---

---

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

---

FORM 10-Q

|(Mark
One)
|----------

|x | QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
|- | ----------------------------------------------------------------------------------------

For the quarterly period ended March 31, 2006

OR

|o | TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
|- | -----------------------------------------------------------------------------------------

For the transition period from _______________________ to_______________

Commission file number
0-538

|AMPAL-AMERICAN
ISRAEL CORPORATION                     
|------------------------------------------------------
|                                                      
|(Exact
Name of Registrant as Specified in Its Charter)

|                                         |                      
|---------------------------------------- | ---------------------
|
|
|
|
|New York                                 | 13-0435685           
|(State or Other Jurisdiction of          | (I.R.S. Employer)    
|Incorporation of Organization)           | Identification Number
|                                         |                      
|111 Arlozorov Street, Tel Aviv, Israel   | 62098                
|(Address of Principal Executive Offices) | (Zip code)           

Registrant's Telephone Number, Including Area Code (866) 447-8636

|                                                                                 
|---------------------------------------------------------------------------------
|Former
Name, Former Address and Former Fiscal Year, If Changed Since Last Report.

|Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 o

|Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large
accelerated filer in Rule 12b-2 of the Exchange Act (Check one):
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Large accelerated filer o  Accelerated filer o   Non-accelerated filer x

Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).

Yes   o         No      x

The
number of shares outstanding of the issuer's Class A Stock, its only authorized common
stock, is 20,178,712       (as of May 3, 2006).



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AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES

Index to Form 10-Q

|Part I | Financial
Information
|------ | ---------------------

|        |                                                     |    
|------- | --------------------------------------------------- | ---
|
|
|
|
|Item 1. | Financial Statements                                |    
|       
|        | Consolidated Statements of Operations for the      
|        | Three Months Ended March 31, 2006 and 2005          | 1  
|       
|        | Consolidated Balance Sheets                         | 2-3
|       
|        | Consolidated Statements of Cash Flows               | 4-5
|       
|        | Consolidated Statements of Changes in Shareholders'
|        | Equity                                              | 6-8
|       
|        | Notes to the Consolidated Financial Statements      | 9  
|       
|Item 2. | Management's Discussion and Analysis of            
|        | Financial Condition and Results of Operations       | 14 
|       
|Item 3. | Quantitative and Qualitative Disclosures           
|        | About Market Risk                                   | 19 
|       
|Item 4. | Controls and Procedures                             | 20 
|       
|Part II | Other Information                                   | 21 
|       

| |          |                                                     |   
| | -------- | --------------------------------------------------- | --
|
|
|
|
| | Item 1.  | Legal Proceedings                                   | 21
|
| | Item 1A. | Risk Factors                                        | 21
|
| | Item 2.  | Unregistered Sales of Equity Securities and        
| |          | Use of Proceeds                                     | 21
|
| | Item 3.  | Defaults upon Senior Securities                     | 21
|
| | Item 4.  | Submission of Matters to a Vote of Security Holders | 21
|
| | Item 5.  | Other Information                                   | 21
|
| | Item 6.  | Exhibits                                            | 21



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ITEM
1. FINANCIAL STATEMENTS

AMPAL-AMERICAN
ISRAEL CORPORATION AND SUBSIDIARIES 
CONSOLIDATED STATEMENTS OF OPERATIONS

|THREE MONTHS ENDED MARCH 31,                | 2006 | 2005
|------------------------------------------- | ---- | ----
|
|
|
|
|REVENUES                                    |      |     
|Equity in earnings of affiliates            |      |     
|Real estate income                          |      |     
|Realized gains on investments               |      |     
|Realized and unrealized gains on marketable |      |     
|securities                                  |      |     
|Interest income                             |      |     
|Other income                                |      |     
|                                            |      |     
|Total revenues                              |      |     
|                                            |      |     
|                                            |      |     
|EXPENSES                                    |      |     
|Interest expense                            |      |     
|Real estate expenses                        |      |     
|Translation loss                            |      |     
|Other (mainly general and administrative)   |      |     
|                                            |      |     
|Total expenses                              |      |     
|                                            |      |     
|                                            |      |     
|(Loss) income before income taxes           |      |     
|Provision for income taxes                  |      |     
|                                            |      |     
|(Loss) income after income tax              |      |     
|Minority interest                           |      |     
|                                            |      |     
|Net (Loss) income                           |      |     
|                                            |      |     
|                                            |      |     
|Basic EPS:                                  |      |     
|(Loss) gain per Class A Share               |      |     
|                                            |      |     
|                                            |      |     
|Shares used in calculation (in thousands)   |      |     
|                                            |      |     
|                                            |      |     
|                                            |      |     
|Diluted EPS:                                |      |     
|                                            |      |     
|(Loss) gain per Class A Share               |      |     
|                                            |      |     
|                                            |      |     
|Shares used in calculation (in thousands)   |      |     
|                                            |      |     

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

1

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---



AMPAL-AMERICAN
ISRAEL CORPORATION AND SUBSIDIARIES 
CONSOLIDATED BALANCE SHEETS

|ASSETS AS OF                           | March 31,
2006 | December 31,
2005
|-------------------------------------- | -------------- | -----------------
|
|
|
|
|Cash and cash equivalents              |                |                  
|Deposits, notes and loans receivable   |                |                  
|                                       |                |                  
|Marketable Securities                  |                |                  
|Other investments                      |                |                  
|                                       |                |                  
|Total Investments                      |                |                  
|                                       |                |                  
|Real estate property, less accumulated |                |                  
|depreciation of $14,354 and $13,907    |                |                  
|                                       |                |                  
|Other assets                           |                |                  
|                                       |                |                  
|                                       |                |                  
|                                       |                |                  
|Total Assets                           |                |                  
|                                       |                |                  

