---

---

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

---

FORM 10-Q

(Mark One)

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

For the quarterly
period ended September 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 of | (I.R.S. Employer)    
|Incorporation of Organization)  | Identification Number

|                                       |      
|-------------------------------------- | -----
|111 Arlozorov Street, Tel Aviv, Israel | 62098

|
|

|                                         |           
|---------------------------------------- | ----------
|(Address of Principal Executive Offices) | (Zip code)

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

|
|

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

Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports) , and
(2) has been subject to such filing requirements for the past 90 days.

Yes x No o

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

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

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

Yes o No x

The
number of shares outstanding of the issuers Class A Stock, its only authorized
common stock, is 57,702,532 (as of November 5, 2007).



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AMPAL-AMERICAN
ISRAEL CORPORATION AND SUBSIDIARIES

Index to Form 10-Q

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

| |         |                                  | 
| | ------- | -------------------------------- | 
| | Item 1. | Financial Statements (unaudited) | 

| |                                                            |    
| | ---------------------------------------------------------- | ---
| | Consolidated Balance Sheets                                | 1-2
|
| | Consolidated Statements of Operations for the             
| | Nine Months Ended September 30, 2007 and 2006              | 3  
|
| | Three Months Ended September 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                            | 25
|
| | Item 4T. | Controls and Procedures                                                               | 27

|         |                   |   
|-------- | ----------------- | --
|Part II. | Other Information | 28

| |          |                                                     |   
| | -------- | --------------------------------------------------- | --
| | Item 1.  | Legal Proceedings                                   | 28
|
| | Item 1A. | Risk Factors                                        | 28
|
| | Item 2.  | Unregistered Sales of Equity Securities and        
| |          | Use of Proceeds                                     | 28
|
| | Item 3.  | Defaults upon Senior Securities                     | 28
|
| | Item 4.  | Submission of Matters to a Vote of Security Holders | 28
|
| | Item 5.  | Other Information                                   | 28
|
| | Item 6.  | Exhibits                                            | 29



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

|ASSETS AS OF                           | September 30,
2007 | December 31,
2006
|-------------------------------------- | ------------------ | -----------------
|
|
|
|
|Cash and cash equivalents              |                    |                  
|                                       |                    |                  
|Deposits receivable                    |                    |                  
|                                       |                    |                  
|None marketable Securities             |                    |                  
|Marketable Securities                  |                    |                  
|                                       |                    |                  
|Total Investments                      |                    |                  
|                                       |                    |                  
|Real estate property, less accumulated |                    |                  
|depreciation of $0 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                                                                                                                                        | September 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 
    62,986,321 and 46,328,429 shares;
    outstanding 57,411,532
    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

