---

---

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

---

FORM 10-Q

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

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

For the quarterly period ended                                   September 30, 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 19,994,917 (as of November 3, 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               
|        
|         | Nine Months Ended September 30, 2005 and 2004        | 1      
|        
|         | Three Months Ended September 30, 2005 and 2004       | 2      
|        
|         | Consolidated Balance Sheets                          | 3 - 4  
|        
|         | Consolidated Statements of Cash Flows                | 5 - 6  
|        
|         | Consolidated Statements of Changes in Shareholders' 
|         | Equity                                               | 7 - 8  
|        
|         | Consolidated Statements of Comprehensive Gain (Loss) | 9      
|        
|         | Notes to the Consolidated Financial Statements.      | 10     
|        
|Item 2.  | Management's Discussion and Analysis of             
|         | Financial Condition and Results of Operations.       | 15     
|        
|Item 3.  | Quantitative and Qualitative Disclosures            
|         | About Market Risk                                    | 22     
|        
|Item 4.  | Controls and Procedures                              | 23     
|        
|        
|Part II. | Other Information                                    | 24 - 26

| |         |                                                     |   
| | ------- | --------------------------------------------------- | --
|
|
|
|
| | Item 1. | Legal Proceedings                                   | 24
|
| | Item 2. | Unregistered Sales of Equity Securities and        
| |         | Use of Proceeds                                     | 25
|
| | Item 3. | Defaults upon Senior Securities                     | 25
|
| | Item 4. | Submission of Matters to a Vote of Security Holders | 25
|
| | Item 5. | Other Information                                   | 26
|
| | Item 6. | Exhibits                                            | 26



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ITEM
1. FINANCIAL STATEMENTS

AMPAL-AMERICAN
ISRAEL CORPORATION AND SUBSIDIARIES 
CONSOLIDATED STATEMENTS OF OPERATIONS

|NINE MONTHS ENDED SEPTEMBER 30,                        | 2005 | 2004
|------------------------------------------------------ | ---- | ----
|
|
|
|
|REVENUES                                               |      |     
|Equity in earnings of affiliates                       |      |     
|Real estate income                                     |      |     
|Realized and unrealized gains on investments           |      |     
|Realized and unrealized gains on marketable securities |      |     
|Interest                                               |      |     
|Other                                                  |      |     
|                                                       |      |     
|Total revenues                                         |      |     
|                                                       |      |     
|                                                       |      |     
|EXPENSES                                               |      |     
|Interest                                               |      |     
|Real estate expenses                                   |      |     
|Realized and unrealized loss on investments            |      |     
|Loss from impairment of investments                    |      |     
|Translation loss                                       |      |     
|Other (mainly general and administrative)              |      |     
|                                                       |      |     
|Total expenses                                         |      |     
|                                                       |      |     
|                                                       |      |     
|Loss before income taxes                               |      |     
|Provision for income taxes                             |      |     
|                                                       |      |     
|Loss after income tax                                  |      |     
|Minority interest                                      |      |     
|                                                       |      |     
|Net Loss                                               |      |     
|                                                       |      |     
|                                                       |      |     
|Basic and diluted EPS:                                 |      |     
|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 STATEMENTS OF OPERATIONS

|THREE MONTHS ENDED SEPTEMBER 30,                                | 2005 | 2004
|--------------------------------------------------------------- | ---- | ----
|
|
|
|
|REVENUES                                                        |      |     
|Equity in(loss) earnings of affiliates                          |      |     
|Real estate income                                              |      |     
|Realized and unrealized gains on investments                    |      |     
|Realized and unrealized gains (losses) on marketable securities |      |     
|Interest                                                        |      |     
|Other                                                           |      |     
|                                                                |      |     
|Total revenues                                                  |      |     
|                                                                |      |     
|                                                                |      |     
|EXPENSES                                                        |      |     
|Interest                                                        |      |     
|Real estate expenses                                            |      |     
|Realized and unrealized loss on investments                     |      |     
|Loss from impairment of investments                             |      |     
|Translation loss                                                |      |     
|Other (mainly general and administrative)                       |      |     
|                                                                |      |     
|Total expenses                                                  |      |     
|                                                                |      |     
|                                                                |      |     
|Loss before income taxes                                        |      |     
|Benefit for income taxes                                        |      |     
|                                                                |      |     
|Loss after income tax                                           |      |     
|Minority interest                                               |      |     
|                                                                |      |     
|Net Loss                                                        |      |     
|                                                                |      |     
|                                                                |      |     
|Basic and diluted EPS:                                          |      |     
|Loss per Class A share                                          |      |     
|                                                                |      |     
|                                                                |      |     
|Shares used in calculation (in thousands)                       |      |     
|                                                                |      |     