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

2

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AMPAL-AMERICAN
ISRAEL CORPORATION AND SUBSIDIARIES 
CONSOLIDATED BALANCE SHEETS

|LIABILITIES AND SHAREHOLDERS' EQUITY AS OF     | March 31,
2006 | December 31,
2005
|---------------------------------------------- | -------------- | -----------------
|
|
|
|
|LIABILITIES                                    |                |                  
|                                               |                |                  
|Notes and loans payable                        |                |                  
|Deposits from tenants                          |                |                  
|Accounts payable, accrued expense and others   |                |                  
|                                               |                |                  
|Total Liabilities                              |                |                  
|                                               |                |                  
|                                               |                |                  
|                                               |                |                  
|Minority interests                             |                |                  
|                                               |                |                  
|                                               |                |                  
|SHAREHOLDERS EQUITY                            |                |                  
|4% Cumulative Convertible Preferred Stock, $5  |                |                  
|par value; authorized 189,287 shares; issued   |                |                  
|113,558 and 114,198 shares; outstanding        |                |                  
|110,208 and 110,848 shares                     |                |                  
|                                               |                |                  
|6-1/2% Cumulative Convertible Preferred Stock, |                |                  
|$5 par value; authorized 988,055 shares;       |                |                  
|issued 617,963 and 641,423 shares; outstanding |                |                  
|495,427 and 518,887 shares                     |                |                  
|                                               |                |                  
|Class A Stock; $1 par value; authorized        |                |                  
|60,000,000 shares; issued 25,900,401 and       |                |                  
|25,826,821 shares; outstanding 20,175,612      |                |                  
|and 20,075,782 shares                          |                |                  
|                                               |                |                  
|Additional paid-in capital                     |                |                  
|                                               |                |                  
|Retained earnings                              |                |                  
|                                               |                |                  
|Accumulated other comprehensive loss           |                |                  
|                                               |                |                  
|Treasury Stock, at cost                        |                |                  
|                                               |                |                  
|                                               |                |                  
|Total shareholders' equity                     |                |                  
|                                               |                |                  
|                                               |                |                  
|                                               |                |                  
|TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY     |                |                  
|                                               |                |                  

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

3

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AMPAL-AMERICAN
ISRAEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS

|THREE MONTHS ENDED MARCH 31,                      | 2006 | 2005
|------------------------------------------------- | ---- | ----
|
|
|
|
|Cash flows from operating activities:             |      |     
|Net (loss) income                                 |      |     
|Adjustments to reconcile net (loss) income to net |      |     
|cash provided by operating activities:            |      |     
|Equity in earnings of affiliates                  |      |     
|Realized and unrealized gains on investments      |      |     
|Depreciation expense                              |      |     
|Amortization income from tenants deposits         |      |     
|Compensation expenses recognized under            |      |     
|SFAS 123R                                         |      |     
|Translation loss                                  |      |     
|Minority interests                                |      |     
|Increase in other assets                          |      |     
|Increase in accounts payable, accrued             |      |     
|expenses and others                               |      |     
|Investments made in trading securities            |      |     
|Proceeds from sale of trading securities          |      |     
|Dividends received from affiliates                |      |     
|                                                  |      |     
|                                                  |      |     
|Net cash provided by operating activities         |      |     
|                                                  |      |     
|                                                  |      |     
|Cash flows from investing activities:             |      |     
|Deposits, notes and loans receivable collected    |      |     
|Investments made in affiliates and others         |      |     
|Proceeds from sale of investments                 |      |     
|Capital improvements                              |      |     
|                                                  |      |     
|                                                  |      |     
|Net cash provided by investing                    |      |     
|activities                                        |      |     
|                                                  |      |     

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

4

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AMPAL-AMERICAN
ISRAEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS

|THREE MONTHS ENDED MARCH 31                      | 2006 | 2005
|------------------------------------------------ | ---- | ----
|
|
|
|
|Cash flows from financing activities:            |      |     
|Notes and loans payable received                 |      |     
|Notes and loans payable repaid                   |      |     
|Debentures repaid                                |      |     
|Proceeds from exercise of stock options          |      |     
|                                                 |      |     
|                                                 |      |     
|Net cash used in financing                       |      |     
|activities                                       |      |     
|                                                 |      |     
|                                                 |      |     
|Effect of exchange rate changes on cash and      |      |     
|Cash equivalents                                 |      |     
|                                                 |      |     
|                                                 |      |     
|Net increase (decrease) in cash and cash         |      |     
|equivalents                                      |      |     
|                                                 |      |     
|                                                 |      |     
|Cash and cash equivalents at beginning of        |      |     
|Period                                           |      |     
|                                                 |      |     
|                                                 |      |     
|Cash and cash equivalents at end of period       |      |     
|                                                 |      |     
|                                                 |      |     
|Supplemental Disclosure of Cash Flow Information |      |     
|Cash paid during the period:                     |      |     
|Interest                                         |      |     
|                                                 |      |     
|                                                 |      |     
|Income taxes paid                                |      |     
|                                                 |      |     
|                                                 |      |     
|Supplemental Disclosure of Non-cash              |      |     
|Investing Activities:                            |      |     
|                                                 |      |     
|Marketable securities received as                |      |     
|consideration for sale of an investment          |      |     
|                                                 |      |     
|                                                 |      |     
|Supplemental Disclosure of Non-Cash              |      |     
|Operating Activities:                            |      |     
|Dividend in kind from an affiliate               |      |     
|                                                 |      |     
|                                                 |      |     
|Dividend from an equity investment               |      |     
|offset against payable accounts                  |      |     
|                                                 |      |     
|                                                 |      |     
|Sale of trading securities for which cash        |      |     
|was received subsequent to March 31, 2006        |      |     
|                                                 |      |     

The
accompanying notes are an integral part of the consolidated financial statement.

5

---

---



# AMPAL-AMERICAN ISRAEL
CORPORATION AND SUBSIDIARIES 
CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY

# (U.S. Dollars in thousands)

|                                                    | Class A stock | 4 % preferred stock | 6.5 % preferred stock |        |  | Accumulated
other
comprehensive
income (loss) |        | 
|--------------------------------------------------- | ------------- | ------------------- | --------------------- | ------ |  | --------------------------------------------- | ------ | 
|
|
|
|
|BALANCE AT JANUARY 1, 2006                          |               |                     |                       | 25,827 |  |                                               | 25,827 | 
|CHANGES DURING 2006:                                |               |                     |                       |        |  |                                               |        | 
|Net loss                                            |               |                     |                       |        |  |                                               |        | 
|Other comprehensive income (loss):                  |               |                     |                       |        |  |                                               |        | 
|Foreign currency translation adjustments            |               |                     |                       |        |  |                                               |        | 
|Unrealized gain on marketable securities            |               |                     |                       |        |  |                                               |        | 
|                                                    |               |                     |                       |        |  |                                               |        | 
|Total comprehensive loss                            |               |                     |                       |        |  |                                               |        | 
|Conversion of 640 4% preferred stock and 23,460     |               |                    
|6.5% preferred stock into Class A stock             |               |                     |                       | 73     |  |                                               | 73     | 
|Compensation expense recognized under SFAS 123R     |               |                     |                       |        |  |                                               |        | 
|Reissuance of 26,250 treasury stock for exercise of |               |                    
|stock options                                       |               |                     |                       |        |  |                                               |        | 
|                                                    |               |                     |                       |        |  |                                               |        | 
|                                                    |               |                    
|BALANCE AT MARCH 31, 2006                           |               |                     |                       | 25,900 |  |                                               | 25,900 | 
|                                                    |               |                     |                       |        |  |                                               |        | 

The
accompanying notes are an integral part of the consolidated financial statement.