|NINE MONTHS ENDED SEPTEMBER 30,                               | 2007 | 2006
|------------------------------------------------------------- | ---- | ----
|
|
|
|
|REVENUES                                                      |      |     
|                                                              |      |     
|Real estate income                                            |      |     
|Equity in earnings (loss) of affiliates                       |      |     
|Realized gain on fixed asset                                  |      |     
|Realized gains on investments                                 |      |     
|Realized and unrealized gains (loss) on marketable securities |      |     
|Interest income                                               |      |     
|Translation gain                                              |      |     
|Leisure-time income                                           |      |     
|Other income                                                  |      |     
|                                                              |      |     
|Total revenues                                                |      |     
|                                                              |      |     
|                                                              |      |     
|EXPENSES                                                      |      |     
|Real estate expenses                                          |      |     
|Realized loss on investments                                  |      |     
|Loss from impairment of investment                            |      |     
|Interest expenses                                             |      |     
|Translation loss                                              |      |     
|Other (mainly general and administrative)                     |      |     
|                                                              |      |     
|Total expenses                                                |      |     
|                                                              |      |     
|                                                              |      |     
|Income (loss) before income taxes                             |      |     
|Provision for income taxes                                    |      |     
|                                                              |      |     
|Income (loss) after income tax                                |      |     
|Minority interests, net                                       |      |     
|                                                              |      |     
|Income (loss) from continuing operations                      |      |     
|Gain on sale of discontinued operations, net of tax           |      |     
|Loss from discontinued operations, net of tax                 |      |     
|                                                              |      |     
|Net income (loss) from discontinued operations                |      |     
|                                                              |      |     
|                                                              |      |     
|Net income (loss) for the period                              |      |     
|                                                              |      |     
|                                                              |      |     
|Basic and Diluted EPS:                                        |      |     
|Loss from continuing operations                               |      |     
|Discontinued operations                                       |      |     
|                                                              |      |     
|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 SEPTEMBER 30,                              | 2007 | 2006
|------------------------------------------------------------- | ---- | ----
|
|
|
|
|REVENUES                                                      |      |     
|                                                              |      |     
|Real estate income                                            |      |     
|Equity in earnings (loss) of affiliates                       |      |     
|Realized gain on fixed asset                                  |      |     
|Realized gains on investments                                 |      |     
|Realized and unrealized gains (loss) on Marketable securities |      |     
|Interest income                                               |      |     
|Leisure-time income                                           |      |     
|Other income                                                  |      |     
|                                                              |      |     
|Total revenues                                                |      |     
|                                                              |      |     
|                                                              |      |     
|EXPENSES                                                      |      |     
|Real estate expenses                                          |      |     
|Interest expenses                                             |      |     
|Translation loss                                              |      |     
|Other (mainly general and administrative)                     |      |     
|                                                              |      |     
|Total expenses                                                |      |     
|                                                              |      |     
|                                                              |      |     
|Loss before income taxes                                      |      |     
|Provision for income taxes                                    |      |     
|                                                              |      |     
|Loss after income tax                                         |      |     
|Minority interests, net                                       |      |     
|                                                              |      |     
|Net loss from Continuing operations                           |      |     
|Gain on sale of discontinued operations, net of tax           |      |     
|Loss from discontinued operations, net of tax                 |      |     
|                                                              |      |     
|Net income (loss) from discontinued operations                |      |     
|                                                              |      |     
|Net income (loss) for the period                              |      |     
|                                                              |      |     
|                                                              |      |     
|Basic and Diluted EPS:                                        |      |     
|Loss from continuing operations                               |      |     
|Discontinued operations                                       |      |     
|                                                              |      |     
|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

|NINE MONTHS ENDED SEPTEMBER 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                         |      |     
|Gain on sale of discontinued operations, net of tax                       |      |     
|Gain from sale of fixed asset                                             |      |     
|Depreciation expense                                                      |      |     
|Amortization income from tenants deposits                                 |      |     
|Non cash stock based compensation                                         |      |     
|Interest from promissory note                                             |      |     
|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 in EMG, affiliates and others                            |      |     
|Proceeds from sale of affiliates and others                               |      |     
|Proceeds from sale of Am-Hal(1),net                                       |      |     
|Proceeds from sale of fixed asset                                         |      |     
|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

|NINE MONTHS ENDED SEPTEMBER 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                                                            |      |     
|Dividends paid on preferred stock                                   |      |     
|                                                                    |      |     
|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:                                 |      |     
|Shares issued for promissory note                                   |      |     
|                                                                    |      |     
|Consideration for sale of an investment recorded as other assets in |      |     
|previous period                                                     |      |     
|                                                                    |      |     
|Consideration for sale of fixed asset offset against other assets   |      |     
|                                                                    |      |     
|Investment in investee offset against issue of shares capital       |      |     
|                                                                    |      |     
|Dividend from an equity investment recorded as payable accounts in  |      |     
|previous period                                                     |      |     
|                                                                    |      |     
|(1)Assets and liabilities disposed of in the sale of Am-Hal:        |      |     
|Current assets                                                      |      |     
|Fixed assets                                                        |      |     
|Debt                                                                |      |     
|Deposits from tenants                                               |      |     
|Current liabilities                                                 |      |     
|Minority interest                                                   |      |     
|Difference from translation                                         |      |     
|Gain on sale of Am-Hal                                              |      |     
|                                                                    |      |     
|Proceeds from sale of Am-Hal                                        |      |     
|                                                                    |      |     

