---

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

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FORM 10-Q

(Mark
One)

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

For the quarterly period ended                                   June 30, 2004

OR

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

For the transition period from _______________________  to_______________

Commission file number
0-538

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

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

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

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

---

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

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

Yes
x  No o

Indicate
by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Exchange Act).

Yes o          No      x

The
number of shares outstanding of the issuers Class A Stock, its only authorized
common stock, is 19,859,445 (as of August 3, 2004).



---

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AMPAL-AMERICAN
ISRAEL CORPORATION AND SUBSIDIARIES

Index to Form 10-Q

|         |                                                                                          |     
|-------- | ---------------------------------------------------------------------------------------- | ----
|
|
|
|
|Part I.  | Financial Information                                                                    | Page
|        
|Item 1.  | Financial Statements                                                                    
|        
|         | Consolidated Statements of Operations                                                   
|        
|         | Six months ended June 30, 2004 and 2003                                                  | 1   
|        
|         | Three Months Ended June 30, 2004 and 2003                                                | 2   
|        
|         | Consolidated Balance Sheets                                                              | 3   
|        
|         | Consolidated Statements of Cash Flows                                                    | 5   
|        
|         | Consolidated Statements of Changes in Shareholders'
     Equity                          | 7   
|        
|         | Consolidated Statements of Comprehensive Gain (Loss)                                     | 9   
|        
|         | Notes to the Consolidated Financial Statements.                                          | 10  
|        
|Item 2.  | Management's Discussion and Analysis of  Financial Condition and Results of Operations.  | 14  
|        
|Item 3.  | Quantitative and Qualitative Disclosures 
        About Market Risk                      | 21  
|        
|Item 4.  | Controls and Procedures                                                                  | 22  
|        
|Part II. | Other Information                                                                        | 22  
|        
|         | Item 1. Legal Proceedings                                                                | 22  
|        
|         | Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities | 23  
|        
|         | Item 3. Defaults upon Senior Securities                                                  | 23  
|        
|         | Item 4. Submission of Matters to a Vote of Security Holders                              | 22  
|        
|         | Item 5. Other Information                                                                | 23  
|        
|         | Item 6. Exhibits and Reports on Form 8-K                                                 | 24  



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|ITEM 1. | FINANCIAL
STATEMENTS
|------- | --------------------

AMPAL-AMERICAN
ISRAEL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS

|SIX MONTHS ENDED JUNE 30,                    | 2004 | 2003
|-------------------------------------------- | ---- | ----
|
|
|
|
|REVENUES                                     |      |     
|Equity in earnings of affiliates             |      |     
|Interest                                     |      |     
|Real estate income                           |      |     
|Realized and unrealized gains on investments |      |     
|Other                                        |      |     
|                                             |      |     
|Total revenues                               |      |     
|                                             |      |     
|EXPENSES                                     |      |     
|Interest                                     |      |     
|Real estate expenses                         |      |     
|Loss from impairment of investments          |      |     
|Minority interests                           |      |     
|Translation loss                             |      |     
|Other (mainly general and administrative)    |      |     
|                                             |      |     
|Total expenses                               |      |     
|                                             |      |     
|Gain before income taxes                     |      |     
|Provision for income taxes                   |      |     
|                                             |      |     
|Net (loss)Gain                               |      |     
|                                             |      |     
|Basic EPS:                                   |      |     
|(Loss)Gain per Class A share                 |      |     
|                                             |      |     
|Shares used in calculation (in thousands)    |      |     
|                                             |      |     
|Diluted EPS:                                 |      |     
|(Loss)Gain per Class A share                 |      |     
|                                             |      |     
|Shares used in calculation (in thousands)    |      |     
|                                             |      |     

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

1

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---



|ITEM 1. | FINANCIAL
STATEMENTS
|------- | --------------------

AMPAL-AMERICAN
ISRAEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

|THREE MONTHS ENDED JUNE 30,                  | 2004 | 2003
|-------------------------------------------- | ---- | ----
|
|
|
|
|REVENUES                                     |      |     
|Equity in (loss) earnings of affiliates      |      |     
|Interest                                     |      |     
|Real estate income                           |      |     
|Realized and unrealized gains on investments |      |     
|Other                                        |      |     
|                                             |      |     
|Total revenues                               |      |     
|                                             |      |     
|EXPENSES                                     |      |     
|Interest                                     |      |     
|Real estate expenses                         |      |     
|Loss from impairment of investments          |      |     
|Minority interests                           |      |     
|Translation loss                             |      |     
|Other (mainly general and administrative)    |      |     
|                                             |      |     
|Total expenses                               |      |     
|                                             |      |     
|Gain before income taxes                     |      |     
|Provision for income taxes                   |      |     
|                                             |      |     
|Net Gain                                     |      |     
|                                             |      |     
|Basic EPS:                                   |      |     
|Gain per Class A share                       |      |     
|                                             |      |     
|Shares used in calculation (in thousands)    |      |     
|                                             |      |     
|Diluted EPS:                                 |      |     
|Gain per Class A share                       |      |     
|                                             |      |     
|Shares used in calculation (in thousands)    |      |     
|                                             |      |     