6

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# AMPAL-AMERICAN ISRAEL
CORPORATION AND SUBSIDIARIES 
CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY

# (U.S. Dollars in thousands)

|                                                    | Class A stock | 4 % preferred stock | 6.5 % preferred stock |        |  | Accumulated
other
comprehensive
income (loss) |        | 
|--------------------------------------------------- | ------------- | ------------------- | --------------------- | ------ |  | --------------------------------------------- | ------ | 
|
|
|
|
|BALANCE AT JANUARY 1, 2005                          |               |                     |                       | 25,715 |  |                                               | 25,715 | 
|CHANGES DURING 2005:                                |               |                     |                       |        |  |                                               |        | 
|Net loss                                            |               |                     |                       |        |  |                                               |        | 
|Other comprehensive income (loss):                  |               |                     |                       |        |  |                                               |        | 
|Foreign currency translation adjustments            |               |                     |                       |        |  |                                               |        | 
|Unrealized loss on marketable securities            |               |                     |                       |        |  |                                               |        | 
|Sale of available for sale securities               |               |                     |                       |        |  |                                               |        | 
|                                                    |               |                     |                       |        |  |                                               |        | 
|Total comprehensive loss                            |               |                     |                       |        |  |                                               |        | 
|Conversion of 9,826 4% preferred stock and 20,796   |               |                    
|6.5% preferred stock into Class A stock             |               |                     |                       | 112    |  |                                               | 112    | 
|Reissuance of 80,625 treasury stock for exercise of |               |                    
|stockoptions                                        |               |                     |                       |        |  |                                               |        | 
|Dividends :                                         |               |                     |                       |        |  |                                               |        | 
|4% preferred stock, $0.2 per share                  |               |                     |                       |        |  |                                               |        | 
|6.5% preferred stock, $0.325 per share              |               |                     |                       |        |  |                                               |        | 
|                                                    |               |                     |                       |        |  |                                               |        | 
|                                                    |               |                    
|BALANCE AT DECEMBER 31, 2005                        |               |                     |                       | 25,827 |  |                                               | 25,827 | 
|                                                    |               |                     |                       |        |  |                                               |        | 

The
accompanying notes are an integral part of the consolidated financial statement.

7

---

---



# AMPAL-AMERICAN ISRAEL
CORPORATION AND SUBSIDIARIES 
CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY

# (U.S. Dollars in thousands)

|                                                  | Class A stock | 4 % preferred stock | 6.5 % preferred stock |        |  | Accumulated
other
comprehensive
income (loss) |        | 
|------------------------------------------------- | ------------- | ------------------- | --------------------- | ------ |  | --------------------------------------------- | ------ | 
|
|
|
|
|BALANCE AT JANUARY 1, 2005                        |               |                     |                       | 25,715 |  |                                               | 25,715 | 
|CHANGES DURING 2005:                              |               |                     |                       |        |  |                                               |        | 
|Net income                                        |               |                     |                       |        |  |                                               |        | 
|Other comprehensive loss:                         |               |                     |                       |        |  |                                               |        | 
|Foreign currency translation adjustments          |               |                     |                       |        |  |                                               |        | 
|Unrealized loss on marketable securities          |               |                     |                       |        |  |                                               |        | 
|Sale of available for sale securities             |               |                     |                       |        |  |                                               |        | 
|                                                  |               |                     |                       |        |  |                                               |        | 
|Total comprehensive gain                          |               |                     |                       |        |  |                                               |        | 
|Conversion of 1,616 4% preferred stock and 18,800 |               |                    
|6.5% preferred stock into Class A stock           |               |                     |                       | 65     |  |                                               | 65     | 
|                                                  |               |                     |                       |        |  |                                               |        | 
|                                                  |               |                    
|BALANCE AT MARCH 31, 2005                         |               |                     |                       | 25,780 |  |                                               | 25,780 | 
|                                                  |               |                     |                       |        |  |                                               |        | 

The
accompanying notes are an integral part of the consolidated financial statement.

8

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AMPAL-AMERICAN
ISRAEL CORPORATION AND SUBSIDIARIES
NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

|1. | As
used in these financial statements, the term the Company refers
               to Ampal-American Israel Corporation (Ampal) and its
consolidated                subsidiaries.
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|2. | The
accompanying unaudited condensed consolidated financial statements of the
               Company have been prepared in accordance with generally accepted
accounting                principles (GAAP), in the United States of America,
for interim                financial information and with the instructions to Form 10-Q
and Article 10 of                Regulation S-X. Accordingly, they do not include all of
the information and                notes required by GAAP for complete financial
statements. In the opinion of                management, all adjustments (consisting of
normal recurring accruals) considered                necessary for a fair presentation
have been included. Operating results for the                interim period are not
necessarily indicative of the results that may be                expected for the full
year. You should read these interim condensed consolidated                financial
statements in conjunction with the audited consolidated financial
               statements in the Annual Report on Form 10-K for the year ended December
31,                2005, filed with the Securities and Exchange Commission.
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Reference
should be made to the Companys consolidated financial statements for the year ended
December 31, 2005 for a description of the accounting policies, which have been continued
without change. Also, reference should be made to the notes to the Companys
December 31, 2005 consolidated financial statements for additional details of the Companys
consolidated financial condition, results of operations and cash flows. The details in
those notes have not changed except as a result of normal transactions in the interim.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3. | Recently
Issued Accounting Pronouncements
|-- | -----------------------------------------

| | FAS
123 (Revised 2004) Share-based Payment
| | ------------------------------------------

| | Effective
January 1, 2006, the Company adopted Statement of Financial Accounting Standards (SFAS)
No. 123R, Shared-Based Payment (SFAS No. 123R) using the Modified
Prospective Approach. There is no cumulative effect of adopting SFAS 123R, based on the
awards outstanding as of January 1, 2006. See Note 4 for further details regarding the
adoption of this standard.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | FAS
154  Accounting Changes and Error Corrections  a replacement of APB Opinion
No. 20 and FASB Statement No. 3
| | -----------------------------------------------------------------------------------------------------------------

| | In
June 2005, the Financial Accounting Standards Board issued FAS No. 154,Accounting
Changes and Error Corrections  a replacement of APB Opinion No. 20 and FASB
Statement No.3 (FAS 154). This Statement generally requires retrospective
application to prior periods financial statements of changes in accounting
principle. Previously, Opinion No. 20 required that most voluntary changes in accounting
principle were recognized by including the cumulative effect of changing to the new
accounting principle in net income of the period of the change. FAS 154 applies to all
voluntary changes in accounting principle. It also applies to changes required by an
accounting pronouncement in the unusual instance that the pronouncement does not include
specific transition provisions. When a pronouncement includes specific transition
provisions, those provisions should be followed. This Statement shall be effective for
accounting changes and corrections of errors made in fiscal years beginning after
December 15, 2005 (Fiscal Year 2006 for the Company). The adoption of this statement did
not have a material effect on the results of operations or financial position.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

