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UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON D.C. 20549

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FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2006

OR

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

For the transition period from _______________________ to_______________

Commission file number
0-538

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

|New York                                                      | 13-0435685                            
|------------------------------------------------------------- | --------------------------------------
|                                                              |                                       
|(State or Other Jurisdiction ofIncorporation of Organization) | (I.R.S. Employer)Identification Number

|111 Arlozorov Street, Tel Aviv, Israel   | 62098     
|---------------------------------------- | ----------
|                                         |           
|(Address of Principal Executive Offices) | (Zip code)

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

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

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

Yes     x No o

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

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

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

Yes oNo      x

The
number of shares outstanding of the issuer's Class A Stock, its only authorized common
      stock, is 32,610,935(as of November 10, 2006).



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AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES

Index to Form 10-Q

|         |                                                                                             | Page
|-------- | ------------------------------------------------------------------------------------------- | ----
|
|
|
|
|Part I   | Financial Information                                                                       |     
|Item 1.  | Financial Statements                                                                       
|         | Consolidated Statements of Operations for the Nine Months Ended September 30, 2006 and 2005 | 1   
|         | Three Months Ended September 30, 2006 and 2005                                              | 2   
|         | Consolidated Balance Sheets                                                                 | 3-4 
|         | Consolidated Statements of Cash Flows                                                       | 5-6 
|         | Consolidated Statements of Changes in Shareholders' Equity                                  | 7-9 
|         | Notes to the Consolidated Financial Statements                                              | 10  
|Item 2.  | Management's Discussion and Analysis of Financial Condition and Results of Operations       | 17  
|Item 3.  | Quantitative and Qualitative Disclosures About Market Risk                                  | 25  
|Item 4.  | Controls and Procedures                                                                     | 26  
|Part II. | Other Information                                                                           | 27  
|         | Item 1. Legal Proceedings                                                                   | 27  
|         | Item 1A. Risk Factors                                                                       | 27  
|         | Item 2. Unregistered Sales of Equity Securities and Use of Proceeds                         | 27  
|         | Item 3. Defaults upon Senior Securities                                                     | 27  
|         | Item 4. Submission of Matters to a Vote of Security Holders                                 | 27  
|         | Item 5. Other Information                                                                   | 28  
|         | Item 6. Exhibits                                                                            | 28  



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ITEM 1. FINANCIAL
STATEMENTS

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

|NINE MONTHS ENDED SEPTEMBER 30,                                            | 2006 | 2005
|-------------------------------------------------------------------------- | ---- | ----
|
|
|
|
|REVENUES                                                                   |      |     
|Equity in earnings of affiliates                                           |      |     
|Real estate income                                                         |      |     
|Realized gain on fixed asset                                               |      |     
|Realized gains on investments                                              |      |     
|Realized and unrealized gains on marketable                                |      |     
|Securities                                                                 |      |     
|Interest income                                                            |      |     
|Other income                                                               |      |     
|                                                                           |      |     
|Total revenues                                                             |      |     
|                                                                           |      |     
|                                                                           |      |     
|EXPENSES                                                                   |      |     
|Interest expenses                                                          |      |     
|Real estate expenses                                                       |      |     
|Realized loss on investments                                               |      |     
|Loss from impairment of investments                                        |      |     
|Translation loss                                                           |      |     
|Other (mainly general and administrative)                                  |      |     
|                                                                           |      |     
|Total expenses                                                             |      |     
|                                                                           |      |     
|                                                                           |      |     
|Income (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                                                     |      |     
|                                                                           |      |     
|                                                                           |      |     
|Weighted average number of shares used in
      calculation (in thousands) |      |     
|                                                                           |      |     

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

1

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ITEM 1. FINANCIAL
STATEMENTS

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

|THREE MONTHS ENDED SEPTEMBER 30,                                           | 2006 | 2005
|-------------------------------------------------------------------------- | ---- | ----
|
|
|
|
|REVENUES                                                                   |      |     
|Equity in loss of affiliates                                               |      |     
|Real estate income                                                         |      |     
|Realized gain on fixed asset                                               |      |     
|Realized gains on investments                                              |      |     
|Realized and unrealized gains on marketable                                |      |     
|Securities                                                                 |      |     
|Interest income                                                            |      |     
|Other income                                                               |      |     
|                                                                           |      |     
|Total revenues                                                             |      |     
|                                                                           |      |     
|                                                                           |      |     
|EXPENSES                                                                   |      |     
|Interest expenses                                                          |      |     
|Real estate expenses                                                       |      |     
|Realized loss on investments                                               |      |     
|Loss from impairment of investments                                        |      |     
|Translation loss                                                           |      |     
|Other (mainly general and administrative)                                  |      |     
|                                                                           |      |     
|Total expenses                                                             |      |     
|                                                                           |      |     
|                                                                           |      |     
|Loss before income taxes                                                   |      |     
|Provision (benefit) for income taxes                                       |      |     
|                                                                           |      |     
|Loss after income tax                                                      |      |     
|Minority interest                                                          |      |     
|                                                                           |      |     
|                                                                           |      |     
|Net Loss                                                                   |      |     
|                                                                           |      |     
|                                                                           |      |     
|Basic and diluted EPS:                                                     |      |     
|Loss per Class A Share                                                     |      |     
|                                                                           |      |     
|                                                                           |      |     
|Weighted average number of 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 
CONDENSED CONSOLIDATED BALANCE SHEETS

|ASSETS AS OF                           | September 30,
2006 | December 31,
2005
|-------------------------------------- | ------------------ | -----------------
|
|
|
|
|Cash and cash equivalents              |                    |                  
|Loans receivable                       |                    |                  
|                                       |                    |                  
|Marketable Securities                  |                    |                  
|Other investments                      |                    |                  
|                                       |                    |                  
|Total Investments                      |                    |                  
|                                       |                    |                  
|Real estate property, less accumulated |                    |                  
|depreciation of $13,612 and $13,907    |                    |                  
|                                       |                    |                  
|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 
CONDENSED CONSOLIDATED BALANCE SHEETS

