---

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

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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 June 30, 2007

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 ofIncorporation of Organization) | (I.R.S. Employer)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 51,470,698 (as of August 1, 2007).



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AMPAL-AMERICAN
ISRAEL CORPORATION AND SUBSIDIARIES

Index to Form 10-Q

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

|         |                                                                     | Page
|-------- | ------------------------------------------------------------------- | ----
|
|Item 1.  | Financial Statements (unaudited)                                    |     
|        
|         | Consolidated Balance Sheets                                         | 1-2 
|        
|         | Consolidated Statements of Operations for the                      
|         | Six Months Ended June 30, 2007 and 2006                             | 3   
|        
|         | Three Months Ended June 30, 2007 and 2006                           | 4   
|        
|         | Consolidated Statements of Cash Flows                               | 5-6 
|        
|         | Consolidated Statements of Changes in Shareholders' Equity          | 7-8 
|        
|         | Notes to the Consolidated Financial Statements                      | 9   
|        
|Item 2.  | Management's Discussion and Analysis of                            
|         | Financial Condition and Results of Operations                       | 15  
|        
|Item 3.  | Quantitative and Qualitative Disclosures About Market Risk          | 24  
|        
|Item 4T. | Controls and Procedures                                             | 26  
|        
|Part II. | Other Information                                                   | 27  
|        
|         | Item 1. Legal Proceedings                                           | 27  
|        
|         | Item 1A. Risk Factors                                               | 27  
|        
|         | Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | 27  
|        
|         | Item 3. Defaults upon Senior Securities                             | 27  
|        
|         | Item 4. Submission of Matters to a Vote of Security Holders         | 27  
|        
|         | Item 5. Other Information                                           | 27  
|        
|         | Item 6. Exhibits                                                    | 27  



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ITEM 1.  FINANCIAL STATEMENTSAMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIESCONDENSED CONSOLIDATED BALANCE SHEETS

|ASSETS AS OF                                                               | June 30,2007 | December 31,2006
|-------------------------------------------------------------------------- | ------------ | ----------------
|
|                                                                           |              |                 
|Cash and cash equivalents                                                  |              |                 
|                                                                           |              |                 
|Deposits receivable                                                        |              |                 
|                                                                           |              |                 
|Investments                                                                |              |                 
|                                                                           |              |                 
|Real estate property, less accumulated depreciation of $14,838 and $14,003 |              |                 
|                                                                           |              |                 
|Other assets                                                               |              |                 
|                                                                           |              |                 
|                                                                           |              |                 
|Total Assets                                                               |              |                 
|                                                                           |              |                 

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

1

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AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

|LIABILITIES AND SHAREHOLDERS' EQUITY AS OF      | June 30,
2007 | December 31,
2006
|----------------------------------------------- | ------------- | -----------------
|
|
|
|LIABILITIES                                     |               |                  
|                                                |               |                  
|Notes and loans payable                         |               |                  
|Convertible note to related party               |               |                  
|Debentures                                      |               |                  
|Deposits from tenants                           |               |                  
|Accounts payable, accrued expense and others    |               |                  
|                                                |               |                  
|Total Liabilities                               |               |                  
|                                                |               |                  
|                                                |               |                  
|Minority interests, net                         |               |                  
|                                                |               |                  
|                                                |               |                  
|Class A Stock; $1 par value; authorized         |               |                  
|100,000,000 and 60,000,000 shares; issued       |               |                  
|56,012,975 and 46,328,429 shares;               |               |                  
|outstanding 50,438,186    and 40,753,640 shares |               |                  
|                                                |               |                  
|Receipt on account of unallocated shares        |               |                  
|                                                |               |                  
|Additional paid-in capital                      |               |                  
|                                                |               |                  
|Warrants                                        |               |                  
|                                                |               |                  
|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 these condensed consolidated financial
statements.

2

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AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

|SIX MONTHS ENDED JUNE 30,                                      | 2007 | 2006
|-------------------------------------------------------------- | ---- | ----
|
|
|
|
|REVENUES                                                       |      |     
|                                                               |      |     
|Real estate income                                             |      |     
|Equity in earnings (loss) of affiliates                        |      |     
|Realized gains on investments                                  |      |     
|Realized and unrealized gains (loss) on  marketable securities |      |     
|Interest income                                                |      |     
|Translation gain                                               |      |     
|Other income                                                   |      |     
|                                                               |      |     
|Total revenues                                                 |      |     
|                                                               |      |     
|                                                               |      |     
|EXPENSES                                                       |      |     
|Real estate expenses                                           |      |     
|Realized loss on investments                                   |      |     
|Loss from impairment of investment                             |      |     
|Interest expenses                                              |      |     
|Other (mainly general and administrative)                      |      |     
|                                                               |      |     
|Total expenses                                                 |      |     
|                                                               |      |     
|                                                               |      |     
|Income (loss) before income taxes                              |      |     
|Provision for income taxes                                     |      |     
|                                                               |      |     
|Income (loss) after income tax                                 |      |     
|Minority interests, net                                        |      |     
|                                                               |      |     
|Net income (loss) for the period                               |      |     
|                                                               |      |     
|                                                               |      |     
|Basic EPS:                                                     |      |     
|Earning (loss) per Class A Share                               |      |     
|                                                               |      |     
|                                                               |      |     
|Shares used in calculation (in thousands)                      |      |     
|                                                               |      |     
|                                                               |      |     
|Diluted EPS:                                                   |      |     
|Earning (loss) per Class A Share                               |      |     
|                                                               |      |     
|                                                               |      |     
|Shares used in calculation (in thousands)                      |      |     
|                                                               |      |     

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

3

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AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

|THREE MONTHS ENDED JUNE 30,                                   | 2007 | 2006
|------------------------------------------------------------- | ---- | ----
|
|
|
|REVENUES                                                      |      |     
|                                                              |      |     
|Real estate income                                            |      |     
|Equity in earnings (loss) of affiliates                       |      |     
|Realized gains on investments                                 |      |     
|Realized and unrealized gains (loss) on marketable securities |      |     
|Interest income                                               |      |     
|Translation gain                                              |      |     
|Other income                                                  |      |     
|                                                              |      |     
|Total revenues                                                |      |     
|                                                              |      |     
|                                                              |      |     
|EXPENSES                                                      |      |     
|Real estate expenses                                          |      |     
|Realized loss on investments                                  |      |     
|Interest expenses                                             |      |     
|Other (mainly general and administrative)                     |      |     
|                                                              |      |     
|Total expenses                                                |      |     
|                                                              |      |     
|                                                              |      |     
|Income (loss) before income taxes                             |      |     
|Provision for income taxes                                    |      |     
|                                                              |      |     
|Income (loss) after income tax                                |      |     
|Minority interests, net                                       |      |     
|                                                              |      |     
|                                                              |      |     
|Net Income (loss) for the period                              |      |     
|                                                              |      |     
|                                                              |      |     
|Basic EPS:                                                    |      |     
|Earning (loss) per Class A Share                              |      |     
|                                                              |      |     
|                                                              |      |     
|Shares used in calculation (in thousands)                     |      |     
|                                                              |      |     
|                                                              |      |     
|Diluted EPS:                                                  |      |     
|Earning (loss) per Class A Share                              |      |     
|                                                              |      |     
|                                                              |      |     
|Shares used in calculation (in thousands)                     |      |     
|                                                              |      |     