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 income for the period |               |  |  |        |  |  |        | 
|Foreign currency          |               | 
|translation adjustments   |               |  |  |        |  |  |        | 
|Sale of foreign currency  |               | 
|translation adjustment    |               |  |  |        |  |  |        | 
|                          |               |  |  |        |  |  |        | 
|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  | 
|Shares issued upon        |               | 
|conversion of             |               | 
|convertible note          |               |  |  | 4,476  |  |  | 4,476  | 
|Compensation expense      |               | 
|recognized under SFAS     |               | 
|123R                      |               |  |  |        |  |  |        | 
|Issuance of shares for    |               | 
|exercise of Warrants      |               |  |  | 3,579  |  |  | 3,579  | 
|                          |               |  |  |        |  |  |        | 
|BALANCE AT SEPTEMBER 30,  |               | 
|2007                      |               |  |  | 62,986 |  |  | 62,986 | 
|                          |               |  |  |        |  |  |        | 

*In thousands

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

7

---

---



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

(U.S. Dollars in thousands)

|                         | Class A stock | 4% Preferred stock | 6.5% Preferredstock
|------------------------ | ------------- | ------------------ | -------------------
|
|
|
|
|BALANCE AT JANUARY 1,    |               |                    |                    
|2006                     |               |                    |                    
|CHANGES DURING 2006:     |               |                   
|Net gain for the period  |               |                    |                    
|Foreign currency         |               |                   
|translation adjustments  |               |                    |                    
|Unrealized gain on       |               |                   
|marketable securities    |               |                    |                    
|                         |               |                    |                    
|Total comprehensive loss |               |                    |                    
|Conversion of 110,848    |               |                   
|4% preferred stock and   |               |                   
|518,887 6.5% preferred   |               |                   
|stock into Class A stock |               |                    |                    
|Shares issued according  |               |                   
|to EMG Agreement         |               |                    |                    
|Elimination of treasury  |               |                   
|stock                    |               |                    |                    
|Compensation expense     |               |                   
|recognized under SFAS    |               |                   
|123R                     |               |                    |                    
|Reissuance of 26,250     |               |                   
|treasury stock for       |               |                   
|exercise of stock option |               |                    |                    
|Dividend - 4%            |               |                   
|Preferred stock          |               |                    |                    
|- 6.5% Preferred         |               |                   
|stock                    |               |                    |                    
|                         |               |                    |                    
|BALANCE AT SEPTEMBER     |               |                   
|30, 2006                 |               |                    |                    
|                         |               |                    |                    

*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 SUBSIDIARIESNOTES 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 SFAS 159 (SFAS 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 the Company, this statement will be
effective as of the year beginning January 1, 2008. Ampal is currently evaluating
the impact that the adoption of SFAS 159 would have on its consolidated financial
statements.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

9

---

---



|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 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, was payable 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 bore interest at 6 months LIBOR (5.375%) and matured on September 20,
2007. Ampal could have pre-paid the Convertible Promissory Note at any time in whole or
in part. The maximum number of shares that could have been 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 fourth quarter of 2007.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

11

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| | 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 September 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. | Discontinued
operations
|-- | -----------------------

| | On
July 10, 2007, Ampal entered into an agreement to sell all of the Companys interest
in Am-Hal Ltd. (Am-Hal) a 100% wholly own subsidiary, which constitute
majority of the real estate segment 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.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

12

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| | 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 also 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 a result of the sale, the
Company recorded a gain of approximately $29.4 million (approximately $21.7 million, net
of tax) and a reduction in assets and liabilities of approximately $75.7 million and
approximately $74.5 million, respectively, a reduction in income of approximately $5.0
million and a reduction in pre tax loss of approximately $0.5 million as of September
30,2007. Loss for the nine months ended September 30, 2007 of $0.4 million attributable
to Am-Hal was recorded as loss from discontinued operations.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|8. | 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.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
real estate rental segment previously consisted of rental property owned in Israel 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. The real estate own by the company was sold in September 2006 and on
August 5, 2007, the Company sold all of its interest in Am-Hal (see note 7).
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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.
| | ----------------------------------------------------------------------------------------------

| | NINE MONTHS ENDED SEPTEMBER 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             |      |     
| |                                       |      |     