9

---

---



|4. | Employee
Stock Based Compensation
|-- | ---------------------------------

| | Effective
January 1, 2006 the Company adopted SFAS No. 123R, using the Modified
Prospective Approach. SFAS No. 123R revises SFAS No. 123, Accounting for
Stock-Based Compensation (SFAS No. 123) and supersedes Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued
to Employees (APB No. 25). SFAS No. 123R requires the cost of
all share-based payments to employees, including grants of employee stock options, to be
recognized in the financial statements based on their fair values at grant date, or the
date of later modification, over the requisite service period. In addition, SFAS No. 123R
requires unrecognized cost (based on the amounts previously disclosed in the pro forma
footnote disclosure) related to options vesting after the date of initial adoption to be
recognized in the financial statements over the remaining requisite service period.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Under
the Modified Prospective Approach, the amount of compensation cost recognized includes:
(i) compensation cost for all share-based payments granted prior to, but not yet
vested as of January 1, 2006, based on the grant date fair value estimated in
accordance with the provisions of SFAS No. 123 and (ii) compensation cost for
all share-based payments that will be granted subsequent to January 1, 2006, based
on the grant date fair value estimated in accordance with the provisions of SFAS No. 123R
(there were no such grants in the first quarter of 2006). Upon adoption, the Company
recognizes the stock based compensation of previously granted share-based options and new
share based options under the straight-line method over the requisite service period.
Total stock-based compensation expense recognized under SFAS No. 123R, was
approximately $216 thousand for the three months ended March 31, 2006. No share
based compensation was capitalized in the consolidated financial statements.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Prior
to January 1, 2006, the Company accounted for the stock-based compensation plans in
accordance with the provisions of APB No. 25, as permitted by SFAS No. 123, and
accordingly did not recognize compensation expense for stock options since the exercise
price was equal to the market price of the underlying stock at the date of grant. If
compensation cost for the options under the plans in effect been determined in accordance
with SFAS No. 123, the Companys net income (loss) and EPS would have been reduced
as follows:
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                                               | Three Months ended
March 31, 2005
(In thousands,
except per
share data)
| | ------------------------------------------------------------- | -----------------------------------------------------------------------
|
|
|
|
| | Net income, as reported                                       |                                                                        
| |                                                               |                                                                        
| | Less - stock based compensation expense determined under fair |                                                                        
| | value method                                                  |                                                                        
| |                                                               |                                                                        
| |                                                               |                                                                        
| | Pro forma, net income                                         |                                                                        
| |                                                               |                                                                        
| |                                                               |                                                                        
| | Basic EPS:                                                    |                                                                        
| | As reported (1)                                               |                                                                        
| | Pro forma (1)                                                 |                                                                        
| |                                                               |                                                                        
| | Diluted EPS:                                                  |                                                                        
| | As reported                                                   |                                                                        
| | Pro forma                                                     |                                                                        

| | (1) After
deduction of accrued Preferred Stock Dividend of $50 thousands.
| | -------------------------------------------------------------------------

10

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| | Stock
Options
| | -------------

| | In
March 1998, the Board approved a Long-Term Incentive Plan (1998 Plan)
permitting the granting of options to all employees, officers, directors and consultants
of the Company and its subsidiaries to purchase up to an aggregate of 400,000 shares of
Class A Stock. The 1998 plan was approved by the majority of the Companys
shareholders at the June 19, 1998, annual meeting of shareholders. The plan remains in
effect for a period of ten years. As of March 31, 2006, 30,000 options of the 1998 Plan
are fully vested and outstanding.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
February 15, 2000, the Stock Option Committee approved a new Incentive Plan (2000
Plan), under which the Company has reserved 4 million shares of Class A Stock,
permitting the granting of options to all employees, officers and directors. The 2000
Plan was approved by the Board of Directors of Ampal (the Board) at the
meeting held on March 27, 2000 and was approved by a majority of the Companys
shareholders at the June 29, 2000 annual meeting of shareholders. The plan remains in
effect for a period of ten years. As of March 31, 2006, 1,964,500 options under the 2000
Plan are outstanding.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
option term is for a period of five years from grant date for the options granted under
the 1998 plan and ten years from grant date for the options granted under the 2000 plan.
If the options are not exercised and the shares not paid for by such date, all interests
and rights of any grantee shall expire. These options were granted for no consideration.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
options granted under the 1998 Plan and the 2000 Plan (collectively, the Plans)
may be either incentive stock options, at an exercise price to be determined by the Stock
Option Compensation Committee (the Committee) but not less than 100% of the
fair market value of the underlying options on the date of grant, or non-incentive stock
options, at an exercise price to be determined by the Committee. The Committee may also
grant, at its discretion, restricted stock, dividend equivalent awards,
which entitle the recipient to receive dividends in the form of Class A Stock, cash or a
combination of both and stock appreciation rights,which permit the recipient
to receive an amount in the form of Class A Stock, cash or a combination of both, equal
to the number of shares of Class A Stock with respect to which the rights are exercised
multiplied by the excess of the fair market value of the Class A Stock on the exercise
date over the exercise price. The options granted under the plans were granted either at
market value or above.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Under
each of the Plans, all granted but unvested options become immediately exercisable upon
the occurrence of a change in control of the Company.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of March 31, 2006, 2,405,500 options under both Plans are available for future grant.
| | ----------------------------------------------------------------------------------------

| | The
fair value of each stock option is estimated on the date of grant using the Black-Scholes
option pricing model that uses the assumptions noted in the following table. Expected
volatility is based on the historical volatility of the Class A common stock. The
risk free rate is based on the U.S. Treasury yield curve in effect at the date of grant.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Under
SFAS No. 123, the fair value of each option is estimated on the date of grant using the
Black Scholes option-pricing model with the following weighted average assumptions for
the outstanding option for March 31, 2006: (1) expected life of options of 5 years; (2)
dividend yield of 0%; (3) volatility ranging from 46% to 60%; and (4) risk-free interest
rate ranging from 3.3% to 4.08%.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

