---

---

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

---

FORM 10-Q

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

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

For the quarterly period ended                                   March 31, 2005

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 an accelerated filer (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 19,951,426 (as of May 2, 2005).
|------------------------------------------------------------------------------------------------------------------------------------



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AMPAL-AMERICAN
ISRAEL CORPORATION AND SUBSIDIARIES

Index to Form 10-Q

|Part I   | Financial Information                                                                  |        
|-------- | -------------------------------------------------------------------------------------- | -------
|         |                                                                                        | Page   
|
|
|
|Item 1.  | Financial Statements                                                                   |        
|         | Consolidated Statements of Operations                                                 
|         | Three Months Ended March 31, 2005 and 2004                                             | 1      
|         | Consolidated Balance Sheets                                                            | 2      
|         | Consolidated Statements of Cash Flows                                                  | 4      
|         | Consolidated Statements of Changes in Shareholders' Equity                             | 6      
|         | Consolidated Statements of Comprehensive Gain (Loss)                                   | 8      
|         | Notes to the Consolidated Financial Statements.                                        | 9      
|Item 2.  | Management's Discussion and Analysis of Financial Condition and Results of Operations. | 14     
|Item 3.  | Quantitative and Qualitative Disclosures About Market Risk                             | 20     
|Item 4.  | Controls and Procedures                                                                | 21     
|Part II. | Other Information                                                                      | 21 - 24
|Item 1.  | Legal Proceedings                                                                      | 21 - 22
|Item 2.  | Unregistered Sales of Equity Securities and Use of Proceeds                            | 23     
|Item 3.  | Defaults upon Senior Securities                                                        | 23     
|Item 4.  | Submission of Matters to a Vote of Security Holders                                    | 23     
|Item 5.  | Other Information                                                                      | 24     
|Item 6.  | Exhibits                                                                               | 24     



---

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ITEM
1. FINANCIAL STATEMENTS

AMPAL-AMERICAN
ISRAEL CORPORATION AND SUBSIDIARIES 
CONSOLIDATED STATEMENTS OF OPERATIONS

|THREE MONTHS ENDED MARCH 31,                 | 2005 | 2004
|-------------------------------------------- | ---- | ----
|
|
|
|
|REVENUES                                     |      |     
|Equity in earnings of affiliates             |      |     
|Real estate income                           |      |     
|Realized and unrealized gains on investments |      |     
|Interest                                     |      |     
|Other                                        |      |     
|                                             |      |     
|Total revenues                               |      |     
|                                             |      |     
|                                             |      |     
|EXPENSES                                     |      |     
|Interest                                     |      |     
|Real estate expenses                         |      |     
|Loss from impairment of investments          |      |     
|Translation loss                             |      |     
|Other (mainly general and administrative)    |      |     
|                                             |      |     
|Total expenses                               |      |     
|                                             |      |     
|                                             |      |     
|Gain (loss) before income taxes              |      |     
|Provision for income taxes                   |      |     
|                                             |      |     
|Gain (loss) after income tax                 |      |     
|Minority interest                            |      |     
|                                             |      |     
|Net Gain (loss)                              |      |     
|                                             |      |     
|                                             |      |     
|                                             |      |     
|Basic EPS:                                   |      |     
|Gain (loss) per Class A share                |      |     
|                                             |      |     
|                                             |      |     
|Shares used in calculation (in thousands)    |      |     
|                                             |      |     
|                                             |      |     
|Diluted EPS:                                 |      |     
|Gain (loss) per Class A share                |      |     
|                                             |      |     
|Shares used in calculation (in thousands)    |      |     
|                                             |      |     

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

1

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---



AMPAL-AMERICAN
ISRAEL CORPORATION AND SUBSIDIARIES 
CONSOLIDATED BALANCE SHEETS

|ASSETS AS OF                           | March 31,
2005 | December 31,
2004
|-------------------------------------- | -------------- | -----------------
|
|
|
|
|Cash and cash equivalents              |                |                  
|                                       |                |                  
|Deposits, notes and loans receivable   |                |                  
|                                       |                |                  
|Marketable Securities                  |                |                  
|Other investment                       |                |                  
|                                       |                |                  
|Total Investments                      |                |                  
|                                       |                |                  
|Real estate property, less accumulated |                |                  
|depreciation of $12,605 and $12,190    |                |                  
|                                       |                |                  
|Other assets                           |                |                  
|                                       |                |                  
|                                       |                |                  
|                                       |                |                  
|                                       |                |                  
|                                       |                |                  
|Total Assets                           |                |                  
|                                       |                |                  