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

4

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

|SIX MONTHS ENDED JUNE 30,                                                 | 2007 | 2006
|------------------------------------------------------------------------- | ---- | ----
|
|
|
|
|Cash flows from operating activities:                                     |      |     
|Net Income (loss) for the period                                          |      |     
|Adjustments to reconcile net (income)loss for the period to net cash from |      |     
|operating activities:                                                     |      |     
|Equity in loss (earnings) of affiliates                                   |      |     
|Realized and unrealized gains on investments, net                         |      |     
|Depreciation expense                                                      |      |     
|Amortization income from tenants deposits                                 |      |     
|Non cash stock based compensation                                         |      |     
|Loss from impairment of investment                                        |      |     
|Translation  gain                                                         |      |     
|Minority interests                                                        |      |     
|Decrease 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(used in) by operating activities                        |      |     
|                                                                          |      |     
|Cash flows from investing activities:                                     |      |     
|Deposit collected                                                         |      |     
|Investments made                                                          |      |     
|Proceeds from sale of investments                                         |      |     
|Capital improvements                                                      |      |     
|                                                                          |      |     
|                                                                          |      |     
|Net cash provided (used in) by investing                                  |      |     
|activities                                                                |      |     
|                                                                          |      |     

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

5

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

|SIX MONTHS ENDED JUNE 30,                                              | 2007 | 2006
|---------------------------------------------------------------------- | ---- | ----
|
|
|
|
|Cash flows from financing activities:                                  |      |     
|Notes and loans payable received                                       |      |     
|Notes and loans payable repaid                                         |      |     
|Contribution to partnership by minority                                |      |     
|Proceeds from exercise of stock option and                             |      |     
|warrants                                                               |      |     
|                                                                       |      |     
|Net cash provided by (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 Non-cash                                    |      |     
|Investing and Financing Activities:                                    |      |     
|                                                                       |      |     
|Consideration  for sale of an  investment  recorded as other assets in |      |     
|previous period                                                        |      |     
|                                                                       |      |     
|                                                                       |      |     
|Dividend  from an equity  investment  recorded as payable  accounts in |      |     
|previous period                                                        |      |     
|                                                                       |      |     

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

6

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AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(U.S. Dollars in thousands)

|                           | Class A stock |  |  |        |  |  |       
|-------------------------- | ------------- |  |  | ------ |  |  | ------
|
|                           |               |  |  |        |  |  |       
|BALANCE AT JANUARY 1, 2007 |               |  |  | 46,328 |  |  | 46,328
|CHANGES DURING 2007:       |               | 
|Net loss for the period    |               |  |  |        |  |  |       
|                           |               | 
|Foreign currency           |               | 
|translation adjustments    |               |  |  |        |  |  |       
|                           |               |  |  |        |  |  |       
|Total comprehensive loss   |               |  |  |        |  |  |       
|                           |               |  |  |        |  |  |       
|Adjustment upon adoption   |               | 
|of FIN 48                  |               |  |  |        |  |  |       
|Change in deferred tax     |               | 
|asset  relating to         |               | 
|adoption of FIN 48         |               |  |  |        |  |  |       
|Shares issued for          |               | 
|investment made            |               |  |  | 8,603  |  |  | 8,603 
|Compensation expense       |               | 
|recognized under SFAS      |               | 
|123R                       |               |  |  |        |  |  |       
|Issuance of shares for     |               | 
|exercise of Warrants       |               |  |  | 1,082  |  |  | 1,082 
|                           |               |  |  |        |  |  |       
|                           |               | 
|BALANCE AT JUNE 30, 2007   |               |  |  | 56,013 |  |  | 56,013
|                           |               |  |  |        |  |  |       

*In thousands

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

7

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AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(U.S. Dollars in thousands)

|                           | Class A stock | 4% Preferred stock | 6.5% Preferred stock |        |  |  |        | 
|-------------------------- | ------------- | ------------------ | -------------------- | ------ |  |  | ------ | 
|
|
|
|
|BALANCE AT JANUARY 1, 2006 |               |                    |                      | 25,827 |  |  | 25,827 | 
|CHANGES DURING 2006:       |               |                   
|Net gain for the period    |               |                    |                      |        |  |  |        | 
|                           |               |                   
|Foreign currency           |               |                   
|translation adjustments    |               |                    |                      |        |  |  |        | 
|Unrealized gain on         |               |                   
|marketable securities      |               |                    |                      |        |  |  |        | 
|                           |               |                    |                      |        |  |  |        | 
|Total comprehensive loss   |               |                    |                      |        |  |  |        | 
|Conversion of 3,721  4%    |               |                   
|preferred stock and        |               |                   
|28,333 6.5% preferred      |               |                   
|stock into Class A stock   |               |                    |                      | 103    |  |  | 103    | 
|Compensation expense       |               |                   
|recognized under SFAS      |               |                   
|123R                       |               |                    |                      |        |  |  |        | 
|Reissuance of 26,250       |               |                   
|treasury stock for         |               |                   
|exercise of stock option   |               |                    |                      |        |  |  |        | 
|                           |               |                    |                      |        |  |  |        | 
|BALANCE AT JUNE 30, 2006   |               |                    |                      | 25,930 |  |  | 25,930 | 
|                           |               |                    |                      |        |  |  |        | 

*In thousands

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

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,                2006, filed with the Securities and Exchange Commission.
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Reference
should be made to the Companys consolidated financial statements for the year ended
December 31, 2006 for a description of the critical accounting policies. Also, reference
should be made to the notes to the Companys December 31, 2006 consolidated
financial statements for additional information regarding the Companys consolidated
financial condition, results of operations and cash flows.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Accounting
Change  Effective January 1, 2007 the Company adopted Financial Accounting
Standards Board (FASB) Interpretation No. 48, Accounting for Uncertainty
in Income Taxes (an interpretation of FASB Statement No. 109) (FIN 48).
Refer to Note 6 for additional information regarding the Companys unrecognized tax
benefits.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | SFAS
No. 157  Fair Value Measurements
| | --------------------------------------

| | In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements(SFAS
157), which provides guidance on how to measure assets and liabilities that use
fair value. SFAS 157 will apply whenever another US GAAP standard requires (or permits)
assets or liabilities to be measured at fair value but does not expand the use of fair
value to any new circumstances. This standard also will require additional disclosures in
both annual and quarterly reports. SFAS 157 will be effective for fiscal years beginning
after November 15, 2007 (January 1, 2008 for the Company). The Company is currently
evaluating the impact, if any, the adoption of SFAS 157 will have on its financial
statements.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | FAS
No. 159  The Fair Value Option for Financial Assets and Financial Liabilities
| | ----------------------------------------------------------------------------------

| | In
February 2007, the FASB issued FAS 159, The Fair Value Option for Financial Assets
and Financial Liabilities. This standard permits entities to choose to measure many
financial assets and financial liabilities at fair value. Unrealized gains and losses on
items for which the fair value option has been elected are reported in earnings. As
applicable to Ampal, this statement will be effective as of the year beginning January 1,
2008. Ampal is currently evaluating the impact that the adoption of FAS 159 would have on
its consolidated financial statements.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