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

|ASSETS AS OF                           | September 30,
2005 | December 31,
2004
|-------------------------------------- | ------------------ | -----------------
|
|
|
|
|Cash and cash equivalents              |                    |                  
|Deposits, notes and loans receivable   |                    |                  
|                                       |                    |                  
|Marketable Securities                  |                    |                  
|Other investments                      |                    |                  
|                                       |                    |                  
|Total Investments                      |                    |                  
|                                       |                    |                  
|Real estate property, less accumulated |                    |                  
|depreciation of $13,463 and $12,190    |                    |                  
|                                       |                    |                  
|Other assets                           |                    |                  
|                                       |                    |                  
|                                       |                    |                  
|                                       |                    |                  
|Total Assets                           |                    |                  
|                                       |                    |                  

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

3

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---



AMPAL-AMERICAN
ISRAEL CORPORATION AND SUBSIDIARIES 
CONSOLIDATED BALANCE SHEETS

|LIABILITIES AND SHAREHOLDERS' EQUITY AS OF     | September 30,
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   |                    |                  
|115,852 and 124,024 shares; outstanding        |                    |                  
|112,502 and 120,674 shares                     |                    |                  
|                                               |                    |                  
|6-1/2% Cumulative Convertible Preferred Stock, |                    |                  
|$5 par value; authorized 988,055 shares;       |                    |                  
|issued 641,655 and 662,219 shares; outstanding |                    |                  
|519,119 and 539,683 shares                     |                    |                  
|                                               |                    |                  
|Class A Stock; $1 par value; authorized        |                    |                  
|60,000,000 shares; issued 25,817,855 and       |                    |                  
|25,715,303 shares; outstanding 19,993,691      |                    |                  
|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.

4

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AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS

|NINE MONTHS ENDED SEPTEMBER 30,                                       | 2005 | 2004
|--------------------------------------------------------------------- | ---- | ----
|
|
|
|Cash flows from operating activities:                                 |      |     
|Net loss                                                              |      |     
|Adjustments to reconcile net loss to net cash                         |      |     
|provided by operating activities:                                     |      |     
|Equity in earnings of affiliates                                      |      |     
|Realized and unrealized gain on investments and marketable securities |      |     
|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 (used in) provided by investing                              |      |     
|activities                                                            |      |     
|                                                                      |      |     

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

5

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AMPAL-AMERICAN
ISRAEL CORPORATION AND SUBSIDIARIESCONSOLIDATED
STATEMENTS OF CASH FLOWS

|NINE MONTHS ENDED SPETEMBER 30                                                                         | 2005 | 2004
|------------------------------------------------------------------------------------------------------ | ---- | ----
|
|
|
|
|Cash flows from financing activities:                                                                  |      |     
|Notes and loans payable received                                                                       |      |     
|Notes and loans payable repaid                                                                         |      |     
|Debentures repaid                                                                                      |      |     
|Proceed of exercise of option                                                                          |      |     
|Contribution to partnership by minority                                                                |      |     
|                                                                                                       |      |     
|                                                                                                       |      |     
|Net cash provided by (used in ) 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:
        realization of an investment |      |     
|                                                                                                       |      |     
|Proceeds in marketable securities receivedfrom realization of an investment                            |      |     
|                                                                                                       |      |     
|Dividend in kind from an affiliate                                                                     |      |     
|                                                                                                       |      |     