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

2

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AMPAL-AMERICAN
ISRAEL CORPORATION AND SUBSIDIARIES 
CONSOLIDATED
BALANCE SHEETS

|ASSETS AS OF                           | June 30,
2004 | December 31,
2003
|-------------------------------------- | ------------- | -----------------
|
|
|
|
|                                       |               |                  
|Cash and cash equivalents              |               |                  
|                                       |               |                  
|Deposits, notes and loans receivable   |               |                  
|                                       |               |                  
|Investments                            |               |                  
|Marketable Securities                  |               |                  
|                                       |               |                  
|Total Investments                      |               |                  
|                                       |               |                  
|Real estate property, less accumulated |               |                  
|depreciation of $11,498 and $9,166     |               |                  
|                                       |               |                  
|Other assets                           |               |                  
|                                       |               |                  
|                                       |               |                  
|                                       |               |                  
|                                       |               |                  
|Total Assets                           |               |                  
|                                       |               |                  

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

3

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AMPAL-AMERICAN
ISRAEL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS

|LIABILITIES AND
SHAREHOLDERS' EQUITY AS OF      | June 30,
2004 | December 31,
2003
|----------------------------------------------- | ------------- | -----------------
|
|
|
|
|LIABILITIES                                     |               |                  
|Notes and loans payable                         |               |                  
|Debentures                                      |               |                  
|Accounts payable, accrued                       |               |                  
|expense and others                              |               |                  
|                                                |               |                  
|Total Liabilities                               |               |                  
|                                                |               |                  
|Minority interests                              |               |                  
|                                                |               |                  
|SHAREHOLDERS EQUITY                             |               |                  
|4% Cumulative Convertible Preferred Stock, $5   |               |                  
|par value; authorized 189,287 shares; issued    |               |                  
|126,077 and 131,952 shares; outstanding 122,727 |               |                  
|and 128,602 shares                              |               |                  
|                                                |               |                  
|6-1/2% Cumulative Convertible Preferred Stock,  |               |                  
|$5 par value; authorized 988,055 shares; issued |               |                  
|666,070 and 697,380 shares; outstanding 543,534 |               |                  
|and 574,844 shares                              |               |                  
|                                                |               |                  
|Class A Stock; $1 par value; authorized         |               |                  
|60,000,000 shares; issued 25,690,515 and        |               |                  
|25,567,210 shares; outstanding 19,858,851       |               |                  
|and 19,735,546 shares                           |               |                  
|                                                |               |                  
|Additional paid-in capital                      |               |                  
|                                                |               |                  
|Retained earnings                               |               |                  
|                                                |               |                  
|Treasury Stock, at cost                         |               |                  
|                                                |               |                  
|Accumulated other comprehensive loss            |               |                  
|                                                |               |                  
|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 
CONSOLIDATED
STATEMENTS OF CASH FLOWS

|SIX MONTHS ENDED JUNE 30,                      | 2004 | 2003
|---------------------------------------------- | ---- | ----
|
|
|
|
|
|Cash flows from operating activities:          |      |     
|Net (loss) gain                                |      |     
|Adjustments to reconcile net loss to net       |      |     
|cash provided by operating activities:         |      |     
|Equity in earnings of affiliates               |      |     
|Realized and unrealized gain                   |      |     
|on investments                                 |      |     
|Depreciation expense                           |      |     
|Amortization of deposits from tenants          |      |     
|Loss from impairment of investments and loans  |      |     
|Translation loss                               |      |     
|Minority interests                             |      |     
|(Increase)decrease in other assets             |      |     
|(Decrease) 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              |      |     
|Return of capital by partnership               |      |     
|Capital improvements                           |      |     
|Change of minority interest due to acquisition |      |     
|                                               |      |     
|Net cash provided by (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 
CONSOLIDATED
STATEMENTS OF CASH FLOWS