13

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| | 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.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|9. | The
following table summarizes securities that were not included in the
               calculations of diluted earnings per Class A share for the periods ended September 30, 2007 and 2006 because such shares are
anti-dilutive.
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (Shares in thousands) | Nine Months endedSeptember 30, | Three months endedSeptember 30,
| | --------------------- | ------------------------------ | -------------------------------
|
|
|
|
| | Options and Rights    |                                |                                

|10. | 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 September 30, 2007, the Company is in compliance with its debt
covenants.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
December 2006, as part of the EMG transaction, the Company issued to Merhav the
Convertible Promissory Note in the principal amount of $20 million, which at the option
of Merhav, was payable 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 bore interest at 6 months LIBOR (5.375%) and matured on the earlier of September 20,
2007, or upon demand by Merhav. On September 20, 2007, Merhav exercised its option to
convert the outstanding balance of $20,815,208 (which includes interest) on the
Convertible Promissory Note into 4,476,389 shares of Class A Stock of the Company.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

14

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|11. | 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.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|12. | SUBSEQUENT
EVENTS
|--- | -----------------

| | On
October 17, 2007, Ampal announced that the Company is conducting preliminary negotiations
with the controlling shareholder of Gadot Chemical Tankers and Terminals Ltd. (Gadot)
for the purchase of all its shares in Gadot based on a company value of approximately 545
million New Israeli Shekel (approximately $136 million). No agreement has been signed
between the parties and there can be no assurance that the negotiations will be
successful.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES

CRITICAL ACCOUNTING POLICIES

The preparation of Ampals
consolidated financial statements is in conformity with accounting principles generally
accepted in the United States which requires management to make estimates and assumptions
in certain circumstances that affect amounts reported in the accompanying consolidated
financial statements and related footnotes. Actual results may differ from these
estimates. To facilitate the understanding of Ampals business activities, described
below are certain Ampal accounting policies that are relatively more important to the
portrayal of its financial condition and results of operations and that require managements
subjective judgments. Ampal bases its judgments on its experience and various other
assumptions that it believes to be reasonable under the circumstances. Please refer to
Note 1 to Ampals consolidated financial statements included in this Annual Report
for the fiscal year ended December 31, 2006 for a summary of all of Ampals
significant accounting policies.

15

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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 September 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 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.

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 September 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. The company recognized an impairment
of $0.4 million in the nine months period ended September 30, 2007 as a result of
indication of decrease in one of the companys investment which was later sold.

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.

16

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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.

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).

17

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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.

Results of Operations

Nine months ended September 30,
2007 compared to Nine months ended September 30, 2006

Ampal-American Israel Corporation (Ampal)
and its subsidiaries (the Company) recorded a consolidated net gain of $3.7
million for the nine months ended September 30, 2007 compared to a net loss of $1.0
million for the same period in 2006. The increase in earning is primarily attributable to
an increase in gain on sale of discontinued operations for the nine months ended
September 30, 2007 as compared to the same period in 2006. This increase in earnings was
partially offset by decrease in net realized gains from investments, increase in losses
from affiliates, increase in marketable securities loss, increase from impairment of
investment and increase in interest expenses and translation loss.

On August 5, 2007 the company sold
all of its interest in Am-Hal a 100% wholly own subsidiary which accounted for majority
of the company real estate segment for $29.3 million. The recorded gain relating to the
sale is $29.4 million ($21.7 million net of tax) and it was recorded as gain on sale from
discontinued operation. Loss for the nine months ended September 30, 2007 attributable to
Am-Hal of $0.4 million compared to a $1.3 million loss for nine months ended September
30, 2006 is recorded as loss from discontinued operations.

In the nine month period ended
September 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 investment 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 Coral World International
Limited (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).

18

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The Company recorded realized and
unrealized loss from marketable securities in the amount of $0.2 million in the nine
months ended September 30, 2007 as compared to $1.1 million in the same period in 2006.