11

---

---



| | The
following table summarizes the activity of both Plans for the three months ended March 31,
2006:
| | ----------------------------------------------------------------------------------------------------

| |                                | Options
(in
thousands) | Weighted-
Average
Exercise
Price
(U.S. Dollars) | Weighted-
Average
Remaining
Contractual
Term
(in years) | Aggregate
Intrinsic
Value (U.S.
Dollars in
thousands)
| | ------------------------------ | ---------------------- | ----------------------------------------------- | ------------------------------------------------------- | -----------------------------------------------------
|
|
|
|
| | Outstanding at January 1, 2006 |                        |                                                 |                                                         | 2,024                                                
| | Granted                        |                        |                                                 |                                                         |                                                      
| | Exercised                      |                        |                                                 |                                                         | (26                                                  
| | Forfeited                      |                        |                                                 |                                                         | (4                                                   
| | Expired                        |                        |                                                 |                                                         | -                                                    
| |                                |                        |                                                 |                                                         |                                                      
| |                                |                        |                                                
| | Outstanding at March 31, 2006  |                        |                                                 |                                                         | 1,994                                                
| |                                |                        |                                                
| | Exercisable at March 31, 2006  |                        |                                                 |                                                         | 1,142                                                
| |                                |                        |                                                 |                                                         |                                                      

| | The
total intrinsic value (market value on date of exercise less exercise price) of options
exercise during the three months ended March 31, 2006 was $33 thousands.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Cash
received from option exercises for the three months ended March 31, 2006 was $82
thousand.
| | -----------------------------------------------------------------------------------------------

| | At
March 31, 2006, there was $1,436 thousands of total unrecognized, pre-tax
compensation cost related to non-vested stock options. This cost is expected to be
recognized over a weighted-average period of approximately three and a half years.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|5. | Segment
information presented below, results primarily from operations in           Israel.
|-- | -------------------------------------------------------------------------------------------

12

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| | THREE MONTHS ENDED MARCH 31,  | 2006 | 2005
| | ----------------------------- | ---- | ----
|
|
|
|
| | Revenues:                     |      |     
| | Finance                       |      |     
| | Real Estate                   |      |     
| | Leisure-time                  |      |     
| | Intercompany adjustments      |      |     
| |                               |      |     
| |                               |      |     
| | Equity                        |      |     
| |                               |      |     
| | Total                         |      |     
| |                               |      |     
| |                               |      |     
| | Pretax Operating (Loss) Gain: |      |     
| | Finance                       |      |     
| | Real Estate                   |      |     
| | Leisure-time                  |      |     
| |                               |      |     
| |                               |      |     
| | Equity                        |      |     
| |                               |      |     
| | Total                         |      |     
| |                               |      |     
| |                               |      |     
| | Total Assets:                 |      |     
| | Finance                       |      |     
| | Real Estate                   |      |     
| | Leisure-Time                  |      |     
| | Intercompany adjustments      |      |     
| |                               |      |     
| | Total                         |      |     
| |                               |      |     

| | Corporate
office expense is principally applicable to the financing operations and has been charged
to that segment above. Revenues and pretax operating (loss) gain above exclude equity in
earnings of affiliates.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
real estate rental segment consists of rental property owned in Israel and the United
States and leased to unrelated parties, and operations of Am-Hal Ltd., a wholly-owned
subsidiary which owns and operates a chain of senior citizen facilities located in Israel.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
leisure-time segment consists of Coral World International Limited (marine parks located
around the world) and Country Club Hod Hasharon Sport Center and Kfar Saba, the Companys
51%-owned subsidiary located in Israel.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|6. | The
following table summarizes securities that were not included in the
          calculations of diluted earnings per Class A share for the three-month periods
          ended March 31, 2006 and 2005 because such shares are anti-dilutive.
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (Shares in thousands)  | MARCH 31,
| | ---------------------- | ---------
|
|
|
|
| | Options and Rights     |          
| | 6-1/2% Preferred Stock |          
| | 4% Preferred Stock     |          

13

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|7. | LEGAL
PROCEEDINGS:
|-- | ------------------

| | None
| | ----

|8. | SUBSEQUENT
EVENTS
|-- | -----------------

| | None
| | ----

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

AMPAL-AMERICAN
ISRAEL CORPORATION AND SUBSIDIARIES

CRITICAL
ACCOUNTING POLICIES

|The
preparation of Ampals consolidated financial statements is in conformity with
accounting principles generally accepted in the United States which requires management to
make estimates and assumptions in certain circumstances that affect amounts reported in
the accompanying consolidated financial statements and related footnotes. Actual results
may differ from these estimates. To facilitate the understanding of Ampals business
activities, described below are certain Ampal accounting policies that are relatively more
important to the portrayal of its financial condition and results of operations and that
require managements subjective judgments. Ampal bases its judgments on its
experience and various other assumptions that it believes to be reasonable under the
circumstances. Please refer to Note 1 to Ampals consolidated financial statements
included in the Annual Report for the year ended December 31, 2005 for a summary of all of
Ampals significant accounting policies.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Portfolio
Investments

|The
Company accounts for a number of its investments, including its main investment in the
energy industry, on the basis of the cost method. Application of this method requires the
Company to periodically review these investments in order to determine whether to maintain
the current carrying value or to write off some or all of the investment. While the
Company uses some objective measurements in its review, such as the portfolio
companys liquidity, burn rate, termination of a substantial number of employees,
achievement of milestones set forth in its business plan or projections and seeks to
obtain relevant information from the company under review, the review process involves a
number of judgments on the part of the Companys management. These judgments include
assessments of the likelihood of the company under review to obtain additional financing,
to achieve future milestones, make sales and to compete effectively in its markets. In
making these judgments the Company must also attempt to anticipate trends in the
particular companys industry as well as in the general economy. There can be no
guarantee that the Company will be accurate in its assessments and judgments. To the
extent that the Company is not correct in its conclusion it may decide to write down all
or part of the particular investment.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Marketable
Securities

|We
determine the appropriate classification of marketable securities at the time of purchase.
We hold marketable securities classified as trading securities that are carried at fair
value, and marketable securities classified as available-for-sale that are carried at fair
value with unrealized gains and losses included in the component of accumulated other
comprehensive loss in stockholders equity. We classify investment in marketable
securities as investment in trading securities, if those securities are bought and held
principally for the purpose of selling them in the near term (held for only a short period
of time). All the other securities are classified as available for sale securities.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