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

2

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---



AMPAL-AMERICAN
ISRAEL CORPORATION AND SUBSIDIARIES 
CONSOLIDATED BALANCE SHEETS

|LIABILITIES AND
SHAREHOLDERS' EQUITY AS OF      | March 31,
2005 | December 31,
2004
|----------------------------------------------- | -------------- | -----------------
|
|
|
|
|
|LIABILITIES                                     |                |                  
|Notes and loans payable                         |                |                  
|Debentures                                      |                |                  
|Deposits from tenants                           |                |                  
|Accounts payable, accrued                       |                |                  
|expense and others                              |                |                  
|                                                |                |                  
|Total Liabilities                               |                |                  
|                                                |                |                  
|                                                |                |                  
|Minority interests                              |                |                  
|                                                |                |                  
|                                                |                |                  
|SHAREHOLDERS EQUITY                             |                |                  
|4% Cumulative Convertible Preferred Stock, $5   |                |                  
|par value; authorized 189,287 shares; issued    |                |                  
|122,408 and 124,024 shares; outstanding 119,058 |                |                  
|and 120,674 shares                              |                |                  
|                                                |                |                  
|6-1/2% Cumulative Convertible Preferred Stock,  |                |                  
|$5 par value; authorized 988,055 shares; issued |                |                  
|643,419 and 662,219 shares; outstanding 520,883 |                |                  
|and 539,683 shares                              |                |                  
|                                                |                |                  
|Class A Stock; $1 par value; authorized         |                |                  
|60,000,000 shares; issued 25,779,783 and        |                |                  
|25,715,303 shares; outstanding 19,948,119       |                |                  
|and 19,883,639 shares                           |                |                  
|                                                |                |                  
|Additional paid-in capital                      |                |                  
|                                                |                |                  
|Retained earnings                               |                |                  
|                                                |                |                  
|Accumulated other comprehensive loss            |                |                  
|                                                |                |                  
|Treasury Stock, at cost                         |                |                  
|                                                |                |                  
|                                                |                |                  
|Total shareholders' equity                      |                |                  
|                                                |                |                  
|                                                |                |                  
|                                                |                |                  
|TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY      |                |                  
|                                                |                |                  

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

3

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

|THREE MONTHS ENDED MARCH 31,                   | 2005 | 2004
|---------------------------------------------- | ---- | ----
|
|
|
|
|Cash flows from operating activities:          |      |     
|Net gain (loss)                                |      |     
|Adjustments to reconcile net loss to net       |      |     
|cash provided by operating activities:         |      |     
|Equity in earnings of affiliates               |      |     
|Realized and unrealized gain                   |      |     
|on investments                                 |      |     
|Depreciation expense                           |      |     
|Amortization of deposits from tenants          |      |     
|Impairment of investments and loans            |      |     
|Translation loss                               |      |     
|Minority interests                             |      |     
|Increase in other assets                       |      |     
|Increase (decrease) in accounts payable,       |      |     
|accrued expenses and others                    |      |     
|Investments made in trading securities         |      |     
|Proceeds from sale of trading securities       |      |     
|Dividends received from affiliates             |      |     
|                                               |      |     
|                                               |      |     
|Net cash provided by operating activities      |      |     
|                                               |      |     
|                                               |      |     
|Cash flows from investing activities:          |      |     
|Deposits, notes and loans receivable collected |      |     
|Deposits, notes and loans receivable granted   |      |     
|Investments made in affiliates and others      |      |     
|Proceeds from sale of investments              |      |     
|Return of capital by partnership               |      |     
|Capital improvements                           |      |     
|                                               |      |     
|                                               |      |     
|Net cash provided by (used in) investing       |      |     
|activities                                     |      |     
|                                               |      |     

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

4

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---



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

|THREE MONTHS ENDED MARCH 31,                     | 2005 | 2004
|------------------------------------------------ | ---- | ----
|
|
|
|
|
|Cash flows from financing activities:            |      |     
|Notes and loans payable received                 |      |     
|Notes and loans payable repaid                   |      |     
|Debentures repaid                                |      |     
|                                                 |      |     
|                                                 |      |     
|Net cash (used in) provided by financing         |      |     
|activities                                       |      |     
|                                                 |      |     
|Effect of exchange rate changes on cash and      |      |     
|cash equivalents                                 |      |     
|                                                 |      |     
|                                                 |      |     
|Net increase in cash and cash equivalents        |      |     
|Cash and cash equivalents at beginning of period |      |     
|                                                 |      |     
|                                                 |      |     
|Cash and cash equivalents at end of period       |      |     
|                                                 |      |     
|                                                 |      |     
|Supplemental Disclosure of Cash Flow Information |      |     
|Cash paid during the period:                     |      |     
|Interest paid to others                          |      |     
|                                                 |      |     
|                                                 |      |     
|Income taxes paid                                |      |     
|                                                 |      |     
|Supplemental Disclosure of Non-cash              |      |     
|Investing Activities:                            |      |     
|Proceeds in tradable securities received from    |      |     
|realization of an investment                     |      |     
|                                                 |      |     
|                                                 |      |     
|Dividend in kind from an affiliate               |      |     
|                                                 |      |     

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

5

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

|                                            | March 31
2005 | December 31
2004
|------------------------------------------- | ------------- | ----------------
|
|
|
|
|4% PREFERRED STOCK                          |               |                 
|Balance, beginning of year                  |               |                 
|Conversion of 1,616 and 7,928 shares into   |               |                 
|Class A Stock                               |               |                 
|                                            |               |                 
|Balance, end of period                      |               |                 
|                                            |               |                 
|                                            |               |                 
|6-1/2% PREFERRED STOCK                      |               |                 
|Balance, beginning of year                  |               |                 
|Conversion of 18,800 and 35,161 shares into |               |                 
|Class A Stock                               |               |                 
|                                            |               |                 
|Balance, end of period                      |               |                 
|                                            |               |                 
|                                            |               |                 
|CLASS A STOCK                               |               |                 
|Balance beginning of year                   |               |                 
|Issuance of shares upon conversion of       |               |                 
|Preferred Stock                             |               |                 
|                                            |               |                 
|Balance, end of period                      |               |                 
|                                            |               |                 
|                                            |               |                 
|ADDITIONAL PAID-IN CAPITAL                  |               |                 
|Balance, beginning of year                  |               |                 
|Conversion of Preferred Stock               |               |                 
|                                            |               |                 
|Balance, end of period                      |               |                 
|                                            |               |                 
|                                            |               |                 
|RETAINED EARNINGS                           |               |                 
|Balance, beginning of year                  |               |                 
|Net gain (loss)                             |               |                 
|Dividends:                                  |               |                 
|4% Preferred Stock - $0.2 per share         |               |                 
|6-1/2% Preferred Stock - $0.325 per share   |               |                 
|                                            |               |                 
|Balance, end of period                      |               |                 
|                                            |               |                 

