss		(1,279)		(2,300)
Other Income (Expenses)
Interest expense		(2)		(7)
Interest expense - related party		(32)		(45)
Other income		13		6
Loss from operations before tax		(1,300)		(2,346)
Income tax expense		--		--
Net loss before other comprehensive loss		(1,300)		(2,346)
Unrealized losses on certain investments in equity securities, net of tax		(52)		22
Comprehensive Net Loss		$                                                                (1,352)		$                                                                (2,324)
Net Loss Per Weighted Average Share:
Net Loss per share - basic and diluted		$                                                                  (0.01)		$                                                                  (0.03)
Weighted Average Shares Outstanding		134,431,683		87,030,525

See notes to consolidated financial statements.

F-3

Financial Statements Index

Ness Energy International, Inc. and Subsidiaries

Consolidated Statements of Changes in Stockholders’ Equity

(Rounded to thousands, except share amounts)

Years Ended December 31, 2004 and 2003

	Common Stock				Paid-In		Accumulated			Accumulated Other Comprehensive			Contracts Requiring Net-Share		Deferred
	Shares		Amount		Capital		Deficit			Income			Settlement		Consulting			Total
Balance January 1, 2003		61,771,108	$	10,936		$ --		$	(13,170)		$	40		$ 99		$	--	$	(2,068)
Issuance of Common stock for:
Future Services		2,948,000		1,150		--			--			--		(51)			(1,099)		--
Oil and gas property		153,219		47		--			--			--		(48)			--		(1)
Property and equipment		6,061		4		--			--			--					--		4
Services		1,460,525		529		--			--			--		--			--		529
Employee benefits		1,370,000		472		--			--			--		--			--		472
Cash		6,155,856		1,587		--			--			--		--			--		1,587
Shares issued in acquisition of subsidiaries		14,301,688		4,004		--			--			--		--			--		4,004
Shares issued to extinguish related party debt		11,312,523		2,772		--			--			--		--			--		2,772
Recognition of services performed for common stock		--		--		--			--			--		--			271		271
Net change in unrealized appreciation of securities available for sale, net of tax effect of $0		--		--		--			--			22		--			--		22
Issuance of stock purchase warrants		--		--		32			--			--		--			--		32
Net loss		--		--		--			(2,346)			--		--			--		(2,346)
Balance December 31, 2003		99,478,980		21,528		32			(15,516)			62		--			(828)		5,278
Issuance of common stock for:
Future services		8,943,873		3,073		--			--			--		--			(2,520)		553
Oil and gas property		2,726,733		651		--			--			--		--			--		651
Services		3,061,243		636		--			--			--		--			--		636
Cash		542,922		144		--			--			--		--			--		144
Shares issued in acquisition of subsidiaries		1,900,000		765		--			--			--		--			--		765
Shares issued to extinguish related party debt		33,766,533		11,542		--			--			--		--			--		11,542
Retirement of stock issued for deferred consulting		--		(4,157)		--			--			--		--			3,348		(809)
Retirement of stock purchase warrants		--		--		(32)			--			--		--			--		(32)
Net change in unrealized appreciation on securities available for sale, net of tax effect of $0		--		--		--			--			(52)		--			--		(52)
Net loss		--		--		--			(1,300)			--		--			--		(1,300)
Balance December 31, 2004		150,420,374	$	34,182		--		$	(16,816)		$	10		--			--	$	17,376

See notes to consolidated financial statements.

F-4

Financial Statements Index

Ness Energy International, Inc. and Subsidiaries

Consolidated Statements of Cash Flows (Rounded to thousands)

Years Ended December 31, 2004 and 2003

	2004		2003
Cash Flows From Operating Activities
Net Loss	$	(1,300)	$	(2,346)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and depletion		160		109
Accretion of interest on asset retirement obligations		6		2
Recognition of services performed for stock		--		271
Stock issued for:
Services		636		529
Employee benefits		--		472
Retirement of stock issued for deferred consulting, net		(809)		--
Change in operating assets and liabilities: Accounts receivable - trade		(74)		(13)
Accounts receivable - related parties		--		(208)
Other current assets		59		(69)
Accounts payable and accrued expenses		746		184
Accounts payable - related party, net of settlement of acquisition, see note 2		1,168		131
Net Cash Provided By (Used In) Operating Activities		592		(938)
Cash Flows From Investing Activities
Capital Expenditures		(418)		(601)
Repayments of related party notes receivable		--		(4)
Net Cash Used in Investing Activities		(418)		(605)
Cash Flows From Financing Activities
Proceeds from borrowings on debt - related party		--		189
Proceeds from borrowings on long-term debt		--		250
Repayments on long-term debt		(571)		(200)
Proceeds received from sales of common stock		144		1,587
Net Cash Provided By (Used In) Financing Activities		(427)		1,826
Net Change in Cash		(253)		283
Cash at Beginning of Year		356		73
Cash at End of Year	$	103	$	356

See notes to consolidated financial statements.