|SIX MONTHS ENDED JUNE 30,                        | 2004 | 2003
|------------------------------------------------ | ---- | ----
|
|
|
|
|Cash flows from financing activities:            |      |     
|Notes and loans payable received                 |      |     
|Notes and loans payable repaid                   |      |     
|Debentures repaid                                |      |     
|Contribution to partnership by minority          |      |     
|                                                 |      |     
|Net cash provided by (used in) financing         |      |     
|activities                                       |      |     
|                                                 |      |     
|Effect of exchange rate changes on cash and      |      |     
|cash equivalents                                 |      |     
|                                                 |      |     
|Net increase in cash and cash equivalents        |      |     
|Cash and cash equivalents at beginning of period |      |     
|                                                 |      |     
|Cash and cash equivalents at end of period       |      |     
|                                                 |      |     
|Supplemental Disclosure of Cash Flow Information |      |     
|Cash paid during the period:                     |      |     
|Interest paid to others                          |      |     
|                                                 |      |     
|Income taxes paid                                |      |     
|                                                 |      |     
|Supplemental Disclosure of Non-cash              |      |     
|Investing Activities:                            |      |     
|Proceeds in tradable securities received from    |      |     
|realization of an investment                     |      |     
|                                                 |      |     
|Investing activities:                            |      |     
|Investment in investees                          |      |     
|                                                 |      |     

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

6

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

|                                           | June 30
2004 | December 31
2003
|------------------------------------------ | ------------ | ----------------
|
|
|
|
|4% PREFERRED STOCK                         |              |                 
|Balance, beginning of year                 |              |                 
|Conversion of 5,875 and 7,439 shares into  |              |                 
|Class A Stock                              |              |                 
|                                           |              |                 
|Balance, end of period                     |              |                 
|                                           |              |                 
|6-1/2% PREFERRED STOCK                     |              |                 
|Balance, beginning of year                 |              |                 
|Conversion of 31,310 and 9,070 shares into |              |                 
|Class A Stock                              |              |                 
|                                           |              |                 
|Balance, end of period                     |              |                 
|                                           |              |                 
|CLASS A STOCK                              |              |                 
|Balance beginning of year                  |              |                 
|Issuance of shares upon conversion of      |              |                 
|Preferred Stock                            |              |                 
|                                           |              |                 
|Balance, end of period                     |              |                 
|                                           |              |                 
|ADDITIONAL PAID-IN CAPITAL                 |              |                 
|Balance, beginning of year                 |              |                 
|Conversion of Preferred Stock              |              |                 
|                                           |              |                 
|Balance, end of period                     |              |                 
|                                           |              |                 
|RETAINED EARNINGS                          |              |                 
|Balance, beginning of year                 |              |                 
|Net gain (loss)                            |              |                 
|Dividends:                                 |              |                 
|4% Preferred Stock - $0.2 per share        |              |                 
|6-1/2% Preferred Stock - $0.325 per share  |              |                 
|                                           |              |                 
|Balance, end of period                     |              |                 
|                                           |              |                 

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

7

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

|                                          | June 30,
2004 | December 31,
2003
|----------------------------------------- | ------------- | -----------------
|
|
|
|
|TREASURY STOCK4% PREFERRED STOCK          |               |                  
|Balance, end of period                    |               |                  
|                                          |               |                  
|6-1/2% PREFERRED STOCK                    |               |                  
|Balance, end of period                    |               |                  
|                                          |               |                  
|CLASS A STOCK                             |               |                  
|Balance, end of period                    |               |                  
|                                          |               |                  
|Balance, end of period                    |               |                  
|                                          |               |                  
|
|
|
|
|
|
|
|
|Cumulative translation adjustments:       |               |                  
|Balance, beginning of year                |               |                  
|Foreign currency translation adjustment   |               |                  
|                                          |               |                  
|Balance, end of period                    |               |                  
|                                          |               |                  
|Unrealized gain on marketable securities: |               |                  
|Balance, beginning of year                |               |                  
|Unrealized gain, net                      |               |                  
|Sale of available-for-sale securities     |               |                  
|                                          |               |                  
|Balance, end of period                    |               |                  
|                                          |               |                  
|Balance, end of period                    |               |                  
|                                          |               |                  