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

6

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

|                                                        | September 30,
2005 | December 31,
2004
|------------------------------------------------------- | ------------------ | -----------------
|
|
|
|
|4% PREFERRED STOCK                                      |                    |                  
|Balance, beginning of year                              |                    |                  
|Conversion of 8,172 and 7,928 shares into Class A Stock |                    |                  
|                                                        |                    |                  
|                                                        |                    |                  
|Balance, end of period                                  |                    |                  
|                                                        |                    |                  
|6-1/2% PREFERRED STOCK                                  |                    |                  
|Balance, beginning of year                              |                    |                  
|Conversion of 20,564 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                           |                    |                  
|Issuance of shares upon exercise of stock options       |                    |                  
|                                                        |                    |                  
|Balance, end of period                                  |                    |                  
|                                                        |                    |                  
|RETAINED EARNINGS                                       |                    |                  
|Balance, beginning of year                              |                    |                  
|Net 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.

7

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

|                                          | September 30,
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, beginning of year                |                    |                  
|Issuance of shares upon exercise of 7,500 |                    |                  
|stock option                              |                    |                  
|                                          |                    |                  
|Balance, end of period                    |                    |                  
|                                          |                    |                  
|                                          |                    |                  
|Balance, end of period                    |                    |                  
|                                          |                    |                  

|NINE MONTHS ENDED SEPTEMBER 30            | 2005 | 2004
|----------------------------------------- | ---- | ----
|
|
|
|
|ACCUMULATED OTHER COMPREHENSIVE LOSS      |      |     
|                                          |      |     
|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.

8

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---



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

|NINE MONTHS ENDED SEPTEMBER 30,                    | 2005 | 2004
|-------------------------------------------------- | ---- | ----
|
|
|
|
|Net 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.

9

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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
September 30, 2005 consolidated financial statements should be read in
               conjunction with the audited consolidated 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 prospectively.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 would have been determined in
accordance with SFAS No. 123, the Companys net income (loss) and EPS would have
been reduced as follows:
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

10

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|NINE MONTHS ENDED SEPTEMBER 30,       | 2005 | 2004
|------------------------------------- | ---- | ----
|
|
|
|
|Basic and diluted EPS:                |      |     
|Net loss:                             |      |     
|As reported(1) (2)                    |      |     
|Less-stock based compensation expense |      |     
|determined under fair value method    |      |     
|                                      |      |     
|                                      |      |     
|Pro forma                             |      |     
|                                      |      |     
|                                      |      |     
|As reported                           |      |     
|                                      |      |     
|                                      |      |     
|Pro forma                             |      |     
|                                      |      |     

|THREE MONTHS ENDED SEPTEMBER 30       | 2005 | 2004
|------------------------------------- | ---- | ----
|
|
|
|
|Basic and diluted EPS:                |      |     
|Net (loss) gain:                      |      |     
|As reported(1) (2)                    |      |     
|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 $150 and $160 (for the           three
months $50 and $53), respectively.
| | --- | --------------------------------------------------------------------------------------------------------------------------------

| | (2) | In
2005 and 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%.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

11

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|5. | Segment
information presented below results
|-- | -------------------------------------------

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

|NINE MONTHS ENDED SEPTEMBER 30, | 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.

|6. | The
following table summarizes securities that were not included in the
               calculations of diluted earnings per Class A share for the nine-month
periods                ended September 30, 2005 and 2004 because such shares are
anti-dilutive.
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(Shares in thousands)  | SEPTEMBER 30,
|---------------------- | -------------
|
|
|
|
|Options and Rights     |              
|6-1/2% Preferred Stock |              
|4% Preferred Stock     |              

12

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|7. | 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., MIRS Communications Ltd. (MIRS), Motorola Israel Ltd., Elisha
Yanai, Peter                Brum, Rami Guzman, Nathan Gidron and Shimon Tal 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.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | A. | Declaring
that the business of MIRS 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 and Ampal Communications           L.P.s
holdings therein, which will encompass a review of the way MIRS           conducts its
business, including a review of the related party transactions           between MIRS 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 at the highest of the following           prices:
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | (2) | based
on the amount paid by Ampal Communications L.P. for its share holding in           MIRS
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,
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, has           violated his
respective fiduciary obligations towards Ampal Communications L.P.           as a
minority shareholder in MIRS; and
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