F-5

Financial Statements Index

Ness Energy International, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2004 and 2003

Note 1. Nature of Business, Organization and Basis of Presentation

(a) Organization

Ness Energy International, Inc. and subsidiaries (“Ness” or the “Company”), was originally incorporated under the laws of the State of Washington on March 1, 1979 as Kit Karson Corporation. The Company’s principal business is the acquisition, either alone or with others, of interests in proved or unproved oil and gas leases, and exploratory and development drilling. This includes but, is not limited to exploitation, development, and well service management. The Company presently owns oil and gas interests in the state of Texas as well as internationally, directly or indirectly, in the nation of Israel. The Corporate offices of the Company are all located in Willow Park, Texas.

In April 2003, the Company acquired substantially all the net assets of two affiliated companies, Hesed Energy International, Inc, (“Hesed”) and Ness of Texas, Inc. ("Ness of TX") through the issuance of common stock (see Note 3 —Business Combinations). Consequently, these entities became wholly-owned subsidiaries of the Company.

In October 2003, the Company acquired a number of oil and gas leases from an officer of the Company (see Notes 6 and 9). In addition, the Company formed a new wholly-owned subsidiary, Ness Operating of Texas, Inc. (“Ness Operating”), which now collects net oil and gas revenues from a majority of the Company’s properties and remits the funds to the Company.

(b) Management's Plans

As of December 31, 2004, the Company’s current liabilities exceed its current assets by $2,002,000 and the Company has experienced net losses of $1,300,000 and $2,346,000 for the years ended December 31, 2004 and 2003, respectively. Although the Company has an accumulated deficit of $16,816,000 at December 31, 2004, total stockholders’ equity is $17,376,000. The Company, through one of its subsidiaries, has entered into an agreement to complete three wells in South Texas for $2,550,000. Additionally, the Company is currently in negotiations with certain lending institutions to secure additional funding for the expansion of wells. Also, $1,322,000 of current liabilities at December 31, 2004 is with related parties, who have a vested interest in the continuation of the Company. Current operational cash flow continues to grow as the wells improve production, and due to increases in the price per MCF received by the Company. During 2002, the Company obtained access to an equity line of credit. Under this agreement, the other party agrees to purchase a variable number of shares up to the number that will provide a maximum of $20,000,000 in funds, effective until April 23, 2005. The Company has the discretion to deliver “put notices” to the other party, which serve as the obligation to purchase shares from the Company. The put notices are calculated as 200% of the average daily trading volume for 20 days prior to the put notice multiplied by the average of the three closing bid prices prior (but not less that $15,000). There must be a minimum of 8 days between closing and additional put notices. The other party, upon receipt of the put notice(s), must purchase shares equal to 15% to 20% (at the discretion of the Company) of any trading volume during “pricing period” (five days after put notice given) multiplied by 96% of the average of the three lowest closing bid prices or the total put amount. Management intends to use the proceeds from the above sources to further develop oil and gas reserves in the United States and in selected foreign countries. To a lesser extent, management is continuing to improve on efficiencies to be gained in the various general and administrative expense items. In conjunction with these efforts, along with the increased production from oil and gas reserves acquired in 2003 and 2004, management believes that the Company will be able to reverse the negative trends mentioned above. Based upon these conditions any substantial doubt about the Company’s ability to continue as a going concern has been alleviated for a reasonable period of time.

Note 2. Summary of Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the accounts of Ness and its wholly-owned and majority-owned subsidiaries since the date of acquisition. All significant intercompany balances and transactions have been eliminated in consolidation.

F-6

Financial Statements Index

Note 2. Summary of Significant Accounting Policies (Continued)

Investments in Securities

The Company has adopted Statement of Financial Accounting Standards (“SFAS”) 115, Accounting for Certain Investments in Debt and Equity Securities, issued by the Financial Accounting Standards Board. In accordance with SFAS 115, the Company’s investments in securities are classified as follows:

Trading Securities — Investments in debt and equity securities held principally for resale in the near term are classified as trading securities and recorded at their fair values. Unrealized gains and losses on trading securities are included in other income.

Securities to be Held to Maturity — Debt securities for which the Company has the positive intent and ability to hold to maturity are reported at cost, adjusted for amortization of premiums and accretion of discounts which are recognized in interest income using the interest method over the period to maturity.

Securities Available for Sale — Securities available for sale consist of debt and equity securities not classified as trading securities nor as securities to be held to maturity. All of the Company’s investments in securities are classified as available for sale. Unrealized holding gains and losses on securities available for sale are reported as a net amount in accumulated other comprehensive income within stockholders’ equity until realized. Gains and losses on the sale of securities available for sale are determined using the specific identification method.