|LIABILITIES AND SHAREHOLDERS' EQUITY AS OF                                                                                                                                   | September 30,
2006 | December 31,
2005
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------ | -----------------
|
|
|
|
|LIABILITIES                                                                                                                                                                  |                    |                  
|                                                                                                                                                                             |                    |                  
|Notes and loans payable                                                                                                                                                      |                    |                  
|Deposits from tenants                                                                                                                                                        |                    |                  
|Accounts payable, accrued expense and others                                                                                                                                 |                    |                  
|                                                                                                                                                                             |                    |                  
|Total Liabilities                                                                                                                                                            |                    |                  
|                                                                                                                                                                             |                    |                  
|                                                                                                                                                                             |                    |                  
|Minority interests                                                                                                                                                           |                    |                  
|                                                                                                                                                                             |                    |                  
|                                                                                                                                                                             |                    |                  
|SHAREHOLDERS EQUITY                                                                                                                                                          |                    |                  
|4% Cumulative Convertible Preferred Stock, $5                                                                                                                                |                    |                  
|par value; authorized zero and 189,287 shares; issued zero and 114,198                                                                                                       |                    |                  
|shares; outstanding zero and 110,848 shares                                                                                                                                  |                    |                  
|                                                                                                                                                                             |                    |                  
|6-1/2% Cumulative Convertible Preferred Stock,
    $5 par value; authorized zero and 988,055 shares; issued zero and
    641,423 shares; outstanding zero and 518,887 shares |                    |                  
|                                                                                                                                                                             |                    |                  
|Class A Stock; $1 par value; authorized                                                                                                                                      |                    |                  
|60,000,000 shares; issued 27,937,722 and                                                                                                                                     |                    |                  
|25,826,821 shares; outstanding 22,212,933                                                                                                                                    |                    |                  
|and 20,075,782 shares                                                                                                                                                        |                    |                  
|                                                                                                                                                                             |                    |                  
|Receipt on account of shares to be allotted                                                                                                                                  |                    |                  
|                                                                                                                                                                             |                    |                  
|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 SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

|NINE MONTHS ENDED SEPTEMBER 30,                   | 2006 | 2005
|------------------------------------------------- | ---- | ----
|
|
|
|
|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 gains on investments, net |      |     
|Gain from sale of fixed asset                     |      |     
|Depreciation expense                              |      |     
|Amortization income from tenants deposits, net    |      |     
|Impairment of investments                         |      |     
|Compensation expenses recognized under            |      |     
|SFAS 123R                                         |      |     
|Translation  loss                                 |      |     
|Minority interests                                |      |     
|Decrease (increase) in other assets               |      |     
|Increase in accounts payable, accrued             |      |     
|expenses and others                               |      |     
|Investments made in trading securities            |      |     
|Proceeds from sale of trading securities          |      |     
|Dividends received from affiliates                |      |     
|                                                  |      |     
|                                                  |      |     
|Net cash provided by operating activities         |      |     
|                                                  |      |     
|                                                  |      |     
|Cash flows from investing activities:             |      |     
|Deposits, notes and loans receivable collected    |      |     
|Deposits, notes and loans receivable granted      |      |     
|Investments made in affiliates and others         |      |     
|Proceeds from sale of investments                 |      |     
|Proceeds from sale of fixed asset                 |      |     
|Capital improvements                              |      |     
|                                                  |      |     
|                                                  |      |     
|Net cash used in investing                        |      |     
|activities                                        |      |     
|                                                  |      |     

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

5

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

|NINE MONTHS ENDED SEPTEMBER 30                            | 2006 | 2005
|--------------------------------------------------------- | ---- | ----
|
|
|
|
|Cash flows from financing activities:                     |      |     
|Notes and loans payable received                          |      |     
|Notes and loans payable repaid                            |      |     
|Debentures repaid                                         |      |     
|Contribution to partnership by minority                   |      |     
|Proceeds from exercise of stock options                   |      |     
|Dividend paid to the shareholders of the  Preferred Stock |      |     
|                                                          |      |     
|                                                          |      |     
|Net cash (used in) provided by financing                  |      |     
|activities                                                |      |     
|                                                          |      |     
|                                                          |      |     
|Effect of exchange rate changes on cash and               |      |     
|cash equivalents                                          |      |     
|                                                          |      |     
|                                                          |      |     
|Net increase in cash and cash                             |      |     
|equivalents                                               |      |     
|Cash and cash equivalents at beginning of                 |      |     
|Period                                                    |      |     
|                                                          |      |     
|                                                          |      |     
|Cash and cash equivalents at end of period                |      |     
|                                                          |      |     
|                                                          |      |     
|Supplemental Disclosure of Cash Flow                      |      |     
|Information                                               |      |     
|Cash paid during the period:                              |      |     
|Interest                                                  |      |     
|                                                          |      |     
|                                                          |      |     
|Income taxes paid                                         |      |     
|                                                          |      |     
|                                                          |      |     
|Supplemental Disclosure of Non-cash                       |      |     
|Investing Activities:                                     |      |     
|                                                          |      |     
|Consideration for sale of an investment offset            |      |     
|against other assets                                      |      |     
|                                                          |      |     
|                                                          |      |     
|Consideration for sale of fixed asset offset              |      |     
|against other assets                                      |      |     
|                                                          |      |     
|                                                          |      |     
|Capital improvement offset against account                |      |     
|payable                                                   |      |     
|                                                          |      |     
|                                                          |      |     
|Investment in investee offset against issue of            |      |     
|shares capital                                            |      |     
|                                                          |      |     
|                                                          |      |     
|Marketable securities received as                         |      |     
|consideration for sale of an investment                   |      |     
|                                                          |      |     
|                                                          |      |     
|Supplemental Disclosure of Non-Cash                       |      |     
|                                                          |      |     
|Operating Activities:                                     |      |     
|Dividend in kind from an affiliate                        |      |     
|                                                          |      |     
|                                                          |      |     
|Dividend from an equity investment                        |      |     
|offset against payable accounts                           |      |     
|                                                          |      |     