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

6

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

|                       | March 31,
2005 | December 31,
2004
|---------------------- | -------------- | -----------------
|
|
|
|
|TREASURY STOCK         |                |                  
|                       |                |                  
|4% PREFERRED STOCK     |                |                  
|Balance, end of period |                |                  
|                       |                |                  
|                       |                |                  
|6-1/2% PREFERRED STOCK |                |                  
|Balance, end of period |                |                  
|                       |                |                  
|                       |                |                  
|CLASS A STOCK          |                |                  
|Balance, end of period |                |                  
|                       |                |                  
|Balance, end of period |                |                  
|                       |                |                  

|THREE MONTHS ENDED MARCH 31,              | 2005 | 2004
|----------------------------------------- | ---- | ----
|
|
|
|
|Cumulative translation adjustments:       |      |     
|Balance, beginning of year                |      |     
|                                          |      |     
|Foreign currency translation adjustment   |      |     
|                                          |      |     
|Balance, end of period                    |      |     
|                                          |      |     
|                                          |      |     
|Unrealized gain on marketable securities: |      |     
|Balance, beginning of year                |      |     
|Unrealized (loss)gain, net                |      |     
|Sale of available-for-sale securities     |      |     
|                                          |      |     
|Balance, end of period                    |      |     
|                                          |      |     
|                                          |      |     
|Balance, end of period                    |      |     
|                                          |      |     

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

7

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AMPAL-AMERICAN ISRAEL
CORPORATION AND SUBSIDIARIES 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE GAIN (LOSS)

|THREE MONTHS ENDED MARCH 31,                 | 2005 | 2004
|-------------------------------------------- | ---- | ----
|
|
|
|
|Net Gain (loss)                              |      |     
|                                             |      |     
|                                             |      |     
|Other comprehensive gain (loss), net of tax: |      |     
|Foreign currency translation adjustments     |      |     
|Unrealized (loss) gain on securities         |      |     
|                                             |      |     
|Other comprehensive (loss) income            |      |     
|                                             |      |     
|                                             |      |     
|Comprehensive income (loss)                  |      |     
|                                             |      |     
|                                             |      |     
|Related tax (expense) on other               |      |     
|comprehensive gain:                          |      |     
|Foreign currency translation adjustments     |      |     
|Unrealized gain on securities                |      |     

The
accompanying notes are an integral part of the 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
March 31, 2005 consolidated financial statements should be read in
               conjunction with the audited financial statements and the notes thereto
included                in our Annual Report on Form 10-K for the fiscal year ended
December 31, 2004.
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Reference
should be made to the Companys consolidated financial statements for the year ended
December 31, 2004 for a description of the accounting policies, which have been continued
without change. Also, reference should be made to the notes to the Companys
December 31, 2004 consolidated financial statements for additional details of the Companys
consolidated financial condition, results of operations and cash flows. The details in
those notes have not changed except as a result of normal transactions in the interim.
All adjustments (of a normal recurring nature), which are, in the opinion of management,
necessary to a fair presentation of the results of the interim period have been included.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | In
December 2004, the FASB revised Statement No. 123 (FAS 123R), Share-Based Payment, which
requires companies to expense the estimated fair value of employee stock options and
similar awards. On April 14, 2005, the U.S. Securities and Exchange Commission adopted a
new rule amending the compliance dates for FAS 123R. In accordance with the new rule, the
accounting provisions of FAS 123R will be effective for the Company in fiscal 2006. The
Company expects to adopt the provisions of FAS 123R using a modified prospective
application.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Under
such transition method, upon the adoption of SFAS 123R, Ampals financial statements
for periods prior to the effective date of the statement will not be restated. The impact
of this statement on Ampals financial statements or its results of operations in
2006 and beyond will depend upon various factors, among them Ampals future
compensation strategy. We expect that the effect of applying this statement on Ampals
results of operations in 2006 as it relates to existing option plans would not be
materially different from the SFAS 123 pro forma effect previously reported.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | The
Company accounts for all employee stock options plans under APB Opinion No. 25, under
which no compensation costs were incurred.
| | ------------------------------------------------------------------------------------------------------------------------------------

| | SFAS
No. 123 Accounting for Stock-Based Compensation (SFAS No. 123) established a fair
value-based method of accounting for employee stock options of similar equity instruments
and encourages adoption of such method for stock compensation plans. However, it also
allows companies to continue to account for those plans using the accounting treatment
prescribed by APB No. 25 and accordingly discloses pro forma data assuming the Company
had accounted for employee stock option grants using the fair value based method as
defined in SFAS in No. 123.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | If
compensation cost for the options under plans in effect been determined in accordance
with SFAS No. 123, the Company net income (loss) and EPS would have been reduced as
follows:
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