Oil and Gas Properties

The Company uses the full cost method of accounting for its oil and gas producing activities, which are located in Texas. Accordingly, all costs associated with the acquisition, exploration and development of oil and gas reserves, including directly related overhead costs, are capitalized. Under the rules of the Securities and Exchange Commission ("SEC") for the full cost method of accounting, the net carrying value of oil and natural gas properties, reduced by the asset retirement obligation, is limited to the sum of the present value (10% discount rate) of the estimated future net cash flows from proved reserves, based on the current prices and costs as adjusted for the Company's cash flow hedge positions, plus the lower of cost or estimated fair market value of unproved properties adjusted for related income tax effects. Depletion rates were $1.34 per MCF for 2003, and $0.00038 per mcf for 2004.  

All capitalized costs of oil and gas properties, including the estimated future costs to develop proved reserves and estimated dismantlement and abandonment costs, net of salvage values, are amortized on the unit-of-production method using estimates of proved reserves. Costs directly associated with the acquisition and evaluation of unproved properties are excluded from the amortization base until the related properties are evaluated. Such unproved properties are assessed for impairment quarterly and any provision for impairment is transferred to the full-cost amortization base. Sales of oil and gas properties, including consideration received from sales or transfers of properties in connection with partnerships, joint venture operations or drilling arrangements, are credited to the full-cost pool unless the sale would have a significant effect on the amortization rate. Abandonment of properties is accounted for as an adjustment to capitalized costs with no loss recognized. No impairment was required in 2004 and 2003.

F-7

Financial Statements Index

In addition, the capitalized costs are subject to a “ceiling test,” For purposes of the ceiling test, we remove the discounted present value included in our future development costs on our reserve report for which we have already booked an obligation under SFAS 143. For purposes of our depletion calculation, we include in future development costs the estimated plugging and abandonment costs, net of estimated salvage values, for proved undeveloped wells. For purposes of both of these calculations, we do not include plugging and abandonment costs in our future development costs on developed proportions for which we have booked an obligation under SFAS 143. As capitalized costs do not exceed the estimated present value limitation, the accompanying consolidated financial statements do not include a provision for such impairment of oil and gas property costs for the years ended December 31, 2004 and 2003.

In accordance with SFAS 143, Accounting for Asset Retirement Obligations, the Company recognizes the fair value of the liability for an asset retirement obligation, which is recorded in the period in which it is incurred and the corresponding cost capitalized by increasing the carrying amount of the related long-lived asset. The liability is accreted to its present value each period, and the capitalized cost is depreciated or depleted over the useful lives of the respective assets. If the liability is settled for an amount other than the recorded amount, a gain or loss would be recognized at such time.

In accordance with SFAS 143, “Accounting for Asset Retirement Obligations,” we carry a liability for any legal retirement obligations on our oil and gas properties. The associated asset retirement costs are capitalized as part of the full cost pool.

Sales of proved and unproved properties are accounted for as adjustments of capitalized costs with no gain or loss recognized, unless such adjustments would significantly alter the relationship between capitalized costs and proved reserves of oil and gas, in which case the gain or loss is recognized in income.

Abandonment of properties are recognized as an expense in the period of abandonment and accounted for as adjustments of capitalized costs.

Goodwill

Goodwill represents the excess of the purchase price of assets acquired over the fair market value of such assets at the date of acquisition. The Company tests goodwill for impairment on an annual basis, relying on a number of factors including operating results, business plans and future cash flows. If the carrying value of the reporting unit exceeds the fair value of that reporting unit, an impairment loss is recognized in an amount equal to the excess. For the years ended December 31, 2004 and 2003, the Company did not recognize any impairment loss related to goodwill (see Note 3).

Long-lived Assets

Long-lived assets to be held and used or disposed of other than by sale are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. When required, impairment losses on assets to be held and used or disposed of other than by sale are recognized based on the fair value of the asset. Long-lived assets to be disposed of by sale are reported at the lower of their carrying amount or fair value less cost to sell.

Property and Equipment

Property and equipment are stated at cost. Depreciation is calculated using the straight-line basis over the estimated useful lives of the assets as follows:

Buildings	30 years
Transportation equipment and vehicles	5 years
Furniture, fixtures and equipment	3-5 years

Accounts Receivable

The Company recognizes receivables for oil and gas production to be received from the operator of its properties. As such, the Company is subject to the risk of loss from uncollectible accounts due to economic conditions and other factors.

The Company has not provided an allowance for doubtful accounts. The majority of the Company’s receivables are from related parties and all receivables considered doubtful have been charged to current operations. It is management’s opinion that no additional material amounts are doubtful of collection.