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

6

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

|(U.S. Dollars in thousands) (Unaudited)
|---------------------------------------

|                                                                                              | Class A stock | 4 % preferred stock | 6.5 % preferred stock |        |  |  |        |  | 
|--------------------------------------------------------------------------------------------- | ------------- | ------------------- | --------------------- | ------ |  |  | ------ |  | 
|
|
|
|
|BALANCE AT JANUARY 1, 2006                                                                    |               |                     |                       | 25,827 |  |  | 25,827 |  | 
|CHANGES DURING 2006:                                                                          |               |                    
|Net loss                                                                                      |               |                     |                       |        |  |  |        |  | 
|Other comprehensive income (loss):                                                            |               |                    
|Foreign currency translation adjustments                                                      |               |                     |                       |        |  |  |        |  | 
|Unrealized gain on marketable securities                                                      |               |                     |                       |        |  |  |        |  | 
|Sale of available for sale securities                                                         |               |                     |                       |        |  |  |        |  | 
|                                                                                              |               |                     |                       |        |  |  |        |  | 
|Total comprehensive gain                                                                      |               |                     |                       |        |  |  |        |  | 
|Conversion of 110,848  4% preferred stock and
518,887 6.5% preferred stock into Class A stock |               |                     |                       | 2,111  |  |  | 2,111  |  | 
|Elimination of treasury stock                                                                 |               |                     |                       |        |  |  |        |  | 
|Shares issued according to EMG Agreement                                                      |               |                     |                       |        |  |  |        |  | 
|Compensation expense recognized under SFAS 123R                                               |               |                     |                       |        |  |  |        |  | 
|Reissuance of 26,250 treasury stock for exercise
of stock options                             |               |                     |                       |        |  |  |        |  | 
|Dividend - 4% Preferred stock                                                                 |               |                     |                       |        |  |  |        |  | 
|- 6.5% Preferred stock                                                                        |               |                     |                       |        |  |  |        |  | 
|                                                                                              |               |                     |                       |        |  |  |        |  | 
|BALANCE AT SEPTEMBER 30, 2006                                                                 |               |                     |                       | 27,938 |  |  | 27,938 |  | 
|                                                                                              |               |                     |                       |        |  |  |        |  | 

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

7

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

(U.S. Dollars in thousands)
(Audited)

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

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

8

---

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

|(U.S. Dollars in thousands) (Unaudited)
|---------------------------------------

|                                                                                               | Class A stock | 4 % preferred stock | 6.5 % preferred stock |        |  |  |        | 
|---------------------------------------------------------------------------------------------- | ------------- | ------------------- | --------------------- | ------ |  |  | ------ | 
|
|
|
|
|BALANCE AT JANUARY 1, 2005                                                                     |               |                     |                       | 25,715 |  |  | 25,715 | 
|CHANGES DURING 2005:                                                                           |               |                    
|Net loss                                                                                       |               |                     |                       |        |  |  |        | 
|Other comprehensive income (loss):                                                             |               |                    
|Foreign currency translation adjustments                                                       |               |                     |                       |        |  |  |        | 
|Unrealized loss on marketable securities                                                       |               |                     |                       |        |  |  |        | 
|Sale of available for sale securities                                                          |               |                     |                       |        |  |  |        | 
|                                                                                               |               |                     |                       |        |  |  |        | 
|Total comprehensive loss                                                                       |               |                     |                       |        |  |  |        | 
|Conversion of 8,172  4% preferred stock and
    20,564 6.5% preferred stock into Class A stock |               |                     |                       | 103    |  |  | 103    | 
|Reissuance  of 7,500 treasury stock for exercise of                                            |               |                    
|stock option                                                                                   |               |                     |                       |        |  |  |        | 
|                                                                                               |               |                     |                       |        |  |  |        | 
|                                                                                               |               |                    
|BALANCE AT SEPTEMBER  30, 2005                                                                 |               |                     |                       | 25,818 |  |  | 25,818 | 
|                                                                                               |               |                     |                       |        |  |  |        | 

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

9

---

---



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

(Unaudited)

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

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

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

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

| | SFAS
No. 155  Accounting for Certain Hybrid Financial Instruments  an
Amendment of FASBS tatements No. 133 and 140.
| | ---------------------------------------------------------------------------------------------------------------------

| | In
February 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 155,
Accounting for Certain Hybrid Financial Instruments  an Amendment of FASB
Statements No. 133 and 140 (SFAS No. 155). SFAS No. 155
allows financial instruments that contain an embedded derivative and that otherwise would
require bifurcation to be accounted for as a whole on a fair value basis, at the holders election.
SFAS No. 155 also clarifies and amends certain other provisions of SFAS No. 133
and SFAS No. 140. This statement is effective for all financial instruments acquired
or issued in fiscal years beginning after September 15, 2006 (January 1, 2007 for
the Company). The adoption of SFAS No. 155 will not have a material impact on the
Companys consolidated financial condition or results of operations.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | ASB
Interpretation No. 48  Accounting for Uncertainty in Income Taxes  an
Interpretation of FASB Statement No. 109
| | --------------------------------------------------------------------------------------------------------------------

| | In
July 2006, the FASB issued FIN 48, Accounting for Uncertainty in Income Taxes an
interpretation of FASB Statement No. 109 (FIN 48). FIN 48
clarifies the recognition threshold and measurement of a tax position taken on a tax
return. FIN 48 is effective for fiscal years beginning after December 15, 2006
(January 1, 2007 for the Company). FIN 48 also requires expanded disclosure with respect
to the uncertainty in income taxes. The Company is currently evaluating the impact, if
any, the adoption of FIN 48 will have on its financial statements.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

10

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

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

| | Staff
Accounting Bulletin No. 108  Considering the Effects of Prior Year Misstatements
when Quantifying Misstatements in Current Year Financial Statements
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
September 2006, the SEC staff issued Staff Accounting Bulletin (SAB) No. 108, Considering
the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year
Financial Statements (SAB 108). SAB 108 was issued in order to eliminate the
diversity of practice in how public companies quantify misstatements of financial
statements, including misstatements that were not material to prior yearsfinancial
statements. We will initially apply the provisions of SAB 108 in connection with the
preparation of our annual financial statements for the year ending December 31, 2006. The
adoption of SAB 108 will not have a material impact on the Companys consolidated
financial condition or results of operations.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | Cash
equal to $9.0 million has already been pledged as security for various loans provided to
the Company and would therefore be unavailable if the Company wished to pledge them in
order to provide an additional source of cash.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | On
December 1, 2005 the Company, through Merhav Ampal Energy, Ltd., a wholly-owned subsidiary
of the Company, acquired a 2% interest in East Mediterranean Gas Co. S.A.E., an Egyptian
joint stock company (EMG) from Merhav M.N.F. Ltd. (Merhav). The
Company paid $29,960 thousand in cash, representing the fair value of the interest
purchased at the time this transaction closed.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
August 1, the Company entered into a new agreement (the Agreement) with
Merhav for the purchase of a portion of its interest in EMG.
| | -----------------------------------------------------------------------------------------------------------------------------------------