14

---

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|SFAS
115, Accounting for Certain Investments in Debt and Equity Securities, and
Securities and Exchange Commission (SEC) Staff Accounting Bulletin (SAB) 59,
Accounting for Noncurrent Marketable Equity Securities, provides guidance on
determining when an investment is other-than-temporarily impaired. Investments are
reviewed quarterly for indicators of other-than-temporary impairment. This determination
requires significant judgment. In making this judgment, we evaluate, among other factors,
the duration and extent to which the fair value of an investment is less than its cost;
the financial health of the investee; and our intent and ability to hold the investment.
Investments with an indicator are further evaluated to determine the likelihood of a
significant adverse effect on the fair value and amount of the impairment as necessary. If
market, industry and/or investee conditions deteriorate, we may incur future impairments.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Long-Lived
Assets

|On
January 1, 2002, Ampal adopted FAS 144, Accounting for the Impairment or Disposal of
Long  Lived Assets. FAS 144 requires that long- lived assets, to be held and
used by an entity, be reviewed for impairment and, if necessary, written down to the
respective estimated fair values, whenever events or changes in circumstances indicate
that the carrying amount of the assets may not be recoverable through undiscounted future
cash flows.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Accounting
for Income Taxes

|As
part of the process of preparing our consolidated financial statements, we are required to
estimate our income taxes in each of the jurisdictions in which we operate. This process
involves estimating our current tax exposure together with assessing temporary differences
resulting from differing treatment of items for tax and accounting purposes. These
differences result in deferred tax assets and liabilities, which are included in our
consolidated balance sheet. We must then assess the likelihood that our deferred tax
assets will be recovered from future taxable income, and, to the extent we believe that
recovery is not likely, we must establish a valuation allowance. To the extent we
establish a valuation allowance or increase this allowance in a period, we must include an
expense within the tax provision in the statement of operations. A valuation allowance is
currently set against certain tax assets because management believes it is more likely
than not that these deferred tax assets will not be realized through the generation of
future taxable income. We also do not provide for taxes on undistributed earnings of our
foreign subsidiaries, as it is our intention to reinvest undistributed earnings
indefinitely outside the United States.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Significant
management judgment is required in determining our provision for income taxes, our
deferred tax assets and liabilities and our future taxable income for purposes of
assessing our ability to realize any future benefit from our deferred tax assets. In the
event that actual results differ from these estimates or we adjust these estimates in
future periods, our operating results and financial position could be materially affected.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

15

---

---



Recently
Issued Accounting Pronouncements

FAS
123 (Revised 2004) Share-based Payment

|Effective
January 1, 2006, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 123R, Shared-Based Payment (SFAS No. 123R)
using the Modified Prospective Approach. There is no cumulative effect of adopting SFAS
123R, based on the awards outstanding as of January 1, 2006. See Note 4 of the financial
statements for further details regarding the adoption of this standard.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

FAS
154  Accounting Changes and Error Corrections  a replacement of APB Opinion
No. 20 and FASB Statement No. 3

|In
June 2005, the Financial Accounting Standards Board issued FAS No. 154,Accounting
Changes and Error Corrections  a replacement of APB Opinion No. 20 and FASB
Statement No.3". This Statement generally requires retrospective application to prior
periods financial statements of changes in accounting principle. Previously, Opinion
No. 20 required that most voluntary changes in accounting principle were recognized by
including the cumulative effect of changing to the new accounting principle in net income
of the period of the change. FAS 154 applies to all voluntary changes in accounting
principle. It also applies to changes required by an accounting pronouncement in the
unusual instance that the pronouncement does not include specific transition provisions.
When a pronouncement includes specific transition provisions, those provisions should be
followed. This Statement shall be effective for accounting changes and corrections of
errors made in fiscal years beginning after December 15, 2005 (Fiscal Year 2006 for the
Company). The adoption of this statement did not have a material effect on the results of
operations or financial position.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Results
of Operations

Three
months ended March 31, 2006 compared to three months ended March 31, 2005

|Ampal-American
Israel Corporation (Ampal) and its subsidiaries (the Company)
recorded a consolidated net loss of $0.6 million for the three months ended March 31, 2006
as compared to a net gain of $6.7 million for the same period in 2005. The decrease in
earnings is primarily attributable to the decrease in earning of affiliates, the decrease
of realized and unrealized gain on investments and the decrease in other income in the
three months ended March 31, 2006 as compared to the same period in 2005.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Equity
in earnings of affiliates decreased to a net gain of $0.9 million for the three months
ended March 31, 2006, as compared to a gain of $6.6 million for the same period in 2005.
The decrease is primarily attributable to a decrease in the earnings of Ophir Holdings
Ltd. which did not recorded any earnings in the three months ended March 31, 2006 as
compared to a gain of $6.3 million in the same period in 2005.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|In
the three month period ended March 31, 2006, Ampal recorded $1.0 million of realized gain
on investments, as compared to $3.3 million of realized gains in the same period in 2005.
The gain recorded in 2006 was primarily attributable to additional proceeds from the sale
of Modem Art Ltd. ($0.6 million gain) and the sale of certain assets by PSINet Europe, one
of the holdings of Ampals investee company, Telecom Partners (TP)($0.4
million gain).
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|The
Company recorded realized and unrealized gains from marketable securities in the amount of
$0.5 million in the three month period ended March 31, 2006 as compared to $0.7 million in
2005.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|In
the three month period ended March 31, 2006, the Company recorded $0.6 million in other
income, as compared to $2.5 million for the same period in 2005. The decrease in other
income is primarily related to the committed dividend for 2005 which had been fully paid
on October 3, 2005 by Motorola Israel Ltd. as part of the sale of the MIRS investment last
year.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

16

---

---

Liquidity and Capital Resources

Cash Flows

The Companys sources of cash
include cash and cash equivalents and marketable securities, which amount to $53.9
million as of March 31, 2006 as compared to $62.9 million in December 31, 2005. The
Company also has sources of cash from operations and cash from investing activities. The
Company believes that these sources are sufficient to fund the current requirements of
operations, capital expenditures, investing activities, dividends on preferred stock and
other financial commitments of the Company for the next 12 months. However, to the extent
that contingencies and payment obligations described below and in other parts of this
Report require the Company to make unanticipated payments, the Company would need to
further utilize these sources of cash. In the event of a decline in the market price of
its marketable securities, the Company may need to draw upon its other sources of cash,
which may include additional borrowing, refinancing of its existing indebtedness or
liquidating other assets, the value of which may also decline.