9

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|4. | Cash
and cash equivalents
|-- | -------------------------

| | Cash
equivalents are short-term, highly liquid investments that have original maturity dates
of three months or less and are readily convertible into cash.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------

| | Cash
equal to $12.0 million has been placed as a compensating balance for various loans
provided to the Company and would therefore be unavailable if the Company wished to
pledge them in order to provide an additional source of cash.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|5. | East
Mediterranean Gas Company
|-- | ------------------------------

| | On
December 1, 2005, the Company, through Merhav Ampal Energy, Ltd. (MAE), a
wholly-owned subsidiary of the Company, acquired a 2% interest in East Mediterranean Gas
Co. S.A.E., an Egyptian joint stock company (EMG) from Merhav M.N.F. Ltd. (Merhav).
The Company paid $30.0 million in cash, representing the fair value of the interest
purchased at the time this transaction closed.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
August 1, 2006, the Company acquired the beneficial ownership of 4.6% of the outstanding
shares of EMGs capital stock from Merhav. The transaction was accounted for as a
transfer of assets between entities under common control, which resulted in Merhav
transferring the investment in EMG to Ampal at carrying value. Due to the nature of Merhavs
operations, this entity would be treated as an investment company under US GAAP, and as
such, the carrying value of the investment in EMG would equal fair value. On this basis,
the 4.6% investment in EMG was transferred to Ampal at carrying value, which also equals
fair value. The cost of the investment was $100.0 million, of which, $50.0 million was
paid in cash and the balance was paid in 10,248,002 shares of the Company Class A Stock
(based on the Companys share price of $4.88 per share) that was accounted for at a
fair value of $49.0 million. The issuance of the shares of Class A Stock received the
approval of the shareholders of the Company as required by the marketplace rules of the
NASDAQ Global Market. As a result of this transaction, the Company beneficially owned
6.6% of the total outstanding shares of EMG. Through August 2008, the cost of the
investment may be adjusted downward should Merhav sell any of its remaining shares of EMG
to a third-party purchaser at a price per share lower than the price per share paid by
the Company pursuant to the agreement. Additionally, pursuant to the agreement, the
Company was granted an option for a period of up to two years to have the right to
acquire up to an additional 5.9% of the total outstanding shares of EMG stock.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Yosef
A. Maiman, the Chairman, President and CEO of the Company and a member of the controlling
shareholder group of the Company, is the sole owner of Merhav. Because of the foregoing
relationships, a special committee of the Board of Directors composed of the Companys
independent directors, who also constitute all of the members of the Companys Audit
Committee, negotiated and approved the transaction. Houlihan Lokey Howard & Zukin
Financial Advisors, Inc., which was retained as financial advisor to the special
committee, delivered a fairness opinion to the special committee regarding the
transaction.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
August 22, 2006, EMG called for additional capital from all of its shareholders. As a
result, the Company paid an additional $2.7 million in order to maintain its pro rata
beneficial interest in this investment.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
December 21, 2006, the Company acquired the beneficial ownership of an additional 5.9% of
the outstanding shares of EMGs capital stock pursuant to an option granted by
Merhav in August 2006. The transaction was accounted for as a transfer of assets between
entities under common control, which resulted in Merhav transferring the investment in
EMG to Ampal at carrying value. Due to the nature of Merhavs operations, this
entity would be treated as an investment company under US GAAP, and as such, the carrying
value of the investment in EMG would equal fair value. On this basis, the 5.9% investment
in EMG was transferred to Ampal at carrying value, which also equals fair value.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

10

---

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| | The
cost of the investment was approximately $128.3 million, of which approximately $68.3
million was paid in cash, $40 million was paid in 8,602,151 shares of the Companys
Class A Stock and the balance was satisfied by the issuance of a promissory note in the
principal amount of $20 million (the Convertible Promissory Note), which, at
the option of Merhav, will be paid in cash, additional shares of the Company Class A
Stock (based on a price per share of $4.65), or a combination thereof. As permitted under
the stock purchase agreement, Merhav assigned its right to the 8,602,151 Shares to De
Majorca Holdings Limited as part of Merhavs restructuring process. The Convertible
Promissory Note bears interest at 6 months LIBOR (5.375%) and matures on September 20,
2007 or upon demand by Merhav. Ampal may pre-pay the Convertible Promissory Note at any
time in whole or in part. The maximum number of shares that can be issued in this
transaction (including accrued interest payable through the maturity date on the
Convertible Promissory Note) is 13,078,540 shares of Class A Stock. As a result of this
transaction, Ampal beneficially owns 12.5% of the total outstanding shares of EMG. The
issuance of the 8,602,151 shares and the shares underlying the Convertible Promissory
Note received the approval of the shareholders of the Company on February 7, 2007, as
required by the marketplace rules of the NASDAQ Global Market. Due to the agreement of
the controlling shareholder group to vote in favor of the issuance of these shares to
Merhav as of the closing date of the EMG transaction(which ensured that the proposal
would be adopted by the requisite shareholders vote on February 7, 2007)the Company, as
of December 31, 2006, classified for accounting purposes the sale of these shares as part
of the exchange with Merhav on December 21, 2006 and recognized the $40 million with
shareholders equity as Receipt on account of unallocated shares.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Yosef
A. Maiman, the Chairman, President and CEO of the Company and a member of the controlling
shareholder group of the Company, is the sole owner of Merhav. Because of the foregoing
relationships, a special committee of the Board of Directors composed of the Companys
independent directors, who also constitute all of the members of the Companys Audit
Committee, negotiated and approved the transaction. Houlihan Lokey Howard & Zukin
Financial Advisors, Inc., which was retained as financial advisor to the special
committee, advised the special committee on these transactions.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
June 4, 2007, EMG called for additional capital from all of its shareholders. As a
result, the Company paid an additional $5.8 million in order to maintain its pro rata
beneficial interest in EMG.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
June 6, 2007, the Company, through MAE, entered into an agreement with Merhav and certain
Israeli institutional investors (the Investors) providing for the
establishment of a joint venture to purchase and hold shares of EMG. The terms of the
transaction provide that the joint venture will purchase, with funds provided by the
Investors, a 1.8% interest in EMG from Merhav for a purchase price of approximately $40
million. The price being paid is the same purchase price (on a per share basis) paid by
MAE in its last purchase of beneficial interests in EMG in December 2006. The Investors
will have a 50% interest in the joint venture for their $40 million contribution. MAE
will contribute a 1.8% interest in EMG in exchange for the remaining 50% interest in the
joint venture. The transaction is subject to customary closing conditions and is expected
to close in the third quarter of 2007.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