9

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|Three Months Ended March 31           | 2005 | 2004
|------------------------------------- | ---- | ----
|
|
|
|
|Basic EPS:                            |      |     
|                                      |      |     
|Net Gain (loss):                      |      |     
|As reported(1)                        |      |     
|Less-stock based compensation expense |      |     
|Determined under fair value method    |      |     
|                                      |      |     
|                                      |      |     
|Pro forma                             |      |     
|                                      |      |     
|                                      |      |     
|As reported                           |      |     
|                                      |      |     
|Pro forma                             |      |     
|                                      |      |     
|                                      |      |     
|                                      |      |     
|Diluted EPS:                          |      |     
|                                      |      |     
|Net Gain (loss):                      |      |     
|As reported                           |      |     
|Less-stock based compensation expense |      |     
|Determined under fair value method    |      |     
|                                      |      |     
|Pro Forma                             |      |     
|                                      |      |     
|As Reported                           |      |     
|                                      |      |     
|                                      |      |     
|Pro forma                             |      |     
|                                      |      |     

| | 1. | After
deduction of accrued Preferred Stock Dividend of $50 and $53           respectively.
| | -- | ------------------------------------------------------------------------------------------

| | 2. | In
2004, the effect of the conversion of the 4% and 61⁄2% Preferred Stock           was
excluded from the basic and diluted EPS calculation due to its antidilutive
          effect.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Under
SFAS No. 123, the fair value of each option is estimated on the date of grant using the
Black Scholes option-pricing model with the following assumptions: (1) expected life of
options of 5 years; (2) dividend yield of 0%; (3) volatility ranging from 57% to 60%; and
(4) risk-free interest rate ranging from 3.3% to 3.46%.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | For
the period of three months ended March 31, 2004, 15,000 options were granted. The fair
value generated by the Black-Scholes model may not be indicative of the future benefit,
if any that may be received by the option holder.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

10

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|4. | Segment
information presented below results primarily from operations in Israel.
|-- | --------------------------------------------------------------------------------

|THREE MONTHS ENDED MARCH 31,  | 2005 | 2004
|----------------------------- | ---- | ----
|
|
|
|
|Revenues:                     |      |     
|Finance                       |      |     
|Real Estate                   |      |     
|Leisure-time                  |      |     
|Intercompany adjustments      |      |     
|                              |      |     
|                              |      |     
|Equity                        |      |     
|                              |      |     
|Total                         |      |     
|                              |      |     
|Pretax Operating Gain (Loss): |      |     
|Finance                       |      |     
|Real Estate                   |      |     
|Leisure-time                  |      |     
|                              |      |     
|                              |      |     
|Equity                        |      |     
|                              |      |     
|Total                         |      |     
|                              |      |     
|Total Assets:                 |      |     
|Finance                       |      |     
|Real Estate                   |      |     
|Leisure-Time*                 |      |     
|Intercompany adjustments      |      |     
|                              |      |     
|Total                         |      |     
|                              |      |     

| | Corporate
office expense is principally applicable to the financing operations and has been charged
to that segment above.
| | --------------------------------------------------------------------------------------------------------------------------

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

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

|5. | The
following table summarizes securities that were not included in the
               calculations of diluted earnings per Class A share for the three-month
periods                ended March 31, 2005 and 2004 because such shares are
anti-dilutive.
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

11

---

---



|6. | LEGAL PROCEEDINGS:
|-- | ------------------

| | Ampal
Communications L.P.
| | -------------------------

| | 1. | On
May 10, 2004, Ampal Communications L.P., a limited partnership           controlled
by Ampal and in which Ampal holds a 75% equity interest, filed a           claim in the
Tel-Aviv District Court against Motorola Communications Israel           Ltd., Motorola
Israel Ltd., Elisha Yanai, Peter Brum, Rami Guzman, Nathan           Gidron, Shimon Tal
and MIRS Communications Ltd. (collectively, the           Defendants), for
injunctive and declaratory relief as described           below. The claim is in
connection with the exploitation by the defendants of           Ampal Communications minority
rights by virtue of its 33% holding in MIRS           Communications Ltd.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Ampal
Communications L.P. requested the Court to issue relief as follows:
| | -------------------------------------------------------------------------

| | A. | Declaring
that the business of MIRS Communications Ltd. is conducted in such a           way as to
be prejudicial to the rights of Ampal Communications L.P. as a           minority
shareholder;
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | B. | Appointing
an appraiser to conduct a valuation of MIRS Communications Ltd. and           Ampal
Communications L.P.s holdings therein, which will encompass a review           of
the way MIRS Communications Ltd. conducts its business, including a review of
          the related party transactions between MIRS Communications Ltd. and Motorola
          Israel Ltd. and/or any other of the Defendants;
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | C. | Instructing
each of the Defendants to acquire and purchase from Ampal           Communications L.P.
the shares it holds in MIRS Communications Ltd. at the           highest of the following
prices:
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (1) | based
on a company valuation of MIRS Communications Ltd. as presented to Ampal
          Communications L.P. by Motorola prior to the signing of the Share Purchase
          Agreement for MIRS Communications Ltd.; or
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | based
on the amount paid by Ampal Communications L.P. for its share holding in           MIRS
Communications Ltd. plus linkage to the Israeli consumer index and           interest; or
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | based
on the company valuation that will be determined by the valuation           specified in
Section B above, excluding any material negative effect           brought about by
the Defendants omissions and/or negligence in their           management of MIRS
Communications Ltd., all as may be assessed and computed by           the appraiser
specified in Section B above;
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | D. | Determining
that each of the individual Defendants, as officers in MIRS           Communications
Ltd., has violated his respective fiduciary obligations towards           Ampal
Communications L.P. as a minority shareholder in MIRS Communications Ltd.;           and
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | E. | Declaring
that the Share Purchase Agreement pursuant to which Ampal           Communications L.P.
acquired its shareholding in MIRS Communications Ltd. and           the Shareholders
Agreement in respect thereof, are void.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | On
May 24, 2004 and on May 31, 2004 the Defendants requested the district court           to
strike out the claim in limine, on the grounds that Ampal had allegedly not
          paid sufficient fees when filing the claim, and further requested an extension
          of the time for filing statements of defense until after the district court had
          reached a decision regarding the request to strike out the claim. Ampal and the
          Defendants filed various responses and on June 30, 2004, the district court
          requested the Attorney General to furnish an opinion regarding the
          Defendants request before issuing its own decision. On October 11, 2004
          the Attorney General furnished its opinion that supported the Defendants          request
that Ampal should pay the fees calculated on the basis of the value of           the
requested remedies in the claim. On November 10, 2004 Ampal filed its           response.
The           Court also
decided that the statements of defense should be filed 10 days after           it issues
its decision regarding the striking out of the claim. The Court has scheduled a
hearing on this matter for June 1, 2005.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