Equity in earnings of affiliates
decreased to a net loss of $1.0 million for the nine months ended September 30, 2007,
compared to a net gain of $1.4 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 $1.6
million in the nine months ended September 30, 2006, the increase in losses from
Bay-Heart Limited (Bay Heart) which recorded a loss of $1.2 million compared
to $0.8 million in the nine months ended September 30, 2006 and the sale of Carmel in May
2007, which recorded earnings of $0.1 million in the nine months ended September 30, 2007
compared to earnings of $0.5 million in the nine months ended September 30, 2006.

In the nine months ended September
30, 2007, the Company recorded $0.5 million of loss from impairment of investment
relating to the investment in Carmel.

In the nine months ended September
30, 2007, the Company recorded $7.8 million of interest expense, compared to $1.9 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 (the Convertible Promissory Note) issued to Merhav which were issued in
November and December 2006, respectively. On September 20, 2007, Merhav exercised its
option to convert the outstanding balance of $20,815,208 on the Convertible Promissory
Note into 4,476,389 shares of Class A Stock of the Company.

In the nine months ended September
30, 2007, the Company recorded a $1.0 million translation loss, as compared to a $0.8
million translation gain for the same period in 2006. The increase in translation loss is
related to the revaluation of the New Israeli Shekel compared to the American Dollar.

Results of operations analyzed by
segments for nine months ended September 30:

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

In the nine months ended September
30, 2007, the Company recorded $2.6 million in revenue which was comprised of $1.9
million in the finance segment, $1.8 million in the leisure-time segment and a $1.0
million loss in equity, as compared to $14.3 million for the same period in 2006 which
was comprised of $4.6 million in the finance segment, $2.7 million in real estate
segment, $5.7 million in the leisure-time segment and a $1.4 million gain in equity. The
decrease in finance segment revenue is primarily related to the decrease in realized and
unrealized gains on marketable securities and the decrease in realized gain from
investments relating to finance segment, which the company recorded $0.2 million in the
nine months ended September 30, 2007 compared to $1.2 million in the same period in 2006.
The decrease in Real estate income is related to the sale of Am-Hal, a wholly owned
subsidiary. 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.

19

---

---



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

In the nine months ended September
30, 2007, the Company recorded $17.3 million in expenses which was comprised of $15.6
million in the finance segment and $1.7 million in the leisure-time segment, as compared
to $11.5 million expense for the same period in 2006 which was comprised of $9.9 million
in the finance segment, $0.1 million in the real estate segment and $1.5 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. On September 20, 2007, Merhav exercised its
option to convert the outstanding balance of $20,815,208 on the Convertible Promissory
Note into 4,476,389 shares of Class A Stock of the Company.

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

The Company recorded a consolidated
net gain of $11.9 million for the three months ended September 30, 2007 compared to a net
loss of $1.8 million for the same period in 2006. The increase in earnings is primarily
attributable to an increase in gain on sale of discontinued operations and decrease in
loss from discontinued operations for the three months ended September 30, 2007, as
compared to the same period in 2006. This increase in earnings was partially offset by an
increase in losses from affiliates, interest expenses and translation loss, for the three
months ended September 30, 2007 as compared to the same period in 2006.

On August 5, 2007, the Company sold
all of its interest in Am-Hal a wholly owned subsidiary for $29.3 million. The recorded
gain relating to the sale is $29.4 million ($21.7 million net of tax) and it was recorded
as gain on sale from discontinued operations.

The Company recorded a loss from
Am-Hal discontinued operations of $0.6 million in the three months ended September 30,
2006 as compared to no loss in the same period in 2007 since the investment was sold in
August 5, 2007.

Equity in earnings of affiliates
decreased to a net loss of $0.7 million for the three months ended September 30, 2007,
compared to a net loss of $0.1 million for the same period in 2006. The increase in
losses is primarily attributable to the increase in losses from Bay Heart which recorded
a loss of $0.7 million in the three months ended September 30, 2007, compared to $0.2
million in the same period in 2006.