In addition, the shares of Ophir
Holdings Ltd. and government debenture notes equal to $9 million have already been
pledged as security for various loans provided to the Company for the purchase of these
shares and would therefore be unavailable if the Company wished to pledge them in order
to provide an additional source of cash (the pledge on the shares of Ophir Holdings Ltd.
has been removed after March 31, 2006).

Cash
flows from operating activities

Net cash provided by operating
activities totaled approximately $2.1 million for the three months ended March 31, 2006,
as compared to approximately $5.0 million at the same period in 2005. The decrease is
primarily attributable to a decrease in accounts payable and to the $0.1 million
dividends received from affiliates as compared to $2.4 million in 2005.

Cash
flows from investing activities

Net cash provided by investing
activities totaled approximately $0.1 million for the three months ended March 31, 2006,
as compared to approximately $2.2 million provided by investing activities for the same
period in 2005.

Cash
flows from financing activities

Net cash used in financing
activities was approximately $3.9 million for the three months ended March 31, 2006, as
compared to approximately $3.6 million of net cash used in financing activities for the
three months period ended March 31 2005.

In the three months ended March 31,
2006, the Company paid down its existing notes payable in the amount of $5.1 million
while using its own cash and borrowing an additional $1.2 million. In 2005, the Company
paid down its notes payable and debentures in the amount of $3.6 million from its own
cash.

Investments

On March 31, 2006, the aggregate
fair value of trading and available-for-sale securities was approximately $31.5 million,
as compared to $38.6 million at December 31, 2005. The decrease in 2006 is mainly
attributable to the sale of various marketable securities.

Debt

Notes and loans payable consist
primarily of bank borrowings either in U.S. dollars, linked to the Consumer Price Index
in Israel or in unlinked Israel Shekels, with interest rates varying depending upon their
linkage provision and mature between 2006-2010.

17

---

---

The Company financed a portion of
the development of Am-Hal, a wholly-owned subsidiary of the Company, which develops and
operates luxury retirement centers for senior citizens, through a revolving credit
facility from Bank Hapoalim ltd, Phoenix Insurance Company and others. On December 1,
2005, a loan agreement creating the facility was signed between Am-Hal, Phoenix Insurance
Company and others. Pursuant to the loan agreement, the lenders granted the Company a
revolving credit facility in Israeli Shekels equal to $12.5 million. The annual interest
rate on the loan, which matures in 10 years, is 7.5%. The interest rate and the principal
of the loan will be adjusted based on the changes in the Israeli Consumer Price Index. As
of March 31, 2006 the Company had drawn $2.5 million from the facility. As of March 31,
2006 and December 31, 2005 the amounts outstanding under these loans were $13.5 million
for both dates. The loans, excluding the Phoenix loan, mature in up to one year and have
interest rates range between 6.0% and 7.5%. The Company generally repays these loans with
the proceeds received from deposits and other payments from the apartments in Am-Hal
facilities. The loans are secured by a lien on Am-Hals properties. The Company also
issued guarantees in the amount of $3.2 million in favor of tenants of Am-Hal in order to
secure their deposits.

The Company finances its general
operations and other financial commitments through bank loans from Bank Hapoalim. These
loans in the amount of $26.3 million mature through 2006-2010. (As of December 31, 2005
the amount was $31.3 million).

Other long term borrowings in the
amount of $1.8 million are linked to the Israeli C.P.I and mature between 2006 and 2010,
of which an amount of $1.4 million bears no interest. The remaining $0.4 million bears an
annual interest of 5.7%.

The weighted average interest rates
and the balances of these short-term borrowings at March 31, 2006 and December 31, 2005
were 6.1% on $15.5 million and 6.0% on $15.0 million, respectively.

As of March 31, 2006, the Company
had issued guarantees on certain outstanding loans to its investees and subsidiaries in
the aggregate principal amount of $9.7 million. This includes:

| | 1. | $5.6
million guarantee on indebtedness incurred by Bay Heart ($3.3 million of
               which is recorded as a liability in the Companys financial
statements as                of March 31, 2006) in connection with the development of the
property, Bay Heart                recorded losses in 2006, in managements belief,
primarily as a result of                decreased rental revenues. There can be no
guarantee that Bay Heart will become                profitable or that it will generate
sufficient cash to repay its outstanding                indebtedness without relying on
the Companys guarantee.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | $3.2
million guarantee to Am-Hal tenants as described above.
| | -- | ------------------------------------------------------------

| | 3. | $0.9
million guarantee to Galha 1960 Ltd.
| | -- | -----------------------------------------

FOREIGN CURRENCY CONTRACTS

The Companys derivative
financial instruments consist of foreign currency forward exchange contracts. The
Company, utilizes these contracts from time to time, to manage risk exposure to movements
in foreign exchange rates. None of these contracts have been designated as hedging
instruments. These contracts are recognized as assets or liabilities on the balance sheet
at their fair value, which is the estimated amount at which they could be settled based
on market prices or dealer quotes, where available, or based on pricing models. Changes
in fair value are recognized currently in earnings. As of March 31 2006, the Company did
not have any open foreign currency forward exchange contract to purchase or to sell U.S.
dollars, in payment of New Israeli Shekel.

18

---

---

FORWARD
LOOKING STATEMENTS

This Quarterly Report (including but
not limited to factors discussed above, in the Managements Discussion and
Analysis of Financial Condition and Results of Operations, as well as those
discussed elsewhere in this Quarterly Report on Form 10-Q) includes forward-looking
statements (within the meaning of Section 27A of the Securities Act of 1993 and Section
21E of the Securities Exchange Act of 1934) and information relating to the Company that
are based on the beliefs of management of the Company as well as assumptions made by and
information currently available to the management of the Company. When used in this
Quarterly Report, the words anticipate, believe, estimate, expect, intend, plan, and
similar expressions, as they relate to the Company or the management of the Company,
identify forward-looking statements. Such statements reflect the current views of the
Company with respect to future events or future financial performance of the Company, the
outcome of which is subject to certain risks and other factors which could cause actual
results to differ materially from those anticipated by the forward-looking statements,
including among others, the economic and political conditions in Israel, the Middle East,
and the global business and economic conditions in the different sectors and markets
where the Companys portfolio companies operate.

Should any of those risks or
uncertainties materialize, or should underlying assumptions prove incorrect, actual
results or outcome may vary from those described herein as anticipated, believed,
estimated, expected, intended or planned. These risks and uncertainties may include, but
are not limited to, those described in this report, in Part II, Item 1A. Risk Factors and
elsewhere in our Annual Report on Form 10-K for the year ended December 31, 2005, and
those described from time to time in our future reports filed with the Securities and
Exchange Commission.