Revenue Recognition

Oil and gas production sales are recorded upon receipt of remittance advices from purchasers of the production and based on estimated production sales and related production taxes at the financial statement date. Such estimates take into consideration production volumes, revenue interests, sales price histories and appropriate reductions. At the time sales are recognized the Company typically has a contract to deliver a specified product, at a specified location, at a specified price. Where the Company deals with large well capitalized buyers, there is a strong evidence of collection.

F-8

Financial Statements Index

Note 2. Summary of Significant Accounting Policies (Continued)

Income Taxes

Deferred taxes are recognized for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income.

Cash

The Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash.

Contracts Settled in the Company’s Common Stock

For financial instruments entered into after May 31, 2003, the Company has classified all instruments applicable under the scope of SFAS 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, as liabilities. The financial instruments issued by the Company after May 31, 2003 fall under the scope of the above statement due to the underlying contracts are financial instruments other than outstanding shares that embody a conditional obligation that the Company must settle by issuing its own equity shares, and, at inception, the monetary value of the obligation is based solely on a fixed monetary amount known at inception. At December 31, 2003, $11,637,000 was recognized in current liabilities pursuant to such financial instruments. The contract was completed with the issuance of shares of the Company’s common stock during 2004, net of settlement of a receivable from a related party of $95,000. The fair value of the shares issued was $11,542,000. The Company had no such liabilities at December 31, 2004. For financial instruments entered into before May 31, 2003, the Company followed the guidance under EITF Abstract No. 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock, whereby contracts that required net-share settlement (in the Company’s specific cases, in unregistered shares), were classified as equity.

Basic Loss Per Common Share

The loss per common share has been computed by dividing the net loss by the weighted average number of shares of common stock outstanding throughout the year. The effect of any conversion of convertible debt, warrants or common stock subscriptions has not been included as doing so would be anti-dilutive.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

Depletion was calculated based on engineers’ estimates of reserves and the proved and unproved properties were evaluated based on their future potential. It is reasonably possible that these estimates may change materially in the near term.

Financial Instruments

Financial instruments consist principally of accounts receivable — trade, accounts receivable — related parties, investments, deposits, accounts payable and accrued expenses, and accounts payable — related parties. Recorded values approximate fair values due to the short maturities of these instruments.

Concentrations of Credit Risk

The Company regularly maintains its cash in bank deposit accounts, which, at times, may exceed federally insured limits provided by the U.S. Federal Deposit Insurance Corporation. As of December 31, 2004 and 2003, the Company had no uninsured deposits. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk related to cash balances.

F-9

Financial Statements Index

Securities Issued for Property and Services

The Company accounts for issuances of its shares of common stock for services under the fair value method. For shares issued for services, the fair market value of the Company’s common stock on the date of stock issuance is used. The Company has adopted Statement of Financial Accounting Standard No. 123, Accounting for Stock-Based Compensation. The statement  requires stock-based compensation transactions to be accounted for based on the fair value of the services rendered, property received, or the fair value of the equity instruments issued, whichever is more reliably measurable. The fair value method generally recognizes expense to the extent of the fair market value for the shares exchanged, after taking into account various factors , such as but not limited to, the volatility, transferability, and market conditions, that existed at the grant date. The Company does not currently differentiate between employee and non-employee recipients of these stock transactions. Accordingly, the adoption of SFAS 123(R)'s fair value method may or may not have a significant impact on the consolidated results of operations, although it will have no impact on the Company’s overall financial position. The impact of adopting SFAS 123(R) in future periods will depend on levels of share-based payments granted in the future. This requirement is expected to reduce net operating cash flows and increase net financing cash flows in periods after adoption.

Reclassification

Certain reclassifications have been made to the 2003 consolidated financial statements to conform with the 2004 consolidated financial statement presentation. Such reclassifications had no effect on income.

New Accounting Pronouncements Standards Implemented

In June 2003, the FASB approved SFAS 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. SFAS 150 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 May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. SFAS 150 did not have a significant effect on the Company’s financial position.

In December 2003, the FASB issued a revised Interpretation 46, Consolidation of Variable Interest Entities. The interpretation clarifies the application of Accounting Research Bulletin 51, Consolidated Financial Statements, to certain types of entities. The Company does not expect the adoption of this interpretation to have any impact on its financial statements.

On September 28, 2004, the SEC released Staff Accounting Bulletin ("SAB") 106 regarding the application of SFAS 143, "Accounting for Asset Retirement Obligations ("AROs")," by oil and gas producing companies following the full cost accounting method. Pursuant to SAB 106, oil and gas producing companies that have adopted SFAS 143 should exclude the future cash outflows associated with settling AROs (ARO liabilities) from the computation of the present value of estimated future net revenues for the purposes of the full cost ceiling calculation. In addition, estimated dismantlement and abandonment costs, net of estimated salvage values, that have been capitalized (ARO assets) should be included in the amortization base for computing depreciation, depletion and amortization expense. Disclosures are required to include discussion of how a company's ceiling test and depreciation, depletion and amortization calculations are impacted by the adoption of SFAS 143. SAB 106 is effective prospectively as of the beginning of the first fiscal quarter beginning after October 4, 2004. Since our adoption of SFAS 143 on January 1, 2003, we have calculated the ceiling test and our depreciation, depletion and amortization expense in accordance with the interpretations set forth in SAB 106; therefore, the adoption of SAB 106 had no effect on our financial statements.