The Company recorded realized and
unrealized gains from marketable securities in the amount of $0.1 million in the three
months ended September 30, 2007 as compared to $0.4 million in the same period in 2006.

20

---

---



In the three months ended September
30, 2007, the Company recorded $3.6 million of interest expense, compared to $0.6 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.
On September 20, 2007, Merhav exercised its option to convert the outstanding balance of
$20,815,208 on the Convertible Promissory Note into 4,476,389 shares of Class A Stock of
the Company.

In the three months ended September
30, 2007, the Company recorded a $1.5 million translation loss, as compared to a $0.1
million translation loss for the same period in 2006. The increase in translation loss is
related to the revaluation of the New Israeli Shekel compared to the American Dollar.

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

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

In the three months ended September
30, 2007, the Company recorded $0.9 million in revenue which was comprised of $0.9
million in the finance segment, $0.7 million in the leisure-time segment and a $0.7
million loss in equity, as compared to $4.0 million for the same period in 2006 which was
comprised of $1.0 million in the finance segment, $2.6 million in real estate segment,
$0.6 million in the leisure-time segment and a $0.1 million loss in equity. The decrease
in real estate income is related to the sale of Am-Hal a wholly owned subsidiary.

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

In the three months ended September
30, 2007, the Company recorded $8.7 million in expenses which was comprised of $8.0
million in the finance segment and $0.7 million in the leisure-time segment, as compared
to a $4.4 million expense for the same period in 2006 which was comprised of $3.8 million
in the finance segment, $0.1 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. On September 20, 2007, Merhav exercised its
option to convert the outstanding balance of $20,815,208 on the Convertible Promissory
Note into 4,476,389 shares of Class A Stock of the Company.

21

---

---



Liquidity and Capital Resources

| | Cash
Flows
| | ----------

On September 30, 2007, cash, cash
equivalents and marketable securities were $78.4 million, as compared with $37.1 million
at December 31, 2006. The increase is primarily attributable to the sale of Am-Hal,
Carmel and proceeds from the exercise of warrants. This increase in cash flow was
partially offset by the additional investment in EMG, Bay Heart and FIMI.

As of September 30, 2007, the
Company had $14.9 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 $26.5 million for the nine months ended September 30,
2007, compared to approximately $35.6 million provided by operating activities for the
same period in 2006. The increase in cash used is primarily attributable to: (1) the
$14.8 million of net investment in marketable securities in 2007 ($17.1 million
investment offset by $2.3 million proceeds) as compared to $39.6 million of net proceeds
from the sale of marketable securities ($89.6 million proceeds offset by $50.0 million
invested) in the same period of 2006; and (2) the increase in interest expense due 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

| | Cash
flows from investing activities
| | ------------------------------------

Net cash provided by investing
activities totaled approximately $24.1 million for the nine months ended September 30,
2007, compared to approximately $31.2 million used in investing activities for the same
period in 2006. The increase in cash is primarily attributable to the proceeds from the
sale of Am-Hal, Carmel, FIMI and by deposit collected,
offset by the Companys investment in EMG ($5.8 million), investment in Bay Heart
($2.4 million) and capital improvement in Am-Hal. The cash used in investing activities
during 2006 is primarily attributable to the Companys investments in EMG ($52.7
million), Bay-Heart ($1.4 million) and Fimi ($0.4 million) offset by the proceeds at the
amount of $23.0 million from the sale of CWI, Ophir, Modem Art and certain assets of TP
and FIMI.

22

---

---



| | Cash
flows from financing activities
| | ------------------------------------

Net cash provided by financing
activities was approximately $28.6 million for the nine months ended September 30, 2007,
compared to approximately $7.4 million of net cash used in financing activities for the
nine months ended September 30, 2006.

In the nine months ended September
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 ($18.0 million). In the nine months ended September 30, 2006, the
Company paid down its existing notes payable to Bank Hapoalim in the amount of $6.0
million while using its own cash and borrowing an additional $0.7 million under a loan
facility with Bank Hapoalim.