12

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|6. | LEGAL
PROCEEDINGS: (CONT.)
|-- | --------------------------

| | Ampal
Communications L.P.
| | -------------------------

| | 3. | On
March 1, 2005,  Ampal  requested the  district  court to enter  judgment
                  against  Peter Brum on the grounds  that he failed  to file a  defense
to the                   Companys  claim.  On March 15,                   2005,
 the district court granted  Ampals  request and entered  judgment  against Peter Brum.
 On March 17, 2005, the district                   court  ordered Mr. Brum to acquire and
purchase from Ampal the shares it holds in                   MIRS for a total
company  valuation of $765,998,000,  which is the highest of the                   prices
set forth in the complaint.  The litigation  with regard to the other  defendants
                  is ongoing.  Peter Brum,                    Motorola and MIRS
                  have  appealed  the  district  courts  judgment  on  numerous
 grounds.  Ampal has filed                   responses to the appeal.  The appellate
court has not ruled                   on this appeal.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4. | The
Company has not received dividends from MIRS in the aggregate         amount of $14.2
million, included among "other assets", due March 31, 2004 ($7.1 million) and March 31,
     2005 ($7.1 million).  The dividends were not received due to the legal dispute
discussed     above. As a result of not receiving the dividends, the principal and the
interest of the loan which were due March 31, 2004 and March 31, 2005 were only partially
paid.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|7. | SUBSEQUENT EVENT
|-- | ----------------

| | On
April 7, 2005, Am-Hal, Ltd. (Am-Hal), a wholly owned subsidiary of the Company,
  entered into an agreement to build a senior citizen facility in Tel-Aviv.  The
           project, in which Am-Hal will hold a 75% interest, is projected to cost $50
million.  The           project, which is in its initial stages, is subject to regulatory
and financing      approvals.  Am-Hal has paid $5.7 million to acquire real estate for
the project.  This              payment was financed by Bank Hapoalim, and  Ampal has
deposited $1.6 million in Bank Hapoalim to secure Am-Hal's loan.  If the    project is
not consummated, the $5.7 million payment will be refunded to Am-Hal, Am-Hal will repay
its loan to Bank Hapoalim and the $1.6 million deposited by Ampal as security will be
returned.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

13

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|ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|----------------------------------------------------------------------------------------------

AMPAL-AMERICAN ISRAEL CORPORATION
AND SUBSIDIARIES

CRITICAL ACCOUNTING POLICIES

The preparation of Ampals
consolidated financial statements is in conformity with accounting principles generally
accepted in the United States which requires management to make estimates and assumptions
in certain circumstances that affect amounts reported in the accompanying consolidated
financial statements and related footnotes. Actual results may differ from these
estimates. To facilitate the understanding of Ampals business activities, described
below are certain Ampal accounting policies that are relatively more important to the
portrayal of its financial condition and results of operations and that require managements
subjective judgments. Ampal bases its judgments on its experience and various other
assumptions that it believes to be reasonable under the circumstances. Please refer to
Note 1 to Ampals consolidated financial statements included in the Annual Report
for the year ended December 31, 2004 for a summary of all of Ampals significant
accounting policies.

Portfolio Investments

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

Investment
in MIRS

MIRS is our largest investment and
is being accounted for at cost (our equity interest is 25%). The cost method is applied
due to preference features we have been granted in our investment in preferred shares in
Mirs. Revenues from guaranteed payments from Motorola are recognized as income. We
perform annual tests for impairment regarding our investment.

Marketable
Securities

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

14

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

Long-Lived
Assets

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

Accounting
for Income Taxes

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

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.

Recently
Issued Accounting Pronouncements

In December 2004, the FASB revised
Statement No. 123 (FAS 123R), Share-Based Payment, which requires companies
to expense the estimated fair value of employee stock options and similar awards. On
April 14, 2005, the U.S. Securities and Exchange Commission adopted a new rule amending
the compliance dates for FAS 123R. In accordance with the new rule, the accounting
provisions of FAS 123R will be effective for the Company in fiscal 2006. The Company expects to
adopt the provisions of FAS 123R using a modified prospective application.

15

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Under such transition method, upon
the adoption of SFAS 123R, Ampals financial statements for periods prior to the
effective date of the statement will not be restated. The impact of this statement on
Ampals financial statements or its results of operations in 2006 and beyond will
depend upon various factors, among them Ampals future compensation strategy. We
expect that the effect of applying this statement on Ampals results of operations
in 2006 as it relates to existing option plans would not be materially different from the
SFAS 123 pro forma effect previously reported.

Results
of Operations

Three months ended March 31, 2005
compared to three months ended March 31, 2004

Ampal-American Israel Corporation (Ampal)
and its subsidiaries (the Company) recorded a consolidated net gain of $6.7
million for the three months ended March 31, 2005 as compared to a net loss of $0.8
million for the same period in 2004. The increase in net gain is primarily attributable
to the increase of equity in earnings of affiliates realized and unrealized gains on
investments and the decrease in loss from impairment of investments in the three months ended March 31,
2005 as compared to the same period in 2004.