13

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|7. | LEGAL
PROCEEDINGS: (CONT.)
|-- | --------------------------

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

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

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

| | 4. | On
August 30, 2005, the Company, through Ampal Communications L.P., entered into a Stock
Purchase and Indemnification Agreement, dated as of August 30, 2005, by and among Motorola
Israel Ltd., Ampal Communications L.P. and MIRS (the Agreement) to sell to
Motorola Israel Ltd. all of its holdings of MIRS. In connection with the closing of the
transactions contemplated by this Agreement, the existing lawsuit among the parties and
others relating to MIRS was dismissed. Please see Note 8 below for more information.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|8. | SUBSEQUENT
EVENT
|-- | ----------------

| | On
October 3, 2005 the Company, through Ampal Communications L.P., completed the sale to
Motorola Israel Ltd. of all of its holdings of MIRS pursuant to the Agreement. In
connection with the sale of its holdings of MIRS, Ampal Communications L.P. received
approximately US $89 million of total proceeds, composed of US$67.7 million for the
purchase price and an additional US$ 21.3 million related to guaranteed dividend
payments. Approximately US$ 74.0 million of the proceeds was used to repay all
outstanding debt to banks incurred in connection with making the MIRS investment, and the
Company received US$ 15.0 million ($11.0 million after the deduction of minority interest) of net proceeds
from the sale.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

14

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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 the Companys 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. For information regarding the sale of the Companys holdings of MIRS,
please see Part II  Other Information Item  1  Legal Proceedings.

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.

15

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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.

16

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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 prospectively.

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

Nine months ended September 30,
2005 compared to nine months ended September 30, 2004

Ampal-American Israel Corporation (Ampal)
and its subsidiaries (the Company) recorded a consolidated net loss of $6.4
million for the nine months ended September 30, 2005 as compared to a net loss of $3.1
million for the same period in 2004. The increase in net loss is primarily attributable
to the increase of realized and unrealized loss on investments, the increase in loss from
impairment of investments and the increase in interest expenses in the nine months ended
September 30, 2005 as compared to the same period in 2004. This increase in net loss was
partially offset by an increase of equity in earning of affiliates, the increase in
realized and unrealized gains on marketable securities, the increase in other income and
the decrease in other expense and minority interest for the nine months ended September
30, 2005 as compared to the same period in 2004.

In the nine month period ended
September 30, 2005, the Company recorded $2.7 million of realized and unrealized loss on
investments, as compared to $5.8 million of realized and unrealized gains in the same
period in 2004. The loss recorded in the nine months ended September 30, 2005, was
primarily attributable to the third-party investment in the high-tech portfolio (which is
treated as a disposition for accounting purposes) which resulted in a $7.3 million loss
($4.6 net loss after tax), which was partially offset by the gain recorded from the sale
of all of its shares of Modem Art Ltd. ($3.3 million gain) the sale of all of its shares
in Epsilon investment ($1.4 million gain).

In
the nine month period ended September 30, 2005, the Company recorded $13.9 million of
losses from the impairment of its investment in MIRS ($13.3 million) and Shiron Ltd. ($0.6
million). In the same period in 2004, the Company recorded a $6.9 million loss from
impairment of certain of its investments. Please see Part II  Other Information;
Item 1  Legal Proceedings for information
regarding the Companys sale of its holdings in MIRS.

Equity in earnings of affiliates
increased to $6.0 million for the nine months ended September 30, 2005, as compared to a
gain of $2.9 million for the same period in 2004. The increase is primarily attributable
to a $5.3 million gain recorded by Ophir Holding Ltd. as a result of the sale of all its
holdings in Industrial Building Corporation Ltd.

Realized and unrealized gains on
marketable securities increased to $2.8 million for the nine months ended September 30,
2005 compared to a gain of $1.1 million for the same period in 2004. The gain is
attributable to the sale of various marketable securities.