ITEM 3.  QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK

MARKET RISKS AND SENSITIVITY
ANALYSIS

The Company is exposed to various
market risks, including changes in interest rates, foreign currency rates and equity
price changes. The following analysis presents the hypothetical loss in earnings, cash
flows and fair values of the financial instruments which were held by the Company at
March 31, 2006, and are sensitive to the above market risks.

During the three months ended March
31, 2006, there have been no material changes in the market risk exposures facing the
Company as compared to those the Company faced in the fiscal year ended December 31,
2005.

Interest Rate Risks

At March 31, 2006, the Company had
financial assets totaling $19.7 million and financial liabilities totaling $46.4 million.
For fixed rate financial instruments, interest rate changes affect the fair market value
but do not impact earnings or cash flows. Conversely, for variable rate financial
instruments, interest rate changes generally do not affect the fair market value but do
impact future earnings and cash flows, assuming other factors are held constant.

At March 31, 2006, the Company had
fixed rate financial assets of $0.3 million and had variable rate financial assets of
$19.4 million.  A ten percent decrease in interest rates would increase the
unrealized fair value of the fixed rate assets by approximately $0.1 million.

At March 31, 2006, the Company had
fixed rate debt of $5.5 million and variable rate debt of $40.9 million. A ten percent
decrease in interest rates would increase the unrealized fair value of the financial
debts in the form of the fixed rate debt by approximately $0.1 million.

19

---

---

The net decrease in earnings for the
next year resulting from a ten percent interest rate increase would be approximately $0.2
million, holding other variables constant.

Exchange Rate Sensitivity Analysis

The Companys exchange rate
exposure on its financial instruments results from its investments and ongoing operations
in Israel. During 2006, the Company didnt enter into foreign exchange forward
purchase contracts to partially hedge this exposure. At March 31, 2006, the Company didnt
have any open foreign exchange forward purchase contracts. Holding other variables
constant, if there were a ten percent devaluation of the foreign currency, the Companys
cumulative translation loss reflected in the Companys accumulated other
comprehensive loss would increase by $1.2 million, and regarding the statements of income
(loss) a ten percent devaluation of the foreign currency would be reflected in a net
decrease in earnings and would be $1.6 million.

Equity Price Risk

The Companys investments at
March 31, 2006, included marketable securities which are recorded at fair value of $31.5
million, including a net unrealized gain of $0.9 million. Those securities have exposure
to price risk. The estimated potential loss in fair value resulting from a hypothetical
ten percent decrease in prices quoted on stock exchanges is approximately $3.2 million.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

The Companys management with
the participation of the Companys Chief Executive Officer and Chief Financial
Officer, has evaluated the effectiveness of the Companys disclosure controls and
procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended (the Exchange Act)) as of the end of the period covered
by this report. Based on such evaluation, the Companys Chief Executive Officer and
Chief Financial Officer have concluded that, as of the end of such period, the Companys
disclosure controls and procedures are effective. Notwithstanding the foregoing, a
control system, no matter how well designed and operated, can provide only reasonable,
not absolute, assurance that it will detect or uncover failures within the Company to
disclose material information otherwise required to be set forth in the Companys
periodic reports.

Internal Control Over Financial
Reporting

There have not been any changes in
the Companys internal control over financial reporting (as such term is defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which
this report relates that have materially affected, or are reasonably likely to materially
affect the Companys internal control over financial reporting.

20

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|Part II - | OTHER INFORMATION
|--------- | -----------------

|Item 1. | Legal Proceedings:
|------- | ------------------

| | None
| | ----

|Item 1A. | RISK FACTORS
|-------- | ------------

| | In
addition to the other information set forth in this report, you should carefully consider
the factors discussed in Part I, Item 1A. Risk Factors in our Annual Report
on Form 10-K for the year ended December 31, 2005, which could materially affect our
business, financial condition or future results. The risks described in our Annual Report
on Form 10-K are not the only risks facing our Company. Additional risks and
uncertainties not currently known to us or that we currently deem to be immaterial also
may materially adversely affect our business, financial condition and/or operating
results.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds.
                         None.
|------- | -------------------------------------------------------------------------------------------

|Item 3. | Defaults upon Senior Securities                          None.
|------- | --------------------------------------------------------------

|Item 4. | Submission of Matters to a Vote of Security Holders.
                         None.
|------- | -----------------------------------------------------------------------------------

|Item 5. | Other Information.                          None.
|------- | -------------------------------------------------

|Item 6. | Exhibits.
|------- | ---------

| | (a) | Exhibits:
| | --- | ---------

| | 11.1 | Schedule
Setting Forth Computation of Gain (Loss) per Share of Class A Stock.
| | ---- | -----------------------------------------------------------------------------

| | 31.1 | Certification
of Jack Bigio pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
| | ---- | -------------------------------------------------------------------------------------

| | 31.2 | Certification
of Irit Eluz pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
| | ---- | -------------------------------------------------------------------------------------

| | 32.1 | Certification
of Jack Bigio and Irit Eluz pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------------

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AMPAL-AMERICAN
ISRAEL CORPORATION AND SUBSIDIARIES

SIGNATURES

Pursuant to the requirements of the
Securities Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.

| |  | AMPAL-AMERICAN ISRAEL CORPORATIONBY: /S/ Jack Bigio
Jack Bigio
Chief Executive Officer
(Principal Executive Officer)
| |  | ----------------------------------------------------------------------------------------------------------------------------------

| |  | BY: /S/ Irit Eluz
Irit Eluz
CFO and Senior Vice President,
Finance and Treasurer
(Principal Financial Officer)
| |  | ----------------------------------------------------------------------------------------------------------------------------

| |  | BY: /S/ Giora Bar-Nir
Giora Bar-NirVP Accounting and Controller(Principal Accounting Officer)
| |  | -----------------------------------------------------------------------------------------------------------

Date: May 11, 2006

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AMPAL-AMERICAN
ISRAEL CORPORATION AND SUBSIDIARIES

Exhibit Index

|Exhibit No. |  | Description
|----------- |  | -----------

|11.1 |  | Schedule
Setting Forth Computation of Earnings Per Share of Class A Stock
|---- |  | -------------------------------------------------------------------------

|31.1 |  | Certification
of Jack Bigio pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|---- |  | -------------------------------------------------------------------------------------

|31.2 |  | Certification
of Irit Eluz pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|---- |  | -------------------------------------------------------------------------------------

|32.1 |  | Certification
of Jack Bigio and Irit Eluz pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------

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