11

---

---



| | The
joint venture entity will be a newly formed Israeli limited partnership, Merhav
Ampal Energy Holdings, LP (the Partnership), whose general partner will
be a newly formed Israeli company equally owned by Ampal and the Israeli Infrastructure
Fund (IIF), one of the Investors. MAE and the Investors will be limited
partners. The general partner shall manage the partnership through a board of directors
consisting of 4 directors, two of whom will be appointed by Ampal and two of whom shall
be appointed by IFF. If a deadlock on the board of directors of the general partner
occurs in connection with certain major decisions relating to EMG (such as changes in EMGs
organizational documents or dividend policy, the sale, merger or liquidation of EMG,
capital calls by EMG, approval of material and related party agreements, new issuances by
EMG and the exercise of preemptive rights), the general partner will cause the shares of
EMG held by the Partnership to be voted pro rata in accordance with the wishes of Ampal
and IIF.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
June 28, 2007, Ampal and the Investors agreed to include additional Israeli institutional
investors (the New Investors) in the previously announced joint venture to
purchase and hold shares in EMG.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
joint venture will use the additional funds provided by the New Investors to purchase an
additional 2.6% interest in EMG from Merhav for a purchase price of approximately $57
million, which is the same purchase price (on a per share basis) paid by MAE for its last
purchase of beneficial ownership in EMG shares in December 2006. MAE will contribute an
additional 2.6% interest in EMG above the 1.8% interest in EMG it has already agreed to
contribute. At closing, the joint venture will hold a total of 8.8% of the outstanding
shares of EMG. Ampals contribution is being valued at the same price per EMG share
as the joint ventures purchase from Merhav. Following the investment, Ampal will
hold a 50% interest in the joint venture and the Investors will have a 50% interest in
the joint venture for their aggregate contribution of approximately $97 million. This
transaction (including the original agreement to form the joint venture) is subject to
customary closing conditions. As of June 30, 2007 the closing conditions were not met.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|6. | Income
Tax
|-- | ----------

| | In
July 2006, the Financial Accounting Standards Board (FASB) released FASB
Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement No. 109 (FIN 48) which became
effective for and was adopted by the Company as of January 1, 2007. FIN 48 clarifies the
accounting and reporting for uncertainties in income taxes and prescribes a comprehensive
model for the financial statement recognition, measurement, presentation and disclosure
of uncertain tax positions taken or expected to be taken in income tax returns.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
a result of the adoption by the Company of FIN 48, on January 1, 2007, the Company
recognized, as a cumulative effect of change in accounting principle, a $2 million
increase in its liability for unrecognized tax benefits, which was accounted for as a
decrease in the January 1, 2007 balance of retained earnings. Furthermore, the Company
recognized an increase in deferred tax assets of approximately $2.0 million, which was
accounted for as an increase in the January 1, 2007 balance of retained earnings. The
Company and its subsidiaries have not received tax assessments for the years 2003 and
thereafter.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|7. | Segment
information presented below, results primarily from operations in           Israel.
|-- | -------------------------------------------------------------------------------------------

| | SFAS 131
Disclosure about Segments of an Enterprise and Related Informationestablishes
annual and interim reporting standards for an enterprises operating segments and
related disclosures about its products, services, geographic areas and major customers.
Segment information presented below results primarily from operations in Israel.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
energy segment consists of the investment in EMG, an Egyptian joint stock company, which
holds the right to supply natural gas to Israel through a pipeline to be constructed from
Egypt to Israel.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

12

---

---



| | 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. (Am-Hal),
a wholly-owned subsidiary which owns and operates a chain of senior citizen facilities
located in Israel. On August 5, 2007, the Company sold all of interest in Am-Hal.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
leisure-time segment consists of Coral World International Limited (marine parks located
around the world) and an affiliate Country Club Hod Hasharon Sport Center and Kfar Saba,
the Companys 51%-owned subsidiary, all located in Israel. During June 2006, the
Company sold all of its interest in Coral World International Limited.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
finance segment consists of all other activities which are not part of the above segments.
| | ----------------------------------------------------------------------------------------------

| | SIX MONTHS ENDED JUNE 30,             | 2007 | 2006
| | ------------------------------------- | ---- | ----
|
|
|
|
|
| | Revenues:                             |      |     
| | Finance                               |      |     
| | Real Estate                           |      |     
| | Leisure-time                          |      |     
| | Intercompany adjustments              |      |     
| |                                       |      |     
| |                                       |      |     
| | Equity                                |      |     
| |                                       |      |     
| | Total consolidated revenues           |      |     
| |                                       |      |     
| |                                       |      |     
| | Pretax Operating Gain (loss):         |      |     
| | Finance                               |      |     
| | Real Estate                           |      |     
| | Leisure-time                          |      |     
| |                                       |      |     
| |                                       |      |     
| | Equity                                |      |     
| |                                       |      |     
| | Total consolidated pretax gain (loss) |      |     
| |                                       |      |     
| |                                       |      |     
| | Total Assets:                         |      |     
| | Finance                               |      |     
| | Energy                                |      |     
| | Real Estate                           |      |     
| | Leisure-Time                          |      |     
| | Intercompany adjustments              |      |     
| |                                       |      |     
| | Total consolidated assets             |      |     
| |                                       |      |     

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

13

---

---



|8. | The
following table summarizes securities that were not included in the
               calculations of diluted earnings per Class A share for the six-month
periods                ended June 30, 2007 and 2006 because such shares are
anti-dilutive.
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (Shares in thousands) | JUNE 30,
| | --------------------- | --------
|
|
|
|
|
| | Options and Rights    |         

|9. | DEBT
|-- | ----

| | During
2007 the Company entered into the following new loan agreement:
| | ----------------------------------------------------------------------

| | On February
26, 2007, the Company entered into a bank loan with Union Bank Of Israel (UBI).
Pursuant to the loan agreement, on April 2, 2007 UBI granted the Company a $10 million
loan, which bears interest at the rate of LIBOR plus 2% to be repaid in six annual
installments commencing on April 2, 2008. The loan is secured by a pledge of certain
assets.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
April 26, 2007, the Company repaid its existing loans with Bank Hapoalim and signed a new
loan agreement. The new agreement provides for a secured $27 million dollar loan facility
to the Company at the value as of March 30, 2007, to be used for general corporate
purposes. On March 30, 2007, the Company borrowed the full $27 million under the loan
facility. The funds borrowed under the loan facility are due in six annual installments
commencing on December 31, 2007 and bear an interest at an annual rate of LIBOR plus 2%.
The Loan Agreement contains financial and other covenants including an acceleration of
payment upon the occurrence of certain changes in the ownership of the Companys
Class A Stock.  As of June 30, 2007, the Company is in compliance with it's debt covenants.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10. | LEGAL
PROCEEDINGS:
|--- | ------------------