On December 16, 2004, the FASB issued SFAS 123 (revised 2004), Share-Based Payment(“SFAS 123(R)”), which is a revision of SFAS 123, Accounting for Stock-Based Compensation. SFAS 123(R) supersedes Accounting Principles Board (“APB”) Opinion 25, Accounting for Stock Issued to Employees, and amends SFAS 95, Statement of Cash Flows. Generally, the approach in SFAS 123(R) is similar to the approach described in SFAS No. 123. However, SFAS 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro-forma disclosure is no longer an alternative.

SFAS 123(R) must be adopted by the Company no later than January 1, 2006. SFAS 123(R) permits public companies to adopt its requirements using one of two methods:

1) A “modified prospective” method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS 123(R) for all share-based payments granted after the effective date and (b) based on the requirements of SFAS 123 for all awards granted to employees prior to the effective date of SFAS 123(R) that remain unvested on the effective date.

2) A “modified retrospective” method which includes the requirements of the modified prospective method described above, but also permits entities to restate based on the amounts previously recognized under SFAS 123 for purposes of pro-forma disclosures either (a) all prior periods presented or (b) prior interim periods of the year of adoption.

The Company expects to adopt SFAS 123(R) on January 1, 2006 , and is currently evaluating the adoption alternatives.

As permitted by SFAS 123, the Company currently accounts for share-based payments to employees, vendors, or outside consultants/contractors, using APB Opinion No.25's fair value method and, as such, generally recognizes expense to the extent of the fair market value of the shares exchanged, after taking into account various factors, such as but not limited to, number of shares, market, and other stock restrictions. Accordingly, the adoption of SFAS 123(R)'s fair value method may or may not have a significant impact on the consolidated results of operations, although it will have no impact on the Company’s overall consolidated financial position. The impact of adopting SFAS 123(R) in future periods will depend on levels of share-based payments granted in the future. This requirement is expected to reduce net operating cash flows and increase net financing cash flows in periods after adoption.

F-10

Financial Statements Index

Note 3. Business Combinations

On April 11, 2003, the Company entered into a business combination with two companies related by common ownership (Hesed and Ness of TX — see Note 1), acquiring 100% of the net assets of each for a total of 14,301,688 shares of restricted stock. The transaction was valued based on the estimated fair value of the common stock issued, which resulted in recorded goodwill of $3,123,000. This goodwill was assessed for impairment, and, evaluating the fair value of the Hesed reporting unit based on the estimated future cash flows from the unit, it was determined that no impairment of goodwill existed at December 31, 2004, and 2003. The results of operations of Hesed and Ness of TX are included in the consolidated statements of operations from the date of acquisition.

On January 5, 2004, the Company entered into a business combination with Lahava Oil and Gas Ltd. (“Lahava”) , acquiring 100% of the partnership interests for a total of 1,500,000 shares of restricted stock. The shares were delivered to the pre-existing partners in proportion to their partnership interests. The transaction was valued based on the estimated fair value of the common stock issued of $637,000, which resulted in recorded goodwill of $637,000. This goodwill was assessed for impairment, and, evaluating the fair value of the reporting unit based on the estimated future cash flows from the unit, it was determined that no impairment of goodwill existed at December 31, 2004. The purpose of this combination was the acquisition of certain lease rights of Lahava. As there were no material balance sheet accounts of Lahava to present, none are reflected here.

Lahava was established in July 2000, with the limited partnership formed in February 2001. The purpose of the acquisition is to obtain the licensed areas in Israel known as Zohar 300 to commence drilling in the area. The results of operations of Lahava are included in the consolidated statements of operations from the date of acquisition.

From May 18, 2004 through August 25, 2004, the Company issued 400,000 shares of its common stock as a downpayment on the acquisition of an Israeli partnership called Equital Management Ltd. ("Equital"). The issuances have been valued at $128,000 based on the fair value of the shares at issue date. The terms of the agreement were finalized in August 2004, and consummation of the transaction took place in October 2004 (see Note 10). $220,000 in cash was paid by a related party for the benefit of the Company. Such advance is reflected as a liability to related parties. The results of operations of Equital are included in the consolidated statements of operations from the date of acquisiton.

Proforma disclosures have not been presented for any of these acquisitions as these entities had no material operations prior to the dates of acquisition.