Equity in earnings of affiliates
increased to $6.6 million for the three months ended March 31, 2005, as compared to a
gain of $1.9 million for the same period in 2004. The increase is primarily attributable
to a $6.3 million gain recorded by Ophir Holding Ltd. as a result of the sale of all its
holdings in Industrial Building Corporation Ltd.. As of December 31, 2004 Ophirs
investment in Industrial Building Corporation Ltd. was treated as available-forsale,
and the $6.0 million unrealized gain was recorded under Accumulated Other
Comprehensive Gain.

In the three month period ended
March 31, 2005, the Company recorded $4.0 million of realized and unrealized gains on
investments, as compared to $0.8 million of realized and unrealized gains in the same
period in 2004. The gains recorded in the three months ended March 31, 2005 are mainly
attributable to the sale of all of its shares of Modem Art Ltd. ($3.3 million gain) and to various tradable
securities.

In the three month period ended
March 31, 2005, the Company did not record losses from the impairment of its investments.
In the same period in 2004, the Company recorded a $1.5 million loss from impairment of
its investments.

The Company recorded a translation
loss of $0.6 million in the three months ended March 31, 2005 as compared to a
translation loss of $1.2 million in the same period in 2004. The translation losses in
2005 and 2004 are attributable to the devaluation of the New Israeli Shekel against the
U.S. dollar.

The Company recorded higher interest
expense of $1.1 million in the three months ended March 31, 2005, as compared to $0.8
million in the same period in 2004, primarily as a result of increase in interest rates.

16

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Liquidity
and Capital Resources

Cash
Flows

On March 31, 2005, cash and cash
equivalents were $21.0 million, as compared with $17.6 million at December 31, 2004. The
increase in cash and cash equivalents is primarily attributable to the proceeds from
investment activity.

The Companys sources of cash
include cash and cash equivalents and marketable securities which amount to $75.0 million
as of March 31, 2005 as compared to $68.1 million in December 31, 2004. The Company also
has sources of cash from operations, cash from 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, dividends on preferred stock and other financial commitments of the
Company for the next 12 months. However, to the extent that contingencies and payment
obligations described below and in other parts of this Report require the Company to make
unanticipated payments, the Company would need to further utilize these sources of cash.
In the event of a decline in the market price of its marketable securities, the Company
may need to draw upon its other sources of cash, which may include additional borrowing,
refinancing of its existing indebtedness or liquidating other assets, the value of which
may also decline.

In addition, the shares of MIRS
owned by the Company, the shares of Ophir Holdings Ltd. and government debenture notes
equal to $9 million have already been pledged as security for various loans provided to
the Company for the purchase of these shares and would therefore be unavailable if the
Company wished to pledge them in order to provide an additional source of cash.

Cash
flows from operating activities

Net cash provided by operating
activities totaled approximately $5.0 million for the three months ended March 31, 2005,
as compared to approximately $9.3 million at the same period in 2004. The decrease is
primarily attributable to the 4.9 million net proceeds in trading securities ($17.0
million proceeds offset by $12.1 million invested) as compared to $16.6 million net
proceeds in 2004, which was partially offset by (i) the $2.4 million dividends received
from affiliates as compared to $0.1 million in 2004 and (ii) an increase in accounts
payable.

Cash flows from investing activities

Net cash provided by investing
activities totaled approximately $2.2 million for the three months ended March 31, 2005,
as compared to approximately $4.7 million used in investing activities for the same
period in 2004. The increase in cash provided by investing activities is primarily
attributable to the decrease in investment expenditures.

Cash flows from financing activities

Net cash used in financing
 activities  was  approximately  $3.6 million for the three months ended March 31, 2005,
as compared to approximately $2.0 million of net cash provided by financing  activities
 for the three months  period  ended March 31,  2004.  The increase in net cash used in
financing  activities is primarily  attributable to the Companys decision to use
the Companys cash in 2005 ($3.6 million) instead of borrowing  additional  funds
($6.2 million in 2004) to pay down it's existing notes payable and debentures  ($3.6
million and $4.2  million  in 2005 and  2004,  respectively).

17

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Investments

On March 31, 2005, the aggregate
fair value of trading and available-for-sale securities was approximately $54.0 million,
as compared to $50.4 million at December 31, 2004. The increase in 2005 is mainly
attributable to the proceeds from the sale of all of our shares of Modem Art
Ltd.

During the three months ended March
31, 2005, the Company made an additional investment of $0.3 million in Fimi Opportunity
Fund, L.P. (Fimi).

During March 2005,  Ampal sold
all of its shares of Modem Art Ltd. for $4.4 million and recorded a gain of       $3.3 million.

Debt

In connection with its investment in MIRS,
the Company has two long-term loans from Bank Hapoalim Ltd.
("Hapoalim") and Bank Leumi le-Israel B.M. (Leumi) in the outstanding amount of $38.3 million and $34.2
million, respectively, as of March 31, 2005. Both loans are due on March 31, 2008 and bear interest at a rate
of LIBOR plus 0.8%.  Other than as described in this paragraph, the loans are non-recourse to the Company and
are secured by the Company's shares in MIRS. A total payment of 10% and 15% of the principal of the loans
were due on March 31, 2004 and March 31, 2005 respectively.  The remaining principal payments are due as
follows: 25% on each of the following dates  March 31, 2006, 2007 and 2008.
Interest is paid annually on
March 31 of each year from March 31, 2001 until and including March 31, 2008. As a result of not receiving
dividends from MIRS on March 31, 2004 and March 31, 2005 (totaling $14.2 million) (see
"Legal Proceedings"), the principal and the interest of the loans due
were only partially paid. Unpaid principal
amounts are accruing interest at a higher interest rate.  As of the date hereof, the banks have not declared
a default with respect to such unpaid amount. These loans are subject to the compliance by MIRS with
covenants regarding its operations and financial results.