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

8

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

|SIX MONTHS ENDED JUNE 30,                    | 2004 | 2003
|-------------------------------------------- | ---- | ----
|
|
|
|
|Net(loss) gain                               |      |     
|                                             |      |     
|Other comprehensive gain (loss), net of tax: |      |     
|Foreign currency translation adjustments     |      |     
|Unrealized gain on securities                |      |     
|                                             |      |     
|Other comprehensive (loss) income            |      |     
|                                             |      |     
|Comprehensive income                         |      |     
|                                             |      |     
|Related tax(expense) on other                |      |     
|comprehensive gain:                          |      |     
|Foreign currency translation adjustments     |      |     
|Unrealized gain on securities                |      |     

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

9

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AMPAL-AMERICAN
ISRAEL CORPORATION AND 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
June 30, 2004 consolidated balance sheet presented herein was derived from           the
audited December 31, 2003 consolidated financial statements of the Company.
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Reference
should be made to the Companys consolidated financial statements for the year ended
December 31, 2003 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, 2003 consolidated financial statements for additional details of the Companys
consolidated financial condition, results of operations and cash flows. The details in
those notes have not changed except as a result of normal transactions in the interim.
All adjustments (of a normal recurring nature) which are, in the opinion of management,
necessary to a fair presentation of the results of the interim period have been included.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3. | Employee
Stock Based Compensation
|-- | ---------------------------------

| | The
Company accounts for all plans under APB Opinion No. 25, under which no compensation
costs were incurred. The following table illustrates the effect on net income and net
loss and EPS as if the Company had applied the fair value-recognition provisions of SFAS
No. 123, Accounting for Stock-Based Compensation, to stock based incentive
plans for the periods indicated below:
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Six Months Ended June 30              | 2004 | 2003
|------------------------------------- | ---- | ----
|
|
|
|
|Basic EPS:                            |      |     
|                                      |      |     
|Net(loss)gain:                        |      |     
|As reported(1)                        |      |     
|Less-stock based compensation expense |      |     
|Determined under fair value method    |      |     
|                                      |      |     
|Pro forma                             |      |     
|                                      |      |     
|As reported                           |      |     
|                                      |      |     
|Pro forma                             |      |     
|                                      |      |     
|                                      |      |     
|Diluted EPS:                          |      |     
|                                      |      |     
|Net(loss)gain:                        |      |     
|As reported                           |      |     
|Less-stock based compensation expense |      |     
|Determined under fair value method    |      |     
|                                      |      |     
|Pro Forma                             |      |     
|                                      |      |     
|As Reported                           |      |     
|                                      |      |     
|Pro forma                             |      |     
|                                      |      |     

10

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|Three Months Ended June 30            | 2004 | 2003
|------------------------------------- | ---- | ----
|
|
|
|
|Basic EPS:                            |      |     
|                                      |      |     
|Net gain:                             |      |     
|As reported(1)                        |      |     
|Less-stock based compensation expense |      |     
|Determined under fair value method    |      |     
|                                      |      |     
|Pro forma                             |      |     
|                                      |      |     
|As reported                           |      |     
|                                      |      |     
|Pro forma                             |      |     
|                                      |      |     
|Diluted EPS:                          |      |     
|                                      |      |     
|Net (loss) gain:                      |      |     
|As reported                           |      |     
|Less-stock based compensation expense |      |     
|Determined under fair value method    |      |     
|                                      |      |     
|Pro forma                             |      |     
|                                      |      |     
|As Reported                           |      |     
|                                      |      |     
|Pro forma                             |      |     
|                                      |      |     

| | (1)After
deduction of accrued Preferred Stock Dividend of $107 and $109 (for three months $53 and
$55), respectively.
| | ---------------------------------------------------------------------------------------------------------------------

| | Under
SFAS No. 123, the fair value of each option is estimated on the date of grant using the
Black Scholes option-pricing model with the following assumptions: (1) expected life of
options; (2) dividend yield; (3) volatility; and (4) risk-free interest rate. For the
periods of six ended June 30, 2004, 15,000 options were granted. The fair value generated
by the Black-Scholes model may not be indicative of the future benefit, if any, that may
be received by the optionholder.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

11

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

|SIX MONTHS ENDED JUNE 30,     | 2004 | 2003
|----------------------------- | ---- | ----
|
|
|
|
|Revenues:                     |      |     
|Finance                       |      |     
|Real Estate                   |      |     
|Leisure-time                  |      |     
|Intercompany adjustments      |      |     
|                              |      |     
|                              |      |     
|Equity                        |      |     
|                              |      |     
|Total                         |      |     
|                              |      |     
|Pretax Operating Gain (Loss): |      |     
|Finance                       |      |     
|Real Estate                   |      |     
|Leisure-time                  |      |     
|                              |      |     
|                              |      |     
|Equity                        |      |     
|Minority Interest             |      |     
|                              |      |     
|Total                         |      |     
|                              |      |     
|Total Assets:                 |      |     
|Finance                       |      |     
|Real Estate                   |      |     
|Leisure-Time*                 |      |     
|Intercompany adjustments      |      |     
|                              |      |     
|Total                         |      |     
|                              |      |     

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

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

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

|5. | The
following table summarizes securities that were not included in the
          calculations of diluted earnings per Class A share for the six-month periods
          ended June 30, 2004 and 2003 because such shares are anti-dilutive.
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

Ampal
Communications L.P.