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Financial Statements Index

Note 4. Investments in Marketable Securities

Equity securities held by the Company are concentrated in the common stock of one company. During 2001 the Company permanently impaired the value of this stock to zero and recorded a $1,000,000 loss against earnings. At December 31, 2004, the investment has an unrealized gain of $10,000.

The Company had no sales of investments during 2004 or 2003.

Changes in accumulated other comprehensive income related to investments for the years ended December 31 are as follows:

	2004		2003
Accumulated other comprehensive income:
Holding gain (loss) arising during the period	$	(52)	$	22
Change in unrealized gain (loss) on securities available for sale	$	(52)	$	22

Note 5. Property and Equipment

Property and equipment are comprised of the following at December 31, 2004:

Land and buildings	$	1,392
Transportation equipment and vehicles		273
Drilling equipment		115
Water farm		34
Furniture and fixtures		147
Gas pipeline		132
Total Property and Equipment		2,093
Less accumulated depreciation		255
Property and Equipment, net	$	1,838

F-12

Financial Statements Index

Ness Energy International, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 5. Property and Equipment (Continued)

Depreciation expense was $141,000 and $69,000 for the years ended December 31, 2004 and 2003, respectively.

During 2003, it was determined that an asset captioned under furniture and fixtures was impaired. For the year ended December 31, 2003, the Company recognized an impairment loss of $8,000 based on the estimated recoverable amount that will be refunded by the asset’s vendor, less related costs to return the item, resulting in an adjusted carrying amount of $15,000. The loss is aggregated in the general and administrative expense caption of the consolidated statements of operations for 2003. There were no such impairments recognized during the year ended December 31, 2004.

Note 6. Accounts Payable — Related Parties

At December 31, 2004, Accounts Payable — Related Parties consisted of amounts due for advances from related parties, that the Company anticipates repaying out of working capital within 2005.

Note 7. Asset Retirement Obligations

Pursuant to SFAS 143, Accounting for Asset Retirement Obligations, the Company has recognized the fair value of the asset retirement obligation for the abandonment of oil and gas producing facilities from January 1, 2003 (implementation date) forward. The present value of the estimated asset retirement costs has been capitalized as part of the carrying amount of the related long-lived assets. The liability has been accreted to its present value at the end of the year, and the capitalized cost approximated $46,000. Upon initial implementation, the Company recognized $460 for the cumulative effect of the change in accounting principle due to accretion from acquisition date to the implementation date less depletion recapture due to the estimated salvage values of the properties. The Company evaluated 28 wells (20 acquired during 2003), and has determined a range of abandonment dates between July 2004 and December 2023 and a total salvage value of $53,000. The following represents the amount of the retirement obligation at the beginning and end of the year ended December 31, 2004:

	2004	2003
Beginning balance at January 1	$                                                                   49	$                                                           --
Liabilities incurred during the period	--	47
Liabilities settled during the period	--	--
Accretion of interest	6	2
Revisions of estimate	33	--
Ending balance at December 31	$                                                                    88	$                                                          49

F-13

Financial Statements Index

Note 8. Long-Term Debt

                Long-term debt consists of the following at December 31, 2004:

Mortgage note payable, bearing interest at 7.75%, maturity date of 5/15/13, with minimum monthly payments of $1,270 including interest; secured by buildings	$	98
Auto notes payable, bearing interest at 6%, maturity date of 10/16/06, with monthly payments of $1,262 including interest; secured by the financed vehicles		45
Auto loans payable, bearing interest at 5.6%, maturity date of 5/7/07, with monthly payments of $2,004 including interest; secured by two vehicles being financed		66
Total long-term debt		209
Less current portion		44
Total long-term portion	$	165

At December 31, 2004, Ness Operating, on behalf of the Company, has established a $50,000 letter of credit with a bank in favor of the Railroad Commission of Texas, as required by the state in order for the Company to perform oil and gas operations within the jurisdiction of the Railroad Commission.

Total annual maturities of long-term debt are as follows:

2005	$                                                                 44
2006	46
2007	27
2008	26
2009	15
Thereafter	51
Total	$                                                               209

F-14

Financial Statements Index

Note 9. Related Party Transactions

During 2003, the Company entered into a contract to purchase oil and gas leases from an officer for the estimated value of the properties $11,637,000 offset against amounts due from the officer of $95,000. The resultant liability was settled in the Company’s common stock in 2004 (See also Note 2, Contracts Settled in the Company’s Common Stock).

Accounts receivable — related party and accounts payable — related party at December 31, 2004 consists primarily of amounts returned to related parties secured by amounts due to those same parties. The net amount of accounts receivable from related parties offset by amounts due to related parties is a net amount due to of $1,230,000. Such advances were primarily used for well expansion, operating expenses, and mineral leases.

During 2003, a company related through common ownership collected net oil and gas revenues from a majority of the Company’s properties and remitted the funds to the Company. In October 2003, the Company formed Ness Operating as a wholly-owned subsidiary to perform this function.