| | On
March 18, 2007, tenants of the retirements centers for senior citizens of Am-Hal filed a
lawsuit in the Tel Aviv District Court against Ampal, Am-Hal and other subsidiaries of
Ampal. The lawsuit was filed after Ampal announced the potential sale of its holdings in
Am-Hal to Mishan. Among other things, the plaintiffs requested that the District Court
(i) issue warrants that will oblige Am-Hal to keep the deposits received from the tenants
in a designated account for each tenant controlled by an accountant agreed to by Am-Hal
and the tenants, (ii) maintain the level of services provided by Am-Hal to the tenants
and (iii) maintain the ratio of independent tenants and supportive tenants in the
centers. The plaintiffs also asked the District Court to issue temporary ex parte
injunctions to prohibit Ampal from signing an agreement for the sale of its holdings in
Am-Hal and to nominate a receiver to locate and keep the tenants deposits. The
District Court did not grant the temporary injunctions ex parte and requested that the
defendants reply to the claim in accordance with the normal procedures. The District
Court removed the plaintiffs request for the temporary injunctions according to the
plaintiffsrequest. On July 29, 2007 the District Court abated the claim as
requested by the plaintiffs and defendants.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|11. | SUBSEQUENT
EVENTS
|--- | -----------------

| | On
July 10, 2007, Ampal entered into an agreement to sell all of the Companys interest
in Am-Hal a 100% wholly own subsidiary to Phoenix Holdings Ltd. (Phoenix) and
Golden Meybar (2007) Ltd. (Golden Meybar)for an aggregate consideration of
$29.3 million.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Since
December 2005, Phoenix held an option to purchase 19.9% of Am-Hals issued share
capital. Phoenix agreed not to exercise such option on or before the closing of the
transaction.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

14

---

---



| | On
August 5, 2007, the Company completed the sale to Phoenix and Golden Meybar of all of the
Companys interest in Am-Hal, and received from Phoenix and Golden Meybar an aggregate
consideration of $29.3 million. The closing of the sale was subject to the approval of
anti-trust authorities and the consent of Bank Hapoalim Ltd., which were obtained on July
26, 2007 and July 29, 2007, respectively. As aresult of the sale, the Company anticipates
recording a gain of approximately $29.7 million (approximately $19.7 million, net of tax)
and a reduction in assets and liabilities of approximately $75.7 million and $75.2 million,
respectively, in the third quarter of 2007.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|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 generally accepted accounting
principles 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 this
Annual Report for the fiscal year ended December 31, 2006 for a summary of all of Ampals
significant accounting policies.

Investment in EMG and other cost
basis investments

The Company accounts for its 12.5%
equity interest in East Mediterranean Gas Co. S.A.E., an Egyptian joint stock company (EMG),
and a number of other investments on the basis of the cost method. EMG, which is the
Companys most significant holding as of June 30, 2007, was acquired from Merhav
(M.N.F.) Ltd. (Merhav), which is an entity controlled by one of the members
of the Companys controlling shareholder group. As a result, the transaction was
accounted for as a transfer of assets between entities under common control, which
resulted in Merhav transferring the investment in EMG to Ampal at carrying value. Due to
the nature of Merhavs operations, this entity would be treated as an investment
company under US GAAP, and as such, the carrying value of the investment in EMG would
equal fair value. As a result, the 12.5% investment in EMG was transferred at carrying
value, which equals fair value. Application of the cost basis 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.

15

---

---



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. 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 (as of June 30, 2007, no marketable securities were
classified as available for sale securities).

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
SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS
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 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 us 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. In
2007, there were no undistributed earnings from foreign subsidiaries.

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.

16

---

---



We account for uncertain tax
positions in accordance with FIN 48. The application of income tax law is
inherently complex. As such, we are required to make many assumptions and judgments
regarding our income tax positions and the likelihood of such tax positions being upheld
if challenged by applicable regulatory authorities. Interpretations and guidance
surrounding income tax laws and regulations change over time. As such, changes in our
assumptions and judgments can materially affect amounts recognized in the consolidated
balance sheets and statements of operations.

Employee Stock-Based Compensation

Prior to January 1, 2006, we
accounted for employees share-based payment under the intrinsic value model in
accordance with Accounting Principles Board Opinion No  25. Accounting for
Stock Issued to Employees (APB 25) and related interpretations. In
accordance with Statement of Financial Accounting Standards No. 123  Accounting
for Stock-Based Compensation (FAS 123), as amended by Statement of
Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation
 Transition and Disclosure, we disclosed pro forma information assuming we
had accounted for employees share-based payments using the fair value-based method
defined in FAS 123.

Effective January 1, 2006, we
adopted Statement of Financial Accounting Standards No. 123 (revised 2004), Share-based
Payment (FAS 123(R)). FAS 123(R) supersedes APB 25 and related
interpretations and amends Statement of Financial Accounting Standards No. 95, Statement
of Cash Flows (FAS 95). FAS 123(R) requires awards classified as equity
awards to be accounted for using the grant-date fair value method. The fair value of
stock options is determined based on the number of shares granted and the price of our
common stock, and determined based on the Black-Scholes models, net of estimated
forfeitures. We estimated forfeitures based on historical experience and anticipated
future conditions.

In March 2005, the Securities and
Exchange Commission issued Staff Accounting Bulletin No. 107 (SAB 107). SAB
107 provides supplemental implementation guidance on FAS 123(R), including guidance on
valuation methods, inventory capitalization of share-based compensation cost, income
statement effects, disclosures and other issues. SAB 107 requires share-based payment to
be classified in the same expense line items as cash compensation. We have applied the
provisions of SAB 107 in our implementation of FAS 123(R).

We elected to adopt the modified
prospective transition method, permitted by FAS 123(R). Under such transition method, FAS
123(R) was implemented as of the first quarter of 2006 with no restatement of prior
periods. The valuation provisions of FAS 123(R) apply to new awards and to awards
modified, repurchased, or cancelled after January 1. 2006. Additionally, compensation
cost for the portion of awards for which the requisite service has not been rendered that
are outstanding as of January 1, 2006, is recognized over the remaining service period
using the grant-date fair value of those awards as calculated for pro forma disclosure
purposes under FAS 123(R).

Recently Issued Accounting
Pronouncements

SFAS No. 157  Fair Value
Measurements

In September 2006, the FASB issued
SFAS No. 157, Fair Value Measurements(SFAS 157), which provides
guidance on how to measure assets and liabilities that use fair value. SFAS 157 will
apply whenever another US GAAP standard requires (or permits) assets or liabilities to be
measured at fair value but does not expand the use of fair value to any new
circumstances. This standard also will require additional disclosures in both annual and
quarterly reports. SFAS 157 will be effective for fiscal years beginning after November
15, 2007 (January 1, 2008 for the Company). The Company is currently evaluating the
impact, if any, the adoption of SFAS 157 will have on its financial statements.

17

---

---



FAS
No. 159  The Fair Value Option for Financial Assets and Financial Liabilities

In February 2007, the FASB issued
FAS 159, The Fair Value Option for Financial Assets and Financial Liabilities. This
standard permits entities to choose to measure many financial assets and financial
liabilities at fair value. Unrealized gains and losses on items for which the fair value
option has been elected are reported in earnings. As applicable to Ampal, this statement
will be effective as of the year beginning January 1, 2008. Ampal is currently
evaluating the impact that the adoption of FAS 159 would have on its consolidated
financial statements.