| | Under
the terms of the transaction, the Company acquired the beneficial ownership of 4.6% of the
outstanding shares of EMGs capital stock. The purchase price for the shares was
$100.0 million, of which, $50.0 million was paid in cash and the balance was paid in
10,248,002 shares of the Companys Class A Stock that accounted at a fair value of
49.0 million. The issuance of the shares of Class A Stock received the approval of the
shareholders of the Company as required by the marketplace rules of the NASDAQ Stock
Market. As a result of this transaction, the Company beneficially owns 6.6% of the total
outstanding shares of EMG. The purchase price may be adjusted downward should Merhav sell
any of its remaining shares of EMG to a third-party purchaser at a purchase price per
share lower than the purchase price per share paid by the Company pursuant to the
Agreement. Additionally, pursuant to the Agreement, the Company was granted up to two
years the right to acquire up to an additional 5.9% of the total outstanding shares of EMG
stock.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

11

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---



| | Yosef
A. Maiman, the chairman of the Companys Board of Directors (the Board)
and the Companys controlling shareholder, is the sole owner of Merhav.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | The
investment, at a total amount of $131,594 thousand, is carried on the Companys
financial statements at cost, subject to periodic tests for impairment.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------

|6. | Employee
Stock Based Compensation
|-- | ---------------------------------

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

| | Under
the Modified Prospective Approach, the amount of compensation cost recognized includes:
(i) compensation cost for all share-based payments granted prior to, but not yet
vested as of January 1, 2006, based on the grant date fair value estimated in
accordance with the provisions of SFAS No. 123 and (ii) compensation cost for
all share-based payments that will be granted subsequent to January 1, 2006, based
on the grant date fair value estimated in accordance with the provisions of SFAS No. 123R.
Upon adoption, the Company recognizes the stock based compensation of previously granted
share-based options and new share-based options under the straight-line method over the
requisite service period.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Prior
to January 1, 2006, the Company accounted for the stock-based compensation plans in
accordance with the provisions of APB No. 25, as permitted by SFAS No. 123, and
accordingly did not recognize compensation expense for stock options since the exercise
price was equal to the market price of the underlying stock at the date of grant. If
compensation cost for the options under the plans in effect been determined in accordance
with SFAS No. 123, the Companys net income (loss) and EPS for the three months and
nine months ended September 30, 2005 would have been reduced as follows:
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

12

---

---



| |                                         | Nine Months ended
September 30, 2005
(In thousands, except
per share data) | Three Months ended
September 30, 2005
(In thousands, except
per share data)
| | --------------------------------------- | -------------------------------------------------------------------------- | ---------------------------------------------------------------------------
|
|
|
|
| | Net loss, as reported                   |                                                                            |                                                                            
| |                                         |                                                                            |                                                                            
| | Less - stock based compensation expense |                                                                            |                                                                            
| | determined under fair value method      |                                                                            |                                                                            
| |                                         |                                                                            |                                                                            
| |                                         |                                                                            |                                                                            
| | Pro forma, net loss                     |                                                                            |                                                                            
| |                                         |                                                                            |                                                                            
| |                                         |                                                                            |                                                                            
| | Basic and diluted EPS:                  |                                                                            |                                                                            
| | As reported (1)(2)                      |                                                                            |                                                                            
| | Pro forma (1)(2)                        |                                                                            |                                                                            

| | (1) After
deduction of accrued Preferred Stock Dividend of $150 thousands and           $50
thousands for the nine months and the three months, respectively.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) The
effect of the conversion of the 4% and 6.5% Preferred Stock was           excluded from
the basic and diluted EPS calculation due to its antidilutive           effect.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

| | On
February 15, 2000, the Stock Option Committee approved a new Incentive Plan (2000
Plan), under which the Company has reserved 4 million shares of Class A Stock,
permitting the granting of options to all employees, officers and directors. The 2000
Plan was approved by the Board of Directors of Ampal (the Board) at the
meeting held on March 27, 2000 and was approved by a majority of the Companys
shareholders at the June 29, 2000 annual meeting of shareholders. The plan remains in
effect for a period of ten years. As of September 30, 2006, 1,964,500 options under the
2000 Plan are outstanding.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

13

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

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

| | The
following table summarizes the activity of both Plans for the nine months ended September
30, 2006:
| | -------------------------------------------------------------------------------------------------------

| |                                   | Options
(in
thousands) | Weighted-
Average
Exercise
Price
(U.S. Dollars) | Weighted-
Average
Remaining
Contractual
Term
(in years) | Aggregate
Intrinsic Value
(U.S. Dollars
in thousands)
| | --------------------------------- | ---------------------- | ----------------------------------------------- | ------------------------------------------------------- | -----------------------------------------------------
|
|
|
|
| | Outstanding at January 1, 2006    |                        |                                                 |                                                         | 2,024                                                
| | Granted                           |                        |                                                 |                                                         | -                                                    
| | Exercised                         |                        |                                                 |                                                         | (26                                                  
| | Forfeited                         |                        |                                                 |                                                         | (4                                                   
| | Expired                           |                        |                                                 |                                                         | -                                                    
| |                                   |                        |                                                 |                                                         |                                                      
| |                                   |                        |                                                
| | Outstanding at September 30, 2006 |                        |                                                 |                                                         | 1,994                                                
| |                                   |                        |                                                
| | Exercisable at September 30, 2006 |                        |                                                 |                                                         | 1,388                                                

| | Valuation
and Expenses under 123R
| | ---------------------------------

| | The
fair value of each stock option is estimated on the date of grant using the Black-Scholes
option pricing model that uses the assumptions noted below. Expected life is based on the
Companys management estimate for future behavior. Expected volatility is based on
the historical volatility of the Class A common stock. The risk free rate is based
on the U.S. Treasury yield curve for a term consistent with the expected life of the
award, in effect at the date of grant.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | No
options were granted during the three months and the nine months ended September 30,
2006. The fair value of options granted during the year ended December 31, 2005 was
estimated using the following weighted average assumptions: (1) expected life of options
of 5 years; (2) dividend yield of 0%; (3) volatility of 46.07%; and (4) risk free
interest of 4.08%.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Total
stock-based compensation expense recognized under SFAS No. 123R, was approximately
$602 and $170 thousand for the nine month and three month periods ended September 30,
2006, respectively. No share-based compensation was capitalized in the consolidated
financial statements.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
total intrinsic value (market value on date of exercise less exercise price) of options
exercise during the nine months ended September 30, 2006 was $33 thousands.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