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

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

12

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

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

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

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

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

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

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

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

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

|3. | As
of June 30, 2004, the Company had not received its dividend from MIRS in the
               amount of $7.1 million, included among other assets, due March
31,                2004. The dividend was not received due to the legal dispute discussed
above. As                a result of not receiving the dividend, the principal and the
interest of the                loan which were due March 31, 2004 were only partially
paid (see                Debt).
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

13

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

AMPAL - AMERICAN ISRAEL CORPORATION
AND SUBSIDIARIES

CRITICAL ACCOUNTING POLICIES

The preparation of Ampals
consolidated financial statements is in conformity with accounting principles generally
accepted in the United States which requires management to make estimates and assumptions
in certain circumstances that affect amounts reported in the accompanying consolidated
financial statements and related footnotes. Actual results may differ from these
estimates. To facilitate the understanding of Ampals business activities, described
below are certain Ampal accounting policies that are relatively more important to the
portrayal of its financial condition and results of operations and that require managements
subjective judgments. Ampal bases its judgments on its experience and various other
assumptions that it believes to be reasonable under the circumstances. Please refer to
Note 1 to Ampals consolidated financial statements included in the Annual Report
for the year ended December 31, 2003 for a summary of all of Ampals significant
accounting policies.

Portfolio Investments

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

14

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Investment in MIRS

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

Marketable Securities

We determine the appropriate
classification of marketable securities at the time of purchase. We hold marketable
securities classified as trading securities that are carried at fair value, and
marketable securities classified as available-for-sale that are carried at fair value
with unrealized gains and losses included in the component of accumulated other
comprehensive loss in stockholders equity. If according to managements
assessment it is determined that a decline in the fair value of the available for sale
securities is other than temporary, an impairment loss is recorded and included in the
consolidated statements of income as loss from impairment of investments.

Long-Lived Assets

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

Accounting for Income Taxes

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

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

15

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Results of Operations

Six months ended June 30, 2004
compared to six months ended June 30, 2003:

Ampal-American Israel Corporation (Ampal)
and its subsidiaries (the Company) recorded a consolidated net loss of $0.5
million for the six months ended June 30, 2004 as compared to a net gain of $8.1 million
for the same period in 2003. The decrease in net gain is primarily attributable to the
decrease in realized and unrealized gains on investments in the six months ended June 30,
2004 as compared to the same period in 2003. These decreases were partially offset by the
increase in equity in earnings of affiliates, a decrease in loss from impairment, a
decrease in minority interests and a decrease in interest expense in the six months ended
June 30, 2004, as compared to the same period in 2003.

In the six month period ended June
30, 2004, the Company recorded $4.7 million of realized and unrealized gains on
investments, as compared to $26.3 million of realized and unrealized gains in the same
period in 2003. The gains recorded in the six months ended June 30, 2004 are mainly
attributable to the realized gains on the sale of approximately 49% of the Companys
holdings in PowerDSine Ltd. (PowerDSine) ($3.5 million). The remaining shares
of PowerDSine were treated as available-for-sale and $2.4 million were
recorded as unrealized gains on marketable securities under, Accumulated Other
Comprehensive Loss. The realized and unrealized gains on investment in the six
months ended June 30, 2003 were primarily attributable to the gains on the sale of the
Companys investment in Granite Hacarmel Investments Ltd. (Granite)
($20.8 million). During the second quarter of 2003, the Company sold 1,466,454 shares in
Granite and through July 7, 2003 sold an additional 12,350,000 shares. Consequently, the
Companys investment in Granite, which was previously accounted for under the equity
method, was accounted for as an investment in a trading marketable security at June 30,
2003.

Equity in earnings of affiliates
increased to $1.4 million for the six months ended June 30, 2004, as compared to a gain
of $0.2 million for the same period in 2003. The increase is primarily attributable to a
$1.7 million loss in Granite, which was recorded in the first quarter of 2003.