Results of Operations

Six months ended June 30, 2007
compared to Six months ended June 30, 2006

Ampal-American Israel Corporation (Ampal)
and its subsidiaries (the Company) recorded a consolidated net loss of $8.2
million for the six months ended June 30, 2007 compared to a net gain of $0.8 million for
the same period in 2006. The increase in losses is primarily attributable to a decrease
in earning of affiliates, a decrease in net realized gains from investments and
marketable securities, an increase in loss from impairment of investment and an increase
in interest expense for the six months ended June 30, 2007 as compared to the same period
in 2006.

Equity in earnings of affiliates
decreased to a net loss of $0.3 million for the six months ended June 30, 2007, compared
to a net gain of $1.5 million for the same period in 2006. The decrease is primarily
attributable to the sale of Coral World International (CWI) in June 2006,
which had recorded a gain of $1.6 million in the six months ended June 30, 2006.

In the six month period ended June
30, 2007, the Company recorded $0.2 million of net realized gain on investments, compared
to $4.4 million of net realized gain in the same period in 2006. On May 21, 2007 the
company sold all of its interest in Carmel Containers Ltd. (Carmel) for $4.6
million. No gain was recorded relating to sale of Carmel since an impairment was recorded
during the first quarter of 2007 (see below loss from impairment). The net gain
recorded in 2006 was primarily attributable to the sale of CWI ($4.2 million gain),
additional proceeds from the sale of Modem Art Ltd. (Modem Art) ($0.6 million
gain), the sale of certain assets by PSINet Europe, one of the holdings of Ampals
investee company, Telecom Partners (TP)($0.4 million gain)and the sale of
certain assets by FIMI Opportunity Fund L.P (FIMI)($0.2 million gain). These
gains were offset partially by a loss from the sale of Ophir Holdings Ltd. (Ophir)
($1.0 million loss).

In the six month period ended June
30, 2007, the Company recorded $0.5 million of loss from impairment of investment
relating to the investment in Carmel.

In the six month period ended June
30, 2007, the Company recorded $4.7 million of interest expense, compared to $1.7 million
for the same period in 2006. The increase in interest expense is primarily attributable
to the notes issued to institutional investors in Israel and the convertible promissory
note issued to Merhav which were issued in November and December 2006, respectively.

Results of operations analyzed by
segments for six months ended June 30:

|                                | 2007 | 2006
|------------------------------- | ---- | ----
|
|
|
|
|Revenues:                       |      |     
|Finance                         |      |     
|Real estate income              |      |     
|Leisure-time                    |      |     
|Intercompany adjustments        |      |     
|                                |      |     
|                                |      |     
|Equity in earning of affiliates |      |     
|                                |      |     
|Total                           |      |     
|                                |      |     

18

---

---



In the six months ended June 30,
2007, the Company recorded $7.3 million in revenue which was comprised of $1.6 million in
the finance segment, $5.0 million in the real estate segment, $1.1 million in the
leisure-time segment and a $0.3 million loss in equity, as compared to $14.3 million for
the same period in 2006 which was comprised of $3.0 million in the finance segment, $4.7
million in real estate segment, $5.1 million in the leisure-time segment and a $1.5
million gain in equity. The decrease in finance segment revenue is primarily related to
decrease in realized and unrealized gains on marketable securities. The decrease in
leisure-time revenue is primarily related to the gain of $4.2 million from the sale of
CWI which was recorded in 2006.

|                    | 2007 | 2006
|------------------- | ---- | ----
|
|
|
|
|Expenses:           |      |     
|                    |      |     
|Finance             |      |     
|Real estate expense |      |     
|Leisure-time        |      |     
|                    |      |     
|                    |      |     
|Total               |      |     
|                    |      |     

In the six months ended June 30,
2007, the Company recorded $14.7 million in expenses which was comprised of $8.0 million
in the finance segment, $5.6 million in the real estate segment and $1.0 million in the
leisure-time segment, as compared to $11.9 million expense for the same period in 2006
which was comprised of $5.6 million in the finance segment, $5.3 million in the real
estate segment and $1.0 million in the leisure-time segment. The increase in finance
expense is primarily attributable to the increase in interest expense relate to the notes
issued to institutional investors in Israel and the convertible promissory note issued to
Merhav, which were issued in November and December of 2006, respectively.

Three months ended June 30, 2007
compared to three months ended June 30, 2006

The Company recorded a consolidated
net loss of $3.2 million for the three months ended June 30, 2007 compared to a net gain
of $1.4 million for the same period in 2006. The increase in losses is primarily
attributable to a decrease in earning of affiliates, a decrease in net realized gains
from investments and marketable securities and increase in interest expense for the three
months ended June 30, 2007 as compared to the same period in 2006. This decrease in
earnings was partially offset by an increase in translation gain for the three months
ended June 30, 2007 as compared to the same period in 2006.

Equity in earnings of affiliates
decreased to a net loss of $0.3 million for the three months ended June 30, 2007,
compared to a net gain of $0.6 million for the same period in 2006. The decrease is
primarily attributable to the sale of CWI in June 2006, which had recorded a gain of $0.9
million in the three months ended June 30, 2006.

In the three month period ended June
30, 2007, the Company recorded $0.2 million of net realized gain on investments, compared
to $3.4 million of net realized gain in the same period in 2006. On May 21, 2007 the
Company sold all of its interest in Carmel for $4.6 million. No gain was recorded
relating to sale of Carmel since impairment was recorded during the first quarter of
2007. The gain recorded in 2006 was primarily attributable to the sale of CWI ($4.2
million gain) and the sale of certain assets by FIMI ($0.2 million gain). These gains
were partially offset by a loss from the sale of Ophir ($1.0 million loss).

19

---

---



In the three month period ended June
30, 2007, the Company recorded $2.6 million of interest expense, compared to $0.7 million
for the same period in 2006. The increase in interest expense is primarily attributable
to the notes issued to institutional investors in Israel and the convertible promissory
note issued to Merhav, which were issued in November and December of 2006, respectively.

In the three month period ended June
30, 2007, the Company recorded a $1.8 million translation gain, as compared to a $0.6
million translation gain for the same period in 2006. The increase in translation gain is
related to the devaluation of the New Israeli Shekel compared to the American Dollar.

Results of operations analyzed by
segments for three months ended June 30:

|                                | 2007 | 2006
|------------------------------- | ---- | ----
|
|
|
|
|Revenues:                       |      |     
|                                |      |     
|Finance                         |      |     
|Real estate income              |      |     
|Leisure-time                    |      |     
|Intercompany adjustments        |      |     
|                                |      |     
|                                |      |     
|Equity in earning of affiliates |      |     
|                                |      |     
|Total                           |      |     
|                                |      |     

In the three months ended June 30,
2007, the Company recorded $5.0 million in revenue which was comprised of $2.3 million in
the finance segment, $2.5 million in the real estate segment, $0.5 million in the
leisure-time segment and a $0.3 million loss in equity, as compared to $9.1 million for
the same period in 2006 which was comprised of $1.5 million in the finance segment, $2.4
million in real estate segment, $4.6 million in the leisure-time segment and a $0.6
million gain in equity. The increase in financial segment is primarily attributable to
the increase in translation gain related to the devaluation of the New Israeli Shekel
compared to the American Dollar. The decrease in leisure-time revenue is primarily
related to the gain of $4.2 million from the sale of CWI which was recorded in 2006.

|                    | 2007 | 2006
|------------------- | ---- | ----
|
|
|
|
|Expenses            |      |     
|                    |      |     
|Finance             |      |     
|Real estate Expense |      |     
|Leisure-time        |      |     
|                    |      |     
|                    |      |     
|Total               |      |     
|                    |      |     

In the three months ended June 30,
2007, the Company recorded $7.6 million in expenses which was comprised of $4.5 million
in the finance segment, $2.6 million in the real estate segment and $0.5 million in the
leisure-time segment, as compared to a $6.4 million expense for the same period in 2006
which was comprised of $2.9 million in the finance segment, $3.0 million in the real
estate segment and $0.5 million in the leisure-time segment. The increase in finance
expense is primarily attributable to the increase in interest expense derived from the
notes issued to institutional investors in Israel and the convertible promissory note
issued to Merhav, which were issued in November and December of 2006, respectively.