Investments

In the nine months ended September
30, 2007, the Company made additional investments of $5.8 million in EMG as part of a
capital call, $2.3 million in the form of a loan to Bay Heart and $0.1 million in FIMI.

In the nine months ended September
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.

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. As a result of the sale, the Company recorded a gain of $29.4 million ($21.7
million net of tax).

Debt

Notes issued to institutional
investors in Israel, the Convertible Promissory 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 September 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.

23

---

---



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.

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 the Convertible Promissory
Note in the principal amount of $20 million, which at the option of Merhav, was payable
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 bore interest at 6
months LIBOR (5.375%) and matured on the earlier of September 20, 2007 or upon demand by
Merhav. On September 20, 2007 Merhav exercised its option to convert the outstanding
balance of $20,815,208 (which includes interest) on the Convertible Promissory Note into
4,476,389 shares of Class A Stock of the Company.

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 September 30, 2007 and December 31,
2006 were 7.4% on $3.5 million and 6.3% on $21.2 million, respectively.

As of September 30, 2007, the
Company had issued guarantees on certain outstanding loans to its investees and
subsidiaries in the aggregate principal amount of $6.3 million. These include:

|1. | A
$5.3 million guarantee on indebtedness incurred by Bay Heart ($1.3 million of
               which is recorded as a liability in the Companys financial
statements as                of September 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
$1.0 million guarantee to Galha 1960 Ltd.
|-- | -------------------------------------------

CHANGES IN SHAREHOLDERS EQUITY

As of September 30, 2007 the Company
issued 3,579,351 Class A Shares to investors that exercised warrants granted to them by
the Company on December 28, 2006. An additional 291,000 Class A shares were issued during
October 2007 and they were recorded as receipt on account of unallocated shares.
The total proceeds from the exercise of warrants were $18.0 million.

On  September  20,  2007  Merhav
 exercised  its  option to  convert  the  outstanding  balance of    $20,815,208  (which
includes  interest) on the Convertible  Promissory Note into 4,476,389  shares    of
Class A Stock of the Company.

24

---

---



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 September 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
prices 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
September 30, 2007, and are sensitive to the above market risks.

During the nine months ended
September 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.

25

---

---



Interest Rate Risks

As of September 30, 2007, the
Company had financial assets totaling $41.1 million and financial liabilities totaling
$106.1 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.

As of September 30, 2007, the
Company did not have fixed rate financial assets and had variable rate financial assets
of $41.1 million.  A ten percent decrease in interest rates would not increase the
unrealized fair value of the fixed rate assets.

As of September 30, 2007, the
Company had fixed rate debt of $67.4 million and variable rate debt of $38.7 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 $0.1 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. As of September 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 $1.7 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 $7.9 million.

Equity Price Risk

The Companys investments as of
September 30, 2007, included marketable securities which are recorded at a fair value of
$14.9 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
$1.5 million. There will be no impact on cash flows resulting from a hypothetical ten
percent decrease in prices quoted on stock exchanges.

26

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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.

27

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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 Securities
|------- |  | -------------------------------

| | None.
| | -----

|Item 4. |  | Submission of Matters to a Vote of Security Holders.
|------- |  | ----------------------------------------------------

| | None.
| | -----

|Item 5. |  | Other Information.
|------- |  | ------------------

| | None.
| | -----

28

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

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

|10.1 |  | Agreement
 between Ampal Industries Inc. and Phoenix Holdings Ltd. and Golden Meybar (2007) Ltd.,
dated July 10,                   2007.  (Filed as Exhibit 10.2 to Form 10-Q, filed with
the SEC on August 8, 2007, and  incorporated  herein by                   reference).
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|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.
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------

29

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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:  November 8, 2007

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AMPAL-AMERICAN
ISRAEL CORPORATION AND SUBSIDIARIES

Exhibit Index

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

|10.1 |  | Agreement
 between Ampal Industries Inc. and Phoenix Holdings Ltd. and Golden Meybar (2007) Ltd.,
dated July 10,                   2007.  (Filed as Exhibit 10.2 to Form 10-Q, filed with
the SEC on August 8, 2007, and  incorporated  herein by                   reference).
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|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.
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------

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