14

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| | Cash
received from option exercises for the nine months ended September 30, 2006 was $82
thousand.
| | --------------------------------------------------------------------------------------------------

| | At
September 30, 2006, there was $1.05 million of total unrecognized, pre-tax compensation
cost related to non-vested stock options. This cost is expected to be recognized over a
weighted-average period of approximately three years.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | NINE MONTHS ENDED SEPTEMBER 30,         | 2006 | 2005
| | --------------------------------------- | ---- | ----
|
|
|
|
| | Revenues:                               |      |     
| | Finance                                 |      |     
| | Real Estate                             |      |     
| | Leisure-time                            |      |     
| | Intercompany adjustments                |      |     
| |                                         |      |     
| |                                         |      |     
| | Equity                                  |      |     
| |                                         |      |     
| | Total consolidated revenues             |      |     
| |                                         |      |     
| |                                         |      |     
| | Pretax Operating Income (loss):         |      |     
| | Finance                                 |      |     
| | Real Estate                             |      |     
| | Leisure-time                            |      |     
| |                                         |      |     
| |                                         |      |     
| | Equity                                  |      |     
| |                                         |      |     
| | Total consolidated pretax income (loss) |      |     
| |                                         |      |     
| |                                         |      |     
| | Total Assets:                           |      |     
| | Finance                                 |      |     
| | Energy                                  |      |     
| | Real Estate                             |      |     
| | Leisure-Time                            |      |     
| | Intercompany adjustments                |      |     
| |                                         |      |     
| | Total consolidated assets               |      |     
| |                                         |      |     

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

| | The
energy segment consists of the investment in EMG, an Egyptian Joint Stock Company, which
holds the right to supply natural gas to Israel through a pipe line to be constructed
from Egypt to Israel.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | The
leisure-time segment consists of Coral World International Limited (marine parks located
around the world) and Country Club Hod Hasharon Sport Center and Kfar Saba, the Companys
51%-owned subsidiary located in Israel. During June 2006, the Company sold all of its
interest in Coral World International Limited. (See Item 2  Investment)
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

15

---

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|8. | 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, 2006 and 2005 because such shares are
anti-dilutive.
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

|9. | LEGAL
PROCEEDINGS:
|-- | ------------------

| | None
| | ----

|10. | SUBSEQUENT
EVENTS
|--- | -----------------

| | Effective
October 1, 2006, the Chairman of the Board Mr. Yosef A. Maiman became the President and
Chief Executive Officer of the Company. The appointment followed Jack Bigios
decision to resign as President and Chief Executive Officer. Mr. Bigio remains on the
Board of Directors of the Company.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

16

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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, 2005 for a summary of all of Ampals significant
accounting policies.

Portfolio
Investments

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

Marketable
Securities

We determine the appropriate
classification of marketable securities at the time of purchase. We hold marketable
securities classified as trading securities that are carried at fair value, and
marketable securities classified as available-for-sale that are carried at fair value
with unrealized gains and losses included in the component of accumulated other
comprehensive loss in stockholders equity. We classify investment in marketable
securities as investment in trading securities, if those securities are bought and held
principally for the purpose of selling them in the near term (held for only a short
period of time). All the other securities are classified as available for sale securities
(as of September 30, 2006, no marketable securities were classified as available for
sale securities).

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

17

---

---



Long-Lived
Assets

On January 1, 2002, Ampal adopted
FAS 144, Accounting for the Impairment or Disposal of Long  Lived Assets. FAS
144 requires that long- lived assets, to be held and used by an entity, be reviewed for
impairment and, if necessary, written down to the respective estimated fair values,
whenever events or changes in circumstances indicate that the carrying amount of the
assets may not be recoverable through undiscounted future cash flows. During the nine
months ended September 30, 2006, the Company did not recognize any impairment related to
our assets and investments.

Accounting
for Income Taxes

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

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

Recently
Issued Accounting Pronouncements

SFAS
No. 155  Accounting for Certain Hybrid Financial Instruments  an
Amendment of FASB Statements No. 133 and 140.

In February 2006, the Financial
Accounting Standards Board (FASB) issued SFAS No. 155, Accounting
for Certain Hybrid Financial Instruments  an Amendment of FASB Statements No. 133
and 140 (SFAS No. 155). SFAS No. 155 allows financial
instruments that contain an embedded derivative and that otherwise would require
bifurcation to be accounted for as a whole on a fair value basis, at the holders election.
SFAS No. 155 also clarifies and amends certain other provisions of SFAS No. 133
and SFAS No. 140. This statement is effective for all financial instruments acquired
or issued in fiscal years beginning after September 15, 2006 (January 1, 2007 for
the Company). The adoption of SFAS No. 155 will not have a material impact on the
Companys consolidated financial condition or results of operations.

ASB Interpretation No. 48 - Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement
No. 109

In July 2006, the FASB issued FIN
48, Accounting for Uncertainty in Income Taxes an interpretation of FASB
Statement No. 109 (FIN 48). FIN 48 clarifies the recognition
threshold and measurement of a tax position taken on a tax return. FIN 48 is effective
for fiscal years beginning after December 15, 2006 (January 1, 2007 for the
Company). FIN 48 also requires expanded disclosure with respect to the uncertainty in
income taxes. The Company is currently evaluating the impact, if any, the adoption of FIN
48 will have on its financial statements.

18

---

---



SFAS
No. 157  Fair Value Measurements

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

Staff
Accounting Bulletin No. 108  Considering the Effects of Prior Year Misstatements
when Quantifying Misstatements in Current Year Financial Statements

In September 2006, the SEC staff
issued Staff Accounting Bulletin (SAB) No. 108, Considering the Effects of Prior
Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (SAB
108). SAB 108 was issued in order to eliminate the diversity of practice in how public
companies quantify misstatements of financial statements, including misstatements that
were not material to prior yearsfinancial statements. We will initially apply the
provisions of SAB 108 in connection with the preparation of our annual financial
statements for the year ending December 31, 2006. The adoption of SAB 108 will not have a
material impact on the Companys consolidated financial condition or results of
operations.