The Company financed a portion of
the development of Am-Hal, a wholly-owned subsidiary which develops and operates luxury
retirement centers for senior citizens, through bank loans from Hapoalim and others. At
March 31, 2005, and December 31, 2004 the amounts outstanding under these loans were $7.9
million and $7.7 million respectively. The loans are dollar linked, mature in up to one
year and have interest rates of LIBOR plus 1.0%. The Company generally repays these loans
with the proceeds received from deposits and other payments from the apartments in Am-Hal
facilities. The loans are secured by a lien on Am-Hals properties. The Company also
issued guarantees in the amount of $3.9 million in favor of tenants of Am-Hal in order to
secure their deposits.

The Company also finances its
general operations and other financial commitments through bank loans from Bank Hapoalim.
The long-term loans in the amount of $31.3 million mature through 2006-2011.

The weighted average interest rates
and the balances of these short-term borrowings at March 31, 2005 and December 31, 2004
were 4.0% on $13.1 million and 3.5% on $13.0 million, respectively.

18

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As of March 31, 2005, the Company
had issued guarantees on certain outstanding loans to its investees and subsidiaries in
the aggregate principal amount of $11.9 million. This includes:

| | 1. | $0.5
million guarantee to Leumi with respect to the MIRS loan as described
               above.
| | -- | ------------------------------------------------------------------------------------------------

| | 2. | $6.6
million guarantee on indebtedness incurred by Bay Heart ($3.5 million of
               which is recorded as a liability in the Companys financial
statements as                of March 31, 2005) in connection with the development of its
property. Bay Heart                recorded losses in 2005, in managements belief, primarily as a result of decreased
rental revenues. There can be                no guarantee that Bay Heart will become
profitable or that it will generate                sufficient cash to repay its
outstanding indebtedness without relying on the                Companys guarantee.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3. | $3.9
million guarantee to Am-Hal tenants as described above.
| | -- | ------------------------------------------------------------

| | 4. | $0.9
million guarantee to Galha 1960 Ltd.
| | -- | -----------------------------------------

FOREIGN
CURRENCY CONTRACTS

The Companys derivative
financial instruments consist of foreign currency forward exchange contracts. The
Company, utilizes these contracts from time to time, to manage risk exposure to movements
in foreign exchange rates. None of these contracts have been designated as hedging
instruments. These contracts are recognized as assets or liabilities on the balance sheet
at their fair value, which is the estimated amount at which they could be settled based
on market prices or dealer quotes, where available, or based on pricing models. Changes
in fair value are recognized currently in earnings. As of March 31, 2005, the Company had
a $10 million open foreign currency forward exchange contracts to purchase 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, 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. Subsequent written and oral forward-looking
statements attributable to the Company or persons acting on its behalf are expressly
qualified in their entirety by the cautionary statements in this paragraph and elsewhere
described in this quarterly Report and other Reports filed with the Securities and
Exchange Commission.

19

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|ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|--------------------------------------------------------------------

MARKET
RISKS AND SENSITIVITY ANALYSIS

The Company is exposed to various
market risks, including changes in interest rates, foreign currency rates and equity
price changes. The following analysis presents the hypothetical loss in earnings, cash
flows and fair values of the financial instruments, which were held by the Company at
March 31, 2005, and are sensitive to the above market risks.

During the three months ended March
31, 2005, 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,
2004.

Interest
Rate Risks

At March 31, 2005, the Company had
financial assets totaling $20.2 million and financial liabilities totaling $119.1
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.

At March 31, 2005, the Company had
fixed rate financial assets of $20.2 million and held no variable rate financial assets.
Holding other variables constant, a ten percent increase in interest rates would decrease
the unrealized fair value of the fixed financial assets by approximately $0.1 million.

At March 31, 2005, the Company had
fixed rate debt of $3.8 million and variable rate debt of $115.3 million. A ten percent
decrease in interest rates would increase the unrealized fair value of the fixed rate
debt by approximately $0.1 million.

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

Exchange
Rate Sensitivity Analysis

The Companys exchange rate
exposure on its financial instruments results from its investments and ongoing operations
in Israel. During 2005, the Company entered into a foreign exchange forward purchase
contract to partially hedge this exposure. At March 31, 2005, the Company held a $10
million foreign exchange forward purchase contracts to purchase U.S. Dollars. Holding other variables constant, if
there were a ten percent devaluation of the foreign currency, the Companys
cumulative translation (loss) reflected in the Companys accumulated other
comprehensive (loss) would increase by $1.2 million, and in the statements of operations,
a ten percent devaluation of the foreign currency would decrease net earnings in the
amount of approximately $4.7 million.

Securities
Price Risk

The Companys investments at
March 31, 2005, included marketable securities (trading and available-for-sale), which
are recorded at fair value of $54.0 million. Those securities have exposure to price
risk. The estimated potential loss in fair value resulting from a hypothetical ten
percent decrease in prices quoted on stock exchanges is approximately $5.4 million.