17

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In the nine month period ended
September 30, 2005, the Company recorded $9.1 million in other income, as compared to
$7.6 million for the same period in 2004. The increase in other income primarily related
to the committed dividend for 2005 which had been fully paid on October 3, 2005 by
Motorola Israel Ltd. as part of the sale of the MIRS investment.

In the nine month period ended
September 30, 2005, the Company recorded $6.4 million of other expenses, as compared to
$7.3 million for the same period in 2004. The decrease in other expenses pertains to the
closing of Ampals office in New York and to a decrease in professional fees.

The Company recorded higher interest
expense of $4.6 million in the nine months ended September 30, 2005, as compared to $3.5
million in the same period in 2004, primarily as a result of increases in interest rates.

Three months ended September 30,
2005 compared to three months ended September 30, 2004

The Company recorded a consolidated
net loss of $10.6 million for the three months ended September 30, 2005 as compared to a
net loss of $2.5 million for the same period in 2004. The increase in net loss is
primarily attributable to the increase in realized and unrealized loss on investments,
the increase in loss from impairment of investment and the decrease in equity in earning
of affiliates in the three months ended September 30, 2005 as compared to the same period
in 2004. This increase in net loss was offset by the increase in realized and unrealized
gains on marketable securities and, the increase in other income for the three month ended
September 30, 2005 as compared to the same period in 2004.

In the three month period ended
September 30, 2005, the Company recorded $6.2 million of realized and unrealized loss on
investments, as compared to $2.5 million of realized and unrealized gains in the same
period in 2004. The loss recorded in the three months ended September 30, 2005 was
primarily attributable to the third-party investment in the high-tech portfolio (which is
treated as a disposition for accounting purposes) which resulted in a $7.3 million loss
($4.6 million net loss after tax), offset by the sale of all of its shares in Epsilon
Investment House Ltd. (1.4 million gain).

In the three month period ended
September 30, 2005, the Company recorded $13.3 million loss from impairment of its
investment in MIRS ($13.3 million), as compared to a $5.4 million loss from impairment of
its investment in the same period in 2004. Please see Part II  Other Information;
Item 1 Legal Proceedings for information regarding the Companys sale of its
holdings in MIRS.

Realized and unrealized gains on
marketable securities increased to $1.2 million for the three months ended September 30,
2005 compared to a loss of $0.3 million for the same period in 2004. The gain is
attributable to the sale of various marketable securities.

In the three month period ended
September 30, 2005, the Company recorded 4.3 million in other income, as compared to $2.8
million in the same period in 2004. The increase in other income primarily related to the
committed dividend for 2005 which had been fully paid by Motorola Israel Ltd. as part of
the sale of the MIRS investment.

18

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Liquidity
and Capital Resources

Cash
Flows

The Companys sources of cash
include cash and cash equivalents and marketable securities, which amount to $78.1
million as of September 30, 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 $14.6 million for the nine months ended September 30,
2005, as compared to approximately $9.6 million at the same period in 2004. The increase
is primarily attributable to the $13.1 million net proceeds in trading securities ($26.0
million proceeds offset by $12.9 million invested) as compared to $20.4 million net
proceeds in 2004, to the $2.5 million dividends received from affiliates as compared to
$0.3 million in 2004 and to an increase in accounts payable.

Cash
flows from investing activities

Net cash used in investing
activities totaled approximately $3.6 million for the nine months ended September 30,
2005, as compared to approximately $11.2 million provided by investing activities for the
same period in 2004. The cash used in investing activities during 2005 is primarily
attributable to a payment of $9.3 million by Am-Hal Ltd. (Am-Hal), a wholly owned
subsidiary of the Company to acquire real estate for a new project in Tel-Aviv, which was
partially offset by proceeds from the sale of investment.

Cash
flows from financing activities

Net cash provided by financing
activities was approximately $3.4 million for the nine months ended September 30, 2005,
as compared to approximately $9.1 million of net cash used in financing activities for
the nine months period ended September 30 2004.

In the nine months ended September
30, 2005, Am-Hal Ltd. and its minority partner in the new project borrowed $6.3 million
and $2.0 million, respectively to finance the new project (see cash flow from investing
activities) and Ampal used its own cash to pay down its existing notes payable and
debentures in the amount of $5.0 million. In 2004, the Company paid down its notes
payable and debentures in the amount of $15.6 million from its own cash and by borrowing
funds in the amount of $6.5 million.