Results
of Operations

Nine
months ended September 30, 2006 compared to nine months ended September 30, 2005

Ampal-American Israel Corporation (Ampal)
and its subsidiaries (the Company) recorded a consolidated net loss of $1.0
million for the nine months ended September 30, 2006 as compared to a net loss of $6.4
million for the same period in 2005. The decrease in losses is primarily attributable to
a decrease in losses from impairment of investments, a decrease in interest expense, a
decrease in translation loss and an increase in net realized gains from investments and
fixed asset for the nine months ended September 30, 2006 as compared to the same period
in 2005. The decrease in losses was partially offset by a decrease in earning of
affiliates and a decrease of other income in the nine months ended September 30, 2006 as
compared to the same period in 2005.

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 2006, the Company recorded no such impairments.

In the nine month period ended
September 30, 2006, the Company recorded $2.5 million of interest expense, as compared to
$4.6 million for the same period in 2005. The decrease in interest expense is primarily
attributable to a decrease in notes payable relating to the MIRS investment, which were
fully paid in October 2005.

In the nine month period ended
September 30, 2006, the Company recorded a $0.3 million translation loss, as compared to
$1.8 million translation loss for the same period in 2005. The decrease in translation
loss is related to revaluation of the New Israeli Shekel compared to the American Dollar.

19

---

---



In the nine month period ended
September 30, 2006, Ampal recorded $4.4 million of net realized gain on investments, as
compared to $2.7 million of net realized loss in the same period in 2005. The gain
recorded in 2006 was primarily attributable to the sale of Coral World International (CWI)($4.2
million gain), additional proceeds from the sale of Modem Art Ltd. ($0.6 million gain),
the sale of certain assets by PSINet Europe, one of the holdings of Ampals investee
company, Telecom Partners (TP)($0.4 million gain)and the sale of certain
assets by FIMI opportunity Fund L.P ($0.2 million gain). These gains were partially
offset by a loss from the sale of Ophir Holding Ltd. ($1.0 million loss).

In the nine month period ended
September 30, 2006, Ampal recorded $2.5 million on the sale of its headquarter building
in Tel-Aviv (proceed of $4.6 million).

The Company recorded realized and
unrealized gains from marketable securities in the amount of $1.1 million in the nine
month period ended September 30, 2006 as compared to $2.8 million in the same period in
2005.

Equity in earnings of affiliates
decreased to a net gain of $1.4 million for the nine months ended September 30, 2006, as
compared to a gain of $6.0 million for the same period in 2005. The decrease is primarily
attributable to a decrease in the earnings of Ophir Holdings Ltd. which did not record
any earnings in the nine months ended September 30, 2006, as compared to a gain of $5.9
million recorded by Ophir Holdings, Ltd. in the same period in 2005.

In the nine month period ended
September 30, 2006, the Company recorded $1.9 million in other income, as compared to
$9.1 million for the same period in 2005. The decrease in other income is primarily
related to the committed dividend for 2005 which had been fully paid on October 3, 2005
by Motorola Israel Ltd. as part of the sale of the MIRS investment last year.

Three months ended September 30,
2006 compared to three months ended September 30, 2005

The Company recorded a consolidated net loss of
     $1.8 million for the three months ended September 30, 2006 as compared to a net loss of $10.6 million
  for the same period in 2005. The decrease in losses is primarily attributable to a decrease in loss from
     impairment of investments, a decrease in net realized losses from investments, a decrease in interest
  expense and an increase in realized gain on fixed asset for the three months ended September 30, 2006 as
   compared to the same period in 2005. The decrease in losses was partially offset by a decrease of other
income in the three months ended September 30, 2006 as compared to the same period in 2005.

In the three month period ended
September 30, 2005, the Company recorded $13.3 million of losses from the impairment of
its investment in MIRS. In the same period in 2006, the Company recorded no such
impairments.

In the three month period ended
September 30, 2006, Ampal recorded $20,000 of realized gain on investments, as compared
to $6.2 million of net realized losses in the same period in 2005.

In the three month period ended
September 30, 2006, Ampal recorded $2.5 million on the sale of its headquarters building
in Tel-Aviv (proceed $4.6 millions).

The Company recorded realized and
unrealized gains from marketable securities in the amount of $0.4 million in the three
month period ended September 30, 2006 as compared to $1.2 million in 2005.

In the three month period ended
September 30, 2006, the Company recorded a $0.8 million interest expense, as compared to
a $1.4 million interest expense for the same period in 2005. The decrease in interest
expense is primarily attributable to a decrease in notes payable relating to the MIRS
investment, which was fully paid in October 2005.

20

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In the three month period ended
September 30, 2006, the Company recorded $0.6 million in other income, as compared to
$4.3 million for the same period in 2005. The decrease in other income is primarily
related to the committed dividend for 2005 which had been fully paid on October 3, 2005
by Motorola Israel Ltd. as part of the sale of the MIRS investment last year

Liquidity
and Capital Resources

Cash
Flows

The Companys sources of cash
include cash and cash equivalents and marketable securities, which amount to $22.1
million as of September 30, 2006 as compared to $62.9 million in December 31, 2005. The
decrease in cash, cash equivalents and marketable securities is primarily attributable to
the Companys investments in EMG in August 2006 as described below. The Company also
has sources of cash from operations and cash from investing activities. The Company
believes that these sources are sufficient to fund the current requirements of
operations, capital expenditures, investing activities 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, cash equal to $9
million has already been pledged as security for various loans provided to the Company
and would therefore be unavailable if the Company wished to pledge them in order to
provide an additional source of cash.

Cash
flows from operating activities

Net cash provided by operating
activities totaled approximately $35.6 million for the nine months ended September 30,
2006, as compared to approximately $14.6 million at the same period in 2005. The increase
is primarily attributable to the $39.6 million of net proceeds from marketable securities
($89.6 million proceeds offset by $50.0 million invested) as compared to $13.1 million
net proceeds in the same period of 2005, which was partially offset by a $0.2 million
dividend received from affiliates as compared to $2.5 million in the same period in 2005.