Note 10. Supplemental Cash Flow Information

The Company made cash payments of interest expense of $45,000 and $7,000 to related parties in 2004 and 2003, respectively. No income taxes were paid during the years ended December 31, 2004 and 2003.

The Company made non-cash adjustments to the Asset Retirement obligation with a corresponding adjustment to Property and Equipment, during 2004 of $39,000.

Non-cash investing and financing activities for the years ended December 31, 2004 and 2003 are as follows:

In 2003 and 2004, the Company issued 153,219 and 2,726,733 shares of its common stock for the acquisition of oil and gas leases. The cost of the leases was recorded at the average stock price on the date of issuance reflecting capital costs of $47,000 and $651,000, respectively.

In connection with the acquisition of Lahava and Equital (see Note 3), the Company issued 1,900,000 shares of common stock with a fair value of $765,000, which resulted in an increase to goodwill of $637,000.

At December 31, 2003, the Company had $11,637,000 recorded in current liabilities as accounts payable - related parties. During 2004, the Company issued 33,766,533 shares with a fair value of $11,542,000 as a non-cash settlement of the amounts due to the related party. The settlement was recorded net of $95,000 in accounts receivable due from the related party (See Note 2, Contracts Settled in the Company’s Common Stock).

During 2003 and 2004, the Company issued 2,948,000 and 8,943,873 shares of its common stock for consulting services to be provided in the future. During 2004, the Company retired and cancelled the shares related to the future consulting services.

The Company entered into three notes payable during 2004 in connection with the acquisition of automobiles for $81,000.

During 2003 and 2004, the Company recorded an increase (decrease) in the unrealized appreciation on securities available for sale account within stockholders’ equity of $22,000 and $(52,000), respectively.

The Company issued 6,061 shares of common stock with a fair value of $4,000 in connection with the acquisition of certain property and equipment. There were no shares issued for the acquisition of property and equipment during 2004.

F-15

Financial Statements Index

Note 11. Income Taxes

A reconciliation of statutory tax rates to the Company's effective tax rates follows:

	2004			2003
Benefit at statutory rates		(34)	%		(34)	%
Losses not providing benefits		34	%		34	%
Effective rate		-%			-%

The deferred tax assets are comprised primarily of the Company’s net operating loss carryforwards and impairment recorded on investments.

	2004		2003
Net operating loss carryforward	$	3,984	$	3,429
Impairment on investments		340		340
Other		6		6
Less valuation allowance		(4,330)		(3,775)
Net deferred tax asset	$	--	$	--

The Company’s net operating loss carryforwards may be applied against future taxable income. The net operating loss carryforwards expire as follows:

		Expiring
2011	$	1
2012		2
2018		104
2019		1,991
2020		2,532
2021		1,390
2022		2,071
2023		2,331
2024		1,295
Total	$	11,717

                   The net change in the valuation allowance during 2004 is as follows:

Balance at beginning of year	$	(3,775)
Balance at end of year		(4,330)
Net change	$	(555)

F-16

Financial Statements Index

Note 12. Stockholders’ Equity

On April 23, 2002, the Company entered an agreement whereby, up to 50,000,000 shares of the   Company’s common stock can be sold to provide capital. Under the agreement, the Company may exercise a put by the delivery of a put purchase notice to the purchaser. The number of shares to be issued is determined by dividing the amount specified in the put purchase notice by the purchase price determined during a specified pricing period. The purchase price is 96% of the average of the three lowest closing bid prices of the Company’s common stock during the five trading days of the specified pricing period.

During 2004 and 2003, the Company received $144,000 and $1,587,000, respectively, for the issuance of 542,992 and 6,155,856 shares, respectively, of the Company’s common stock under the put agreement.

Note 13. Commitments and Contingencies

The Company leases office equipment under an operating lease arrangement. Future minimum annual rent payments required under noncancelable lease in effect at December 31, 2004 approximates $10,000, $4,000, and $1,000 for the years ending December 31, 2005, 2006, and 2007, respectively.

Total lease expense during the years ended December 31, 2004 and 2003 was $4,000 and $3,000, respectively.

Note 14. Major Customers

The Company sells natural gas and natural gas liquids to a limited number of purchasers. However, management believes the competitive nature of the industry, capitalized levels of purchasers, and available marketing alternatives do not make the Company dependent on any single purchaser. The Company sells it products to intermediaries, who either have, or have access to consumer delivery systems. The Company feels that in this highly competitive industry, should circumstances require other third party intermediaries would be readily available to acquire the Company’s products. Currently the Company sells its products to three customers, the largest of which accounts for 34% of such sales.