19

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Investments

On September 30, 2005, the aggregate
fair value of trading and available-for-sale securities was approximately $46.1 million,
as compared to $50.4 million at December 31, 2004. The decrease in 2005 is mainly
attributable to the sale of various marketable securities.

In the nine months ended September
30 2005, the Company made an additional investment of $0.7 million in Fimi Opportunity
Fund, L.P. (Fimi).

During the nine months ended
September 30, 2005, Ampal made the following dispositions:

| |  | On
March 8, 2005, the Company sold its holdings in Modem Art Ltd. for $4.3 million and
recorded a gain of $3.3 million.
| | - | -----------------------------------------------------------------------------------------------------------------------

| |  | On September 7, 2005 a third-party
Israeli based venture fund and certain of its affiliated companies invested $2.65 million
in the companys high-tech portfolio. Ampal
received $2.5 million in connection with this transaction. The Company treated this
investment as a disposition for accounting purposes and recorded a loss of $7.3 million
($4.6 million after taxes).
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | On
August 15, 2005 the Company sold its holdings in Epsilon Investment House Ltd and
Renaissance Investment Company Ltd for $2.0 million and recorded a $1.4 million gain.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Debt

In connection with its investment in
MIRS, the Company has two loans from Bank Hapoalim Ltd. (Hapoalim) and Bank
Leumi le-Israel B.M. (Leumi) in the outstanding amount of $38.2 million and
$34.4 million, respectively, as of September 30 2005. Both loans are due on March 31, 2008
and bear interest at a rate of LIBOR plus 0.8%.The loans are non-recourse to the Company
and are secured by the Companys shares in MIRS. In connection with the sale of the
Companys holdings in MIRS, both loans were repaid in full on October 3, 2005. Please
see Part II  Other Information; Item 1 Legal Proceedings for information
regarding the Companys sale of its holdings in MIRS.

The Company financed a portion of
the development of Am-Hal, a wholly-owned subsidiary of the Company which develops and
operates luxury retirement centers for senior citizens, through bank loans from Hapoalim
and others. At September 30, 2005, and December 31, 2004 the amounts outstanding under
these loans were $12.5 million and $7.7 million, respectively. The loans mature in up to
one year and have interest rates range between 5.3% and 6.5%. The Company generally
repays these loans with the proceeds received from deposits and other payments from the
apartments in Am-Hal facilities. The loans are secured by a lien on Am-Hals
properties. The Company also issued guarantees in the amount of $3.5 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.
These 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 September 30, 2005 and December 31,
2004 were 5.8% on $17.6 million and 3.5% on $13.0 million, respectively.

20

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As of September 30, 2005, the
Company had issued guarantees on certain outstanding loans to its investees and
subsidiaries in the aggregate principal amount of $12.0 million. This includes:

| | 1. | $0.5
million guarantee to Leumi with respect to the MIRS loan as described
               above. In connection with the sale of the Companys holdings in MIRS,
the                guarantee was terminated on October 3, 2005. Please see Part II  Other
Information; Item 1  Legal Proceedings for information regarding the
Company's sale of its holdings in MIRS.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | $5.5
million guarantee on indebtedness incurred by Bay Heart ($3.4 million of
               which is recorded as a liability in the Companys financial
statements as                of September 30, 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. | $3.5
million guarantee to Am-Hal tenants as described above.
| | -- | ------------------------------------------------------------

| | 4. | $1.6
million guarantee to am-Hal for the new project in Tel-Aviv.
| | -- | -----------------------------------------------------------------

| | 5. | $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 September 30 2005, the Company
had a $10.0 million open foreign currency forward exchange contract to purchase U.S.
Dollars and a U.S. $0.9 million open foreign currency forward exchange contract to sell
U.S. dollars, in payment of N.I.S.

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.

21

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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.

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
September 30 2005, and are sensitive to the above market risks.