Cash
flows from investing activities

Net cash used in investing
activities totaled approximately $31.2 million for the nine months ended September 30,
2006, as compared to approximately $3.6 million used in investing activities for the same
period in 2005. The increase is primarily attributable to the Companys investments
in EMG ($52.7 million), Bay-Heart ($1.4 million) and Fimi ($0.4 million). This increase
was partially offset by proceeds in the amount of $23.1 million from the sale of our
interests in Coral World International, Ophir, Modem Art, certain assets of TP and other
investments.

Cash
flows from financing activities

Net cash used in financing
activities was approximately $7.4 million for the nine months ended September 30, 2006,
as compared to approximately $3.4 million of net cash provided by financing activities
for the nine months period ended September 30, 2005.

In the nine months ended September
30, 2006, the Company paid down its existing notes payable in the amount of $6.0 million
and a dividend to the Preferred Stock shareholders in the amount of $2.3 million while
using its own cash and borrowing an additional $0.7 million. In the nine months ended
September 30, 2005, Am-Hal Ltd. and its minority partner borrowed $6.3 million and $2.0
million, respectively to finance a new project and Ampal used its own cash to pay down
its existing notes payable and debentures in the amount of $5.0 million.

21

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Investments

On September 30, 2006, the aggregate
fair value of trading and available-for-sale securities was approximately $0.4 million,
as compared to $38.6 million at December 31, 2005. The decrease in 2006 is mainly
attributable to the sale of various marketable securities in order to finance the
purchase of EMG.

In the nine months ended September
30 2006, the Company made an additional investment of $101.6 million in EMG, $0.4 million
in Fimi Opportunity Fund, L.P. (Fimi) and $1.4 million loan to Bay Heart Ltd.

On August 1, 2006, the Company,
through Merhav Ampal Energy, Ltd., a wholly-owned subsidiary of the Company, entered into
an agreement (the Agreement) with Merhav M.N.F. Ltd. (Merhav) for
the purchase from Merhav of a portion of its interest in East Mediterranean Gas Co.
S.A.E., an Egyptian joint stock company (EMG).

Under the terms of the transaction,
the Company acquired the beneficial ownership of 4.6% of the outstanding shares of
EMGs capital stock. The purchase price for the shares was $100.0 million, of which,
$50.0 million was paid in cash and the balance was paid in 10,248,002 shares of the
Companys Class A Stock that accounted at a fair value of 49.0 million. The issuance
of the shares of Class A Stock received the approval of the shareholders of the Company as
required by the marketplace rules of the NASDAQ Stock Market. As a result of this
transaction, the Company beneficially owns 6.6% of the total outstanding shares of EMG.
The purchase price may be adjusted downward should Merhav sell any of its remaining shares
of EMG to a third-party purchaser at a purchase price per share lower than the purchase
price per share paid by the Company pursuant to the Agreement. Additionally, pursuant to
the Agreement, the Company was granted up to two years the right to acquire up to an
additional 5.9% of the total outstanding shares of EMG stock.

Yosef A. Maiman, the chairman of the
Companys Board of Directors (the Board) and the Companys
controlling shareholder, is the sole owner of Merhav.

On August 22,2006 EMG called for
additional capital from all its shareholders. As a result, the Company paid additional
$2,7 million in order to maintain its beneficial interest in the investment.

During the nine months ended
September 30, 2006, Ampal made the following dispositions:

| |  | On
June 13, 2006, the Company sold its holdings in Coral world international for $21.0
million and recorded a gain of $4.2 million.
| | - | -----------------------------------------------------------------------------------------------------------------------------------

| |  | On
March, 2006 the Company received an additional proceeds from the sale of Modem Art Ltd.
In the amount of $ 0.6 million.
| | - | --------------------------------------------------------------------------------------------------------------------------

| |  | On
April, 2006 the Company received an additional proceeds In the amount of $ 0.4 million
from the sale of certain assets by PSINet Europe, one of the holdings of Ampals
investee company, Telecom Partner.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | On
May 8, 2006, the Company sold its holdings in Ophir Holding Ltd. for $1.1 million and
recorded a loss of $1.0 million.
| | - | -------------------------------------------------------------------------------------------------------------------------

Debt

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

22

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The Company financed a portion of
the development of Am-Hal, a wholly-owned subsidiary of the Company, which develops and
operates luxury retirement centers for senior citizens, through a revolving credit
facility from Bank Hapoalim Ltd., Phoenix Insurance Company and others. On December 1,
2005, a loan agreement creating the facility was signed between Am-Hal, Phoenix Insurance
Company and others. Pursuant to the loan agreement, the lenders granted the Company a
revolving credit facility in Israeli Shekels equal to $12.5 million. The annual interest
rate on the loan, which matures in 10 years, is 7.5%. The interest rate and the principal
of the loan will be adjusted based on the changes in the Israeli Consumer Price Index. As
of September 30, 2006 the Company had drawn $2.5 million from the facility. As of
September 30, 2006 and December 31, 2005 the amount of Am-Hals outstanding debt
under the loans from Bank Hapoalim Ltd., Phoenix Insurance Company and others, were $14.5
million and $13.5 million, respectively. The loans, excluding the Phoenix loan, mature in
up to one year and have interest rates ranging between 6.5% and 7.5%. 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 $3.0 million in favor of
tenants of Am-Hal in order to secure their deposits.

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

Other long term borrowings in the
amount of $1.8 million are linked to the Israeli C.P.I and mature between 2006 and 2010,
of which an amount of $1.5 million bears no interest. The remaining $0.3 million bears an
annual interest of 5.7%.

The weighted average interest rates
and the balances of these short-term borrowings at September 30, 2006 and December 31,
2005 were 6.5% on $20.8 million and 6.0% on $15.0 million, respectively.

As of September 30, 2006, the
Company had issued guarantees on certain outstanding loans to its investees and
subsidiaries in the aggregate principal amount of $9.9 million. This includes:

| | 1. | $5.9
million guarantee on indebtedness incurred by Bay Heart ($2.9 million of
               which is recorded as a liability in the Companys financial
statements as                of September 30, 2006) in connection with the development of
the property, Bay                Heart recorded losses in 2006, in managements
belief, primarily as a                result of decreased rental revenues. There can be
no guarantee that Bay Heart                will become profitable or that it will
generate sufficient cash to repay its                outstanding indebtedness without
relying on the Companys guarantee.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | $3.0
million guarantee to Am-Hal tenants as described above.
| | -- | ------------------------------------------------------------

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

CHANGES
IN SHAREHOLDERS EQUITY

During the third quarter of 2006 the
shares holders equity was change as follows:

On July 31, 2006, all outstanding 4%
Cumulative Convertible Preferred Stock and 6-1/2% Cumulative Convertible Preferred Stock
were converted as follows:

Each share of Ampals 4% Cumulative Convertible
  Preferred Stock was converted to five shares of Ampal's Class A Stock plus an additional $2.58 per share
     paid in cash and each share of Ampals 6-1/2% Cumulative Convertible Preferred Stock was converted to
three shares of Ampal's Class A Stock plus an additional $4.09 per share paid in cash.