20

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|ITEM 4. CONTROLS AND PROCEDURES
|-------------------------------

Disclosure
Controls and Procedures

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

Internal
Control Over Financial Reporting

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

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

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

Ampal
Communications L.P.

| | 1. | On
May 10, 2004, Ampal Communications L.P., a limited partnership           controlled
by Ampal and in which Ampal holds a 75% equity interest, filed a           claim in the
Tel-Aviv District Court against Motorola Communications Israel           Ltd., Motorola
Israel Ltd., Elisha Yanai, Peter Brum, Rami Guzman, Nathan           Gidron, Shimon Tal
and MIRS Communications Ltd. (collectively, the           Defendants), for
injunctive and declaratory relief as described           below. The claim is in
connection with the exploitation by the defendants of           Ampal Communications minority
rights by virtue of its 33% holding in MIRS           Communications Ltd.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Ampal
Communications L.P. requested the Court to issue relief as follows:
| | -------------------------------------------------------------------------

| | A. | Declaring
that the business of MIRS Communications Ltd. is conducted in such a           way as to
be prejudicial to the rights of Ampal Communications L.P. as a           minority
shareholder;
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | B. | Appointing
an appraiser to conduct a valuation of MIRS Communications Ltd. and           Ampal
Communications L.P.s holdings therein, which will encompass a review           of
the way MIRS Communications Ltd. conducts its business, including a review of
          the related party transactions between MIRS Communications Ltd. and Motorola
          Israel Ltd. and/or any other of the Defendants;
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | C. | Instructing
each of the Defendants to acquire and purchase from Ampal           Communications L.P.
the shares it holds in MIRS Communications Ltd. at the           highest of the following
prices:
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (1) | based
on a company valuation of MIRS Communications Ltd. as presented to Ampal
          Communications L.P. by Motorola prior to the signing of the Share Purchase
          Agreement for MIRS Communications Ltd.; or
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | based
on the amount paid by Ampal Communications L.P. for its share holding in           MIRS
Communications Ltd. plus linkage to the Israeli consumer index and           interest; or
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

21

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Part II  OTHER INFORMATION
(CONT.)

| | (3) | based
on the company valuation that will be determined by the valuation           specified in
Section B above, excluding any material negative effect           brought about by
the Defendants omissions and/or negligence in their           management of MIRS
Communications Ltd., all as may be assessed and computed by           the appraiser
specified in Section B above;
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | D. | Determining
that each of the individual Defendants, as officers in MIRS           Communications
Ltd., has violated his respective fiduciary obligations towards           Ampal
Communications L.P. as a minority shareholder in MIRS Communications Ltd.;           and
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | E. | Declaring
that the Share Purchase Agreement pursuant to which Ampal           Communications L.P.
acquired its shareholding in MIRS Communications Ltd. and           the Shareholders
Agreement in respect thereof, are void.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | On
May 24, 2004 and on May 31, 2004 the Defendants requested the district court           to
strike out the claim in limine, on the grounds that Ampal had allegedly not
          paid sufficient fees when filing the claim, and further requested an extension
          of the time for filing statements of defense until after the district court had
          reached a decision regarding the request to strike out the Claim. Ampal and the
          Defendants filed various responses and on June 30, 2004, the district court
          requested the Attorney General to furnish an opinion regarding the
          Defendants request before issuing its own decision. On October 11, 2004
          the Attorney General furnished its opinion that supported the Defendants          request
that Ampal should pay the fees calculated on the basis of the value of           the
requested remedies in the Claim. On November 10, 2004 Ampal filed its           response.
The Court called for a hearing in that matter for June 1, 2005. The           Court also
decided that the statements of defense should be filed 10 days after           it issues
its decision regarding the striking out of the claim.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3. | On
March 1, 2005,  Ampal requested the district  court to enter judgment against Peter Brum
                  on the grounds that he failed to file a defense to the Companys
 claim. On March 15,                   2005,  the district  court  granted  Ampals
 request and entered                   judgment  against Peter Brum. On March 17,
                  2005,  the district  court  ordered Mr. Brum to acquire and purchase
from Ampal the shares it holds in                   MIRS for a total
                  company  valuation  of  $765,998,000,  which is the  highest of the
prices  set forth in the  complaint.  The                   litigation  with regard to
the other  defendants is ongoing.  Peter Brum,                    Motorola and
                  MIRS have  appealed the  district  courts  judgment on numerous
 grounds.  Ampal has filed  responses to the                   appeal. The appellate
court has not ruled on this appeal.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4. | A
The Company  has not received dividends  from MIRS in                   the aggregate
amount of $14.2 million,  included among  other assets,  due March 31, 2004 ($7.1
                  million) and March 31,  2005 ($7.1 million).  The dividends  were not
received                   due to the legal dispute  discussed  above.  As a result of
not receiving the  dividends,                   the  principal  and the  interest  on the
loan which were due March 31, 2004 and March 31, 2005                   were only
partially paid.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

22

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Part II  OTHER INFORMATION
(CONT.)

| | SUBSEQUENT
EVENT
| | ----------------

| | On
April 7, 2005, Am-Hal, Ltd. (Am-Hal),  a wholly owned subsidiary of the Company,
                  entered into an agreement to build a senior  citizen facility in
Tel-Aviv. The                    project,  in which  Am-Hal  will hold a 75%  interest,
 is  projected  to cost  $50  million.  The                   project,  which is in its
 initial  stages,  is subject to  regulatory  and  financing                   approvals.
 Am-Hal  has paid $5.7  million to acquire  real estate for the  project.  This
                  payment  was  financed  by Bank  Hapoalim,  and
                   Ampal has deposited $1.6 million in Bank Hapoalim to secure Am-Hal's
loan. If the                   project is not consummated,  the $5.7 million payment will
be refunded to Am-Hal,  Am-Hal will repay its loan                   to Bank Hapoalim and
the $1.6 million deposited by Ampal as security will be returned.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

23

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|Part II  OTHER INFORMATION (CONT.)
|-----------------------------------

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

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

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

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

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

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

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

24

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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 dully authorized.

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

| |  | BY: /S/ Irit Eluz
Irit EluzCFO and Senior Vice President - Financeand Treasurer(Principal Financial Officer)
| |  | --------------------------------------------------------------------------------------------------------------------------

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

Dated:
May 10, 2005

25

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AMPAL-AMERICAN
ISRAEL CORPORATION AND SUBSIDIARIES

Exhibit Index

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

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

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

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

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

26

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