Note 15. Subsequent Events - (Unaudited)

In February 2005, the Company, entered into a working interest agreement with certain investors under which the Company sold a working interest to reenter three of the Company’s leased wells. Under the terms of the agreement, the investors have the right to acquire the entire working interest in the wells being sold by the Company for an aggregate sum of $2,550,000 in exchange for 75% of the net revenues from the sale of the oil and gas produced by the wells. The agreement allows for purchase of the working interest to be completed no later than August 2005. If not completed by this date the agreement terminates. To date, the Company has received an aggregate of $1,253,000 from the investors.

F-17

Financial Statements Index

Ness Energy International, Inc. and Subsidiaries

SUPPLEMENTAL OIL AND GAS DATA (UNAUDITED)

This section provides information required by SFAS 69, Disclosures About Oil and Gas Producing Activities.

The SEC defines proved oil and gas reserves as those estimated quantities of crude oil, natural gas, and natural gas liquids 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 oil and gas reserves are reserves that can be expected to be recovered through existing wells with existing equipment and operating methods.

Estimates of petroleum reserves have been made by an independent engineer. The valuation of proved reserves may be revised in the future on the basis of new information as it becomes available. Estimates of proved reserves are inherently imprecise.

Estimated quantities of proved oil and gas reserves of the Company (all of which are located in the United States) are as follows:

	Petroleum Liquids (Bbls)	Natural Gas (Mcf)
December 31, 2004 - proved producing reserves	7,937	418,991
December 31, 2004 - proved non-producing reserves	248,778	31,904,139
December 31, 2003 - proved producing reserves	61,183	129,309
December 31, 2003 - proved non-producing reserves	757	15,075,038

	Petroleum Liquids (Bbls)	Natural Gas (Mcf)
Reserves at December 31, 2002	--	215,804
Revisions of previous estimates	(105)	3,751,970
Production	--	(24,029)
Purchase of reserves in place	62,045	11,260,602
Reserves at December 31, 2003	61,940	15,204,347
Revisions of previous estimates	58,228	745,303
Production	(438)	(48,360)
Purchase of reserves in place	136,985	16,421,840
Reserves at December 31, 2004	256,715	32,323,130

F-18

Financial Statements Index

Ness Energy International, Inc. and Subsidiaries

SUPPLEMENTAL OIL AND GAS DATA (UNAUDITED)

The standardized measure of discounted estimated future net cash flows, and changes therein, related to proved oil and gas reserves for the years ended December 31, 2004 and 2003 is as follows:

	2004		2003
Future cash inflows	$	209,942,000	$	73,020,000
Future production costs		(27,930,000)		(9,143,000)
Future development costs		(4,326,000)		(713,000)
Future income tax		(30,151,000)		(4,253,000)
Future net cash flows		147,535,000		58,911,000
10% annual discount		(78,293,000)		(35,628,000)
Standardized measure of discounted future net cash flows	$                                                                       69,242,000		$                                                                       23,283,000

Primary changes in standardized measure of discounted future net cash flow for the years ended December 31, 2004 and 2003 are as follows:

	2004		2003
Net change in sales and transfer prices and in production costs related to future production	$	15,281,000	$	264,000
Change in estimated future development costs		(880,000)		201,000
Sales of oil and gas produced during the period , net of production costs		(319,000)		(25,000)
Net change due to Purchase of minerals in place		33,097,000		11,084,000
Accretion of discount		--		172,000
Net change due to revisions in quantity estimates		3,425,000		12,301,000
Net change in income tax expense		(4,965,000)		(926,000)
Other - unspecified		320,000		(8,000)
	$	45,959,000	$	23,063,000

F-19

Financial Statements Index

Estimated future cash inflows are computed by applying year-end prices of oil and gas to year-end quantities of proved reserves. Estimated future development and production costs are determined by estimating the expenditures to be incurred in developing and producing the proved oil and gas reserves in future years, based on year-end costs and assuming continuation of existing economic conditions.

These estimates are furnished and calculated in accordance with requirements of the FASB and the SEC. Because of unpredictable variances in expenses and capital forecasts, crude oil and natural gas price changes, and the fact that the bases for such estimates vary significantly, management believes the usefulness of these projections is limited. Estimates of future net cash flows does not necessarily represent management’s assessment of future profitability or future cash flow to the Company.

The aggregate amounts of capitalized costs relating to oil and gas producing activities and the related accumulated depletion and depreciation as of December 31, 2004, is as follows (000):

	Properties (000)						Net Book
	Unproved		Proven		Depletion		Value
December 31, 2003	$	247	$	12,279	$	121		$	12,405
Expenditures		1,258		388		--			1,646
Reclass proven wells		(371)		371		--			--
Expensed/dry holes		--		--		18			18
December 31, 2004	$	1,134	$	13,038	$	139		$	14,033

Production Revenue	$	425
Compression		6
Production Costs		182
Depletion		19
Production Tax		25
Net Production Revenue	$	193

F-20

Financial Statements Index