23

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Holders of Ampals 4%
Cumulative Convertible Preferred Stock and 6-1/2% Cumulative Convertible Preferred Stock
who voted in favor of the amendments to Ampals Restated Certificate of
Incorporation as described in Part II Item 4 below also received $0.15 per share voted in
favor of the amendments.

From July 31, 2006, the only class
of shares Ampal has outstanding is its Class A Stock.

On October 9, 2006, as part of the
investment in EMG ,the Company issued to Merhav (m.n.f.)Ltd. 10,248,002 shares of the
Companys Class A Stock. The issuance of these shares received the approval of the
shareholders of the Company on September 19, 2006, as required by the marketplace rules
of the NASDAQ Stock Market. As of September 30, 2006, the Company classified the issuance
of the shares as receipt on account of shares to be allotted.

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 2006, the Company
did not have any open foreign currency forward exchange contract to purchase or to sell
U.S. dollars, in payment of New Israeli Shekel.

FORWARD LOOKING
STATEMENTS

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

Should any of those risks or
uncertainties materialize, or should underlying assumptions prove incorrect, actual
results or outcome may vary from those described herein as anticipated, believed,
estimated, expected, intended or planned. These risks and uncertainties may include, but
are not limited to, those described in this report, in Part II, Item 1A. Risk Factors and
elsewhere in our Annual Report on Form 10-K for the year ended December 31, 2005, and
those described from time to time in our future reports filed with the Securities and
Exchange Commission. The Company assumes no obligation to update or revise any
forward-looking statements.

24

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ITEM 3.  QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK

MARKET RISKS AND SENSITIVITY ANALYSIS

The Company is exposed to various
market risks, including changes in interest rates, foreign currency rates and equity
price changes. The following analysis presents the hypothetical loss in earnings, cash
flows and fair values of the financial instruments which were held by the Company at
September 30, 2006, and are sensitive to the above market risks.

During the nine months ended
September 30, 2006, there have been no material changes in the market risk exposures
facing the Company as compared to those the Company faced in the fiscal year ended
December 31, 2005.

Interest Rate Risks

At September 30, 2006, the Company
had financial assets totaling $15.6 million and financial liabilities totaling $46.1
million. For fixed rate financial instruments, interest rate changes affect the fair
market value but do not impact earnings or cash flows. Conversely, for variable rate
financial instruments, interest rate changes generally do not affect the fair market
value but do impact future earnings and cash flows, assuming other factors are held
constant.

At September 30, 2006, the Company
had fixed rate financial assets of $0.4 million and had variable rate financial assets of
$15.2 million.  A ten percent decrease in interest rates would increase the
unrealized fair value of the fixed rate assets by approximately $0.1 million.

At September 30, 2006, the Company
had fixed rate debt of $5.1 million and variable rate debt of $41.0 million. A ten
percent decrease in interest rates would increase the unrealized fair value of the
financial debts in the form of the fixed rate debt by approximately $0.1 million.

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

Exchange Rate
Sensitivity Analysis

The Companys exchange rate
exposure on its financial instruments results from its investments and ongoing operations
in Israel. During 2006, the Company did not enter into foreign exchange forward purchase
contracts to partially hedge this exposure. At September 30, 2006, the Company didnt
have any open foreign exchange forward purchase contracts. Holding other variables
constant, if there were a ten percent devaluation of the foreign currency, the Companys
cumulative translation loss reflected in the Companys accumulated other
comprehensive loss would increase by $1.3 million, and regarding the statements of income
(loss) a ten percent devaluation of the foreign currency would be reflected in a net
increase in earnings and would be $2.0 million.

Equity Price Risk

The Companys investments at
September 30, 2006, included marketable securities, which are recorded at fair value of
$0.4 million, including a net unrealized gain of $0.1 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
$0.1 million.

25

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ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

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

Internal Control Over Financial
Reporting

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

26

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

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

| |  | None
| |  | ----

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

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

|Item 2. | Unregistered
Sales of Equity Securities and Use of Proceeds.
|------- | ------------------------------------------------------------

| | None.
| | -----

|Item 3. | Defaults
upon Senior Securities
|------- | -------------------------------

| | None.
| | -----

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

| | The
Annual Meeting of Shareholders was held on September 19, 2006. The following proposals
were approved by the margins indicated below:
| | ----------------------------------------------------------------------------------------------------------------------------------------

| | To
elect eight (8) 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 |     |                   
| | Dr. Nimrod Novik      |     |                   
| | Yehuda Karni          |     |                   
| | Eitan Haber           |     |                   
| | Menahem Morag         |     |                   

27

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| | 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, 2006:
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |            |  | 
| | ---------- |  | 
|
|
|
|
| | 17,572,276 |  | 

| | To
approve the proposed issuance of 10,248,002 shares of Class A Stock of the Company to
Merhav (m.n.f.) Ltd. (Merhav) in connection with the Companys purchase
from Merhav of a portion of its interest in East Mediterranean Gas Co. S.A.E., an Egyptian
joint stock company
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | For        | Against | Abstain
| | ---------- | ------- | -------
|
|
|
|
| | 12,339,485 |         |        

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

| | None.
| | -----

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

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

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

| | 31.1 | Certification
of Yosef A. Maiman pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
| | ---- | -------------------------------------------------------------------------------------------

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

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

28

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AMPAL-AMERICAN
ISRAEL CORPORATION AND SUBSIDIARIES

SIGNATURES

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

| |  | AMPAL-AMERICAN ISRAEL CORPORATIONBy: /s/ Yosef A. Maiman
Yosef A. MaimanChairman of the Board
President & Chief Executive Officer
(Principal Executive Officer)
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

Date:  November 13, 2006

29

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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 Yosef A. Maiman pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|---- |  | -------------------------------------------------------------------------------------------

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

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

30

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