20

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Liquidity
and Capital Resources

Cash
Flows

On June 30, 2007, cash, cash
equivalents and marketable securities were $43.3 million, as compared with $37.1 million
at December 31, 2006. The increase is primarily attributable to the investment in
marketable securities which was funded by the sale of Carmel and FIMI and by proceeds
from exercise of warrants. This increase in cash flow was partially offset by the
additional investment in EMG, Bay Heart Ltd. (Bay Heart) and FIMI.

As of June 30, 2007, the Company had
$8.4 million of marketable securities as compared to $0.4 million in 2006.

The Company may also receive cash
from operations and investing activities and amounts available under credit facilities,
as described below. The Company believes that these sources are sufficient to fund the
current requirements of operations, capital expenditures, investing activities 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. 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, cash equal to $12
million has been placed as compensating balance for various loans provided to the Company
and would therefore be unavailable if the Company wished to pledge them in order to
provide an additional source of cash.

Cash
flows from operating activities

Net cash used in by operating
activities totaled approximately $15.4 million for the six months ended June 30, 2007,
compared to approximately $15.9 million provided by operating activities for the same
period in 2006. The decrease is primarily attributable to the $8.4 million of net
investment in marketable securities in 2007 ($9.5 million investment offset by $1.1
million proceeds) as compared to $21.8 million of net proceeds from the sale of
marketable securities ($71.8 million proceeds offset by $50.0 million invested) in the
same period of 2006.

Cash
flows from investing activities

Net cash used in investing
activities totaled approximately $1.4 million for the Six months ended June 30, 2007,
compared to approximately $21.3 million provided by investing activities for the same
period in 2006. The decrease is primarily attributable to the Companys investments
in EMG ($5.8 million), Bay Heart ($1.5 million) and capital improvement in Am-Hal offset
by proceeds from the sale of Carmel ($4.6 million) and FIMI and by deposit collected. The
cash provided by investing activities during 2006 is primarily attributable to the
proceeds at the amount of $23.0 million from the sale of CWI, Ophir, Modem Art and
certain assets of TP and FIMI.

Cash
flows from financing activities

Net cash provided by financing
activities was approximately $15.8 million for the six months ended June 30, 2007,
compared to approximately $5.0 million of net cash used in financing activities for the
six month period ended June 30, 2006.

In the six months ended June 30,
2007, the Company paid down its existing notes payable to Bank Hapoalim in the amount of
$26.6 million while borrowing $27.2 million under a loan facility with Bank Hapoalim and
an additional $10 million from Union Bank Of Israel (UBI) and from exercise
of warrants ($5.0 million). In the six months ended June 30, 2006, the Company paid down
its existing notes payable to Bank Hapoalim in the amount of $5.8 million while using its
own cash and borrowing an additional $0.7 million under a loan facility with Bank
Hapoalim.

21

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Investments

In the six months ended June 30,
2007, the Company made additional investments of $5.8 million in EMG as part of a capital
call, $1.4 million in the form of a loan to Bay Heart and $0.1 million in FIMI.

In the six months ended June 30,
2007, the Company disposed of the following investment:

On May 21, 2007, the Company closed
the sale of all of its holdings in Carmel, a packaging manufacturer based in Israel.
Pursuant to this transaction,
Ampal and its subsidiaries sold to Carmel an aggregate of 522,350 ordinary shares of
Carmel for an aggregate sales price of approximately $4.6 million. The Company recorded
no gain since impairment was recorded in the first quarter of 2007.

On
June 21, 2007, the Company sold certain assets of FIMI for $0.4 million.

Debt

Notes issued to institutional
investors in Israel, the convertible note issued to Merhav and other loans payable
pursuant to bank borrowings are 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 they mature between 2007-2015.

The Company finances its general
operations and other financial commitments through bank loans from Bank Hapoalim and UBI.
As of June 30, 2007, the outstanding indebtedness under these bank loans totaled $37.0
million and the loans mature through 2007-2013. As of December 31, 2006, the outstanding
indebtedness under the bank loans from Bank Hapoalim was $26.3 million.

On February 26, 2007, the Company
entered into a bank loan with UBI. Pursuant to the loan agreement, UBI granted the
Company a $10 million loan, which bears interest at the rate of LIBOR plus 2% to be
repaid in six annual installments commencing on April 2, 2008. The loan is secured by a
pledge of certain assets.

On April 26, 2007, the Company
repaid its existing loans with Bank Hapoalim and signed a new agreement. The new
agreement provides for a secured $27 million dollar loan facility to the Company at the
value as of March 30, 2007, to be used for general corporate purposes. On March 30, 2007,
the Company borrowed the full $27 million under the loan facility. The funds borrowed
under the loan facility are due in six annual installments commencing on December 31,
2007 and bear an interest at an annual rate of LIBOR plus 2%. The Loan Agreement contains
financial and other covenants including an acceleration of payment upon the
occurrence of certain changes in the ownership of our Class A Stock.

On November 20, 2006, the Company
entered into a trust agreement with Hermatic Trust (1975) Ltd. pursuant to which the
Company issued notes to institutional investors in Israel in the principal aggregate
amount of NIS 250,000,000 (approximately $58 million) with an interest rate of 5.75%,
which is linked to the Consumer Price Index in Israel. The notes shall rank pari passu
with our unsecured indebtedness. The notes will be repaid in five equal annual
installments commencing on November 20, 2011, and the interest will be paid
semi-annually. The Company received the funds from the private placement of the notes on
November 20, 2006. Midroog Ltd., an affiliate of Moodys Investors Service rated the
Company as A3.

22

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On August 1, 2007, the Company
published a prospectus for the registration and listing of the notes for trading on the
TASE. Until the date of the listing, Ampal paid an additional annual interest rate of
0.5% on the notes.

In addition, as part of the EMG
transaction in December 2006, the Company issued to Merhav a promissory note (the Convertible
Promissory Note) in the principal amount of $20 million, which at the option of
Merhav, will be paid in cash, additional shares of Ampal Class A Stock (based on a price
per share of $4.65 per share), or a combination thereof. The Convertible Promissory Note
bears interest at 6 months LIBOR (5.375%) and matures on the earlier of September 20,
2007 or upon demand by Merhav. Ampal may pre-pay the Convertible Promissory Note at any
time in whole or in part.