During the nine months ended
September 30, 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 September 30, 2005, the Company
had financial assets totaling $30.4 million and financial liabilities totaling $123.5
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 September 30, 2005, the Company
had fixed rate financial assets of $30.4 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 September 30, 2005, the Company
had fixed rate debt of $3.5 million and variable rate debt of $120.0 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 $0.6
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 September 30, 2005, the Company held a
$10.0 million foreign exchange forward purchase contracts to purchase U.S. Dollars and a
U.S. $0.9 million open foreign currency forward exchange contract to sell 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 $1.3 million, and in the
statements of operations, a ten percent devaluation of the foreign currency would
decrease net earnings in the amount of approximately $2.6 million.

22

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Securities
Price Risk

The Companys investments at
September 30, 2005, included marketable securities (trading and available-for-sale),
which are recorded at fair value of $46.1 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 $4.6 million.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

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

Internal Control Over Financial
Reporting

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

23

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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., MIRS
Communications Ltd.(MIRS), Motorola Israel Ltd., Elisha Yanai, Peter           Brum, Rami
Guzman, Nathan Gidron, and Shimon Tal (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.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | A. | Declaring
that the business of MIRS 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 and Ampal Communications           L.P.s
holdings therein, which will encompass a review of the way MIRS           conducts its
business, including a review of the related party transactions           between MIRS 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 at the highest of the following           prices:
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | (2) | based
on the amount paid by Ampal Communications L.P. for its share holding in           MIRS
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,
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, has           violated his
respective fiduciary obligations towards Ampal Communications L.P.           as a
minority shareholder in MIRS; and
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

24

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Part II  OTHER INFORMATION (CONT.)

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

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

| | 4. | On
August 30, 2005, the Company, through Ampal Communications L.P. entered into a Stock
Purchase and Indemnification Agreement, dated as of August 30, 2005, by and among Motorola
Israel Ltd., Ampal Communications L.P. and MIRS (the Agreement) to sell
Motorola Israel Ltd. all of its holdings of MIRS. In connection with the closing of the
transactions contemplated by this Agreement the existing lawsuit among the parties and
other relating to MIRS was dismissed. Please see Subsequent Event for information
regarding the Companys sale of its holdings in MIRS.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

SUBSEQUENT EVENT

| | On
October 3, 2005 the Company, through Ampal Communications L.P., completed the sale to
Motorola Israel Ltd. of all of its holdings of MIRS pursuant to the Agreement. In
connection with the sale of its holdings of MIRS, Ampal Communications L.P. received
approximately US $89 million of total proceeds, composed of $67.7 million for the
purchase price and an additional $ 21.3 million related to guaranteed dividend
payments. Approximately $ 74.0 million of the proceeds was used to repay all
outstanding debt to banks incurred in connection with making the MIRS investment, and the
Company received US$ 15.0 million ($11.0 million after the deduction of minority interest) of net proceeds
from the sale.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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The Annual Meeting of Shareholders
was held on September 28, 2005. The following proposals were approved by the margins
indicated below:

To elect seven (7) directors to the
Board of Directors of the Company to hold office for one year terms and until their
respective successors shall be elected and qualified:

|Names                 | For | Withheld Authority
|--------------------- | --- | ------------------
|
|
|
|
|Yosef A. Maiman       |     |                   
|                      |     |                   
|Jack Bigio            |     |                   
|                      |     |                   
|Leo Malamud           |     |                   
|                      |     |                   
|Dr. Joseph Yerushalmi |     |                   
|                      |     |                   
|Yehuda Karni          |     |                   
|                      |     |                   
|Eitan Haber           |     |                   
|                      |     |                   
|Menahem Morag         |     |                   

To ratify the appointment of
Kesselman & Kesselman, a member firm of PricewaterhouseCoopers International Limited,
as the independent registered public accounting firm of the Company for the fiscal year
ending December 31, 2005:

|For        | Against | Abstain
|---------- | ------- | -------
|
|
|
|
|18,084,559 |         |        

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

26

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AMPAL-AMERICAN
ISRAEL CORPORATION AND SUBSIDIARIES

SIGNATURES

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

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

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

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

Date: November 10, 2005

27

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

28

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