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 Am-Hal 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 June 30, 2007, Am-Hal had drawn $2.5 million from the facility. As of June 30, 2007,
and December 31, 2006, the amount of Am-Hals outstanding indebtedness under the
loans from Bank Hapoalim Ltd., Phoenix Insurance Company and others, was $15.3 million
and $15.0 million, respectively. The loans, excluding the Phoenix loan, mature in up to
one year and have interest rates ranging between 6.5% and 7.5%. Am-Hal 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 $2.8 million in favor of
tenants of Am-Hal in order to secure their deposits. On August 5, 2007, the Company
completed the sale of all of its interest in Am-Hal (see subsequent events).

Other long term borrowings in the
amount of $1.7 million are linked to the Consumer Price Index in Israel and mature
between 2007 and 2010, of which $1.4 million bears no interest. The remaining $0.3
million bears an annual interest rate of 5.7%.

The weighted average interest rates
and the balances of these short-term borrowings as of June 30, 2007 and December 31, 2006
were 6.2% on $16.3 million and 6.4% on $21.2 million, respectively.

As of June 30, 2007, the Company had
issued guarantees on certain outstanding loans to its investees and subsidiaries in the
aggregate principal amount of $9.0 million. These include:

|1. | A
$5.3 million guarantee on indebtedness incurred by Bay Heart ($1.6 million of
          which is recorded as a liability in the Companys financial statements as
          of June 30, 2007) in connection with the development of the property. Bay Heart
          recorded losses in 2007 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. | A
$2.8 million guarantee to Am-Hal tenants as described above.
|-- | --------------------------------------------------------------

|3. | A
$1.0 million guarantee to Galha 1960 Ltd.
|-- | -------------------------------------------

CHANGES IN
SHAREHOLDERS EQUITY

During the second quarter of 2007
the Company issued 1,082,395 Class A Shares to investors that exercised warrants granted
to them by the Company on December 28, 2006. The total proceeds from the exercise of
warrants were $5.0 million.

23

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FOREIGN CURRENCY
CONTRACTS

The Companys derivative
financial instruments consist of foreign currency forward exchange contracts to purchase
or sell US dollars. These contracts are utilized by the Company, 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 June 30, 2007, the Company did
not have any open foreign currency forward exchange contracts to purchase or sell U.S.
Dollars.

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 and 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, 2006, and
those described from time to time in our future reports filed with the Securities and
Exchange Commission. The Company assumes no obligation to update or revise any
forward-looking statements.

|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 June
30, 2007, and are sensitive to the above market risks.

During the six months ended June 30,
2007, 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, 2006.

24

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Interest Rate Risks

At June 30, 2007, the Company had
financial assets totaling $32.7 million and financial liabilities totaling $116.4
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 June 30, 2007, the Company did
not have fixed rate financial assets and had variable rate financial assets of $32.7
million.  A ten percent decrease in interest rates would not increase the unrealized
fair value of the fixed rate assets.

At June 30, 2007, the Company had
fixed rate debt of $66.0 million and variable rate debt of $50.4 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.

The net decrease in earnings and
cash flow for the next year resulting from a ten percent interest rate increase would be
approximately $0.3 million, holding other variables constant.

Foreign Currency
Exchange Rate Sensitivity Analysis

The Companys exchange rate
exposure on its financial instruments results from its investments and ongoing operations
in Israel. During 2007, the Company did not enter into foreign exchange forward purchase
contracts. At June 30, 2007, 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
$1.6 million, and regarding the statements of operations, a ten percent devaluation of
the foreign currency would be reflected in a net increase in earnings and cash flow would
be $8.1 million.

Equity Price Risk

The Companys investments as of
June 30, 2007, included marketable securities which are recorded at a fair value of $8.4
million, including a net unrealized loss of $0.2 million. Those securities have exposure
to equity price risk. The estimated potential loss in fair value resulting from a
hypothetical ten percent decrease in prices quoted on stock exchanges is approximately
$0.8 million. There will be no impact on cash flows resulting from a hypothetical ten
percent decrease in prices quoted on stock exchanges.

25

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|ITEM 4T. |  | 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.

26

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

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

| | On
March 18, 2007, tenants of the retirements centers for senior citizens of Am-Hal filed a
lawsuit in the Tel Aviv District Court against Ampal, Am-Hal and other subsidiaries of
Ampal. The lawsuit was filed after Ampal announced the potential sale of its holdings in
Am-Hal to Mishan. Among other things, the plaintiffs requested that the District Court
(i) issue warrants that will oblige Am-Hal to keep the deposits received from the tenants
in a designated account for each tenant controlled by an accountant agreed to by Am-Hal
and the tenants, (ii) maintain the level of services provided by Am-Hal to the tenants
and (iii) maintain the ratio of independent tenants and supportive tenants in the
centers. The plaintiffs also asked the District Court to issue temporary ex parte
injunctions to prohibit Ampal from signing an agreement for the sale of its holdings in
Am-Hal and to nominate a receiver to locate and keep the tenants deposits. The
District Court did not grant the temporary injunctions ex parte and requested that the
defendants reply to the claim in accordance with the normal procedures. The District
Court removed the plaintiffs request for the temporary injunctions according to the
plaintiffsrequest. On July 29, 2007, the District Court abated the claim as
requested by the plaintiffs and defendants.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|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, 2006, 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 SecuritiesNone.
|------- |  | ------------------------------------

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

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

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

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

| | 10.1 | Form
of Amended and Restated Agreement of Certain Shareholders of East Mediterranean Gas
                  Co. (Filed as Exhibit 10.1 to Form 8-K, filed with the SEC on June 8,
2007, and                   incorporated herein by reference).
| | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

27

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| | 10.2 | Agreement
 between  Ampal  Industries  Inc. and Phoenix  Holdings  Ltd. and Golden Meybar
                  (2007) Ltd., dated July 10, 2007.
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------

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

| | 31.1 | Certification
 of Yosef A. Maiman 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 Yosef A. Maiman and Irit Eluz  pursuant to 18 U.S.C.  Section 1350, as
                  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
| | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

28

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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/ Yosef A. Maiman
Yosef A. MaimanChairman of the BoardPresident & Chief Executive Officer(Principal Executive Officer)
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | By: /s/ Irit Eluz
Irit EluzCFO 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:  August 8, 2007

29

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AMPAL-AMERICAN
ISRAEL CORPORATION AND SUBSIDIARIES

Exhibit Index

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

|10.1 |  | Form
of Amended and Restated Agreement of Certain Shareholders of East Mediterranean Gas
                  Co. (Filed as Exhibit 10.1 to Form 8-K, filed with the SEC on June 8,
2007, and                   incorporated herein by reference).
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.2 |  | Agreement
 between  Ampal  Industries  Inc. and Phoenix  Holdings  Ltd. and Golden Meybar
                  (2007) Ltd., dated July 10, 2007.
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------

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

|31.1 |  | Certification
 of Yosef A. Maiman 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 Yosef A. Maiman and Irit Eluz  pursuant to 18 U.S.C.  Section 1350, as
                  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

30

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