In the six month period ended June
30, 2004, the Company recorded $1.5 million in losses from the impairment of its
investments in Identify Solutions Ltd. ($0.7 million) and Star Management of Investment
II (2000) L.P., ($0.8 million). In the same period in 2003, the Company recorded an $8.1
million loss from impairment of its investments.

The Company recorded a translation
loss of $1.6 million in the six months ended June 30, 2004 as compared to a translation
loss of $2.3 million in the same period in 2003. The translation losses in 2004 and 2003
are attributable to the devaluation of the new Israeli shekel against the U.S. dollar.

The Company recorded lower interest
expense of $2.2 million in the six months ended June 30, 2004, as compared to $3.6
million in the same period in 2003, primarily as a result of lower interest rates.

Results of Operations

Three months ended June 30, 2004
compared to three months ended June 30, 2003:

The Company recorded a consolidated
net gain of $0.3 million for the three months ended June 30, 2004 as compared to a net
gain of $10.2 million for the same period in 2003. The decrease in net gain is primarily
attributable to the decrease in equity in earnings of affiliates, and a decrease in
realized and unrealized gains on investment in the three months ended June 30, 2004 as
compared to the same period in 2003. These decreases were partially offset by the
decrease in loss from impairment and a translation loss in the three months ended June
30, 2004, as compared to the same period in 2003.

16

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In the three month period ended June
30, 2004, the Company recorded a $3.9 million realized and unrealized gain on
investments, as compared to a $25.4 million realized and unrealized gain on investments
in the same period of fiscal 2003. The gains recorded in 2004 are primarily attributable
to the realized gains on the sale of approximately 49% the Companys holdings in
PowerDSine Ltd ($3.9 million). The remaining shares of PowerDSine were treated as available-for-sale and
$2.4 million were recorded as unrealized gains on marketable securities under Accumulated
Other Comprehensive Loss. The realized and unrealized gains on investment in the
three months ended June 30, 2003 were primarily attributable to the gains on the sale of
Granite ($20.8 million). During the second quarter of 2003, the Company sold 1,466,454
shares in Granite and through July 7, 2003 sold an additional 12,350,000 shares.
Consequently, the Companys investment in Granite, which was previously accounted
for under the equity method, was accounted for as an investment in a trading marketable
security at June 30, 2003.

Equity in loss of affiliates was
$0.5 million for the three months ended June 30, 2004, as compared to a gain of $0.7
million for the same period in 2003. The decrease is primarily attributable to a gain
recorded by Ophir Holdings Ltd. as a result of a sale of real estate in 2003.

In the three-month period ended June
30, 2004 the Company did not record an impairment loss, while in the three-month period
ended June 30, 2003, the Company recorded $8.1 million in losses from the impairment of
its investments.

The Company recorded a translation
loss of $0.3 million in the three months ended June 30, 2004 as compared to a translation
loss of $2.0 million in the same period in 2003. The translation losses in 2003 are
attributable to the devaluation of the new Israeli shekel against the U.S. dollar.

Liquidity and Capital Resources

Cash Flows

On June 30, 2004, cash and cash
equivalents were $16.2 million, as compared with $4.6 million at December 31, 2003.

The Companys sources of cash
include cash and cash equivalents, marketable securities, cash from operations, cash from
investing activities and amounts available under credit facilities, as described below.
The Company believes that these sources are sufficient to fund the current requirements
of operations, capital expenditures, investing activities, dividends on preferred stock
and other financial commitments of the Company for the next 12 months. However, to the
extent that contingencies and payment obligations described below and in other parts of
this Report require the Company to make unanticipated payments, the Company would need to
further utilize these sources of cash. To the extent that the Company intends to rely on
the sale of its unpledged marketable securities in order to satisfy its cash needs, it is
subject to the risk of a shortfall in the amount of proceeds from any such sale as
compared with the anticipated sale proceeds due to a decline in the market price of those
securities. In the event of a decline in the market price of its marketable securities,
the Company may need to draw upon its other sources of cash, which may include additional
borrowing, refinancing of its existing indebtedness or liquidating other assets, the
value of which may also decline. In addition, the shares of MIRS owned by the Company,
the shares of Ophir Holdings Ltd. and $9 million of marketable securities have 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.

17

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Cash flows from operating activities

Net cash provided by operating
activities totaled approximately $0.1 million for the six months ended June 30, 2004, as
compared to approximately $6.4 million at the same period in 2003. The decrease in cash
provided is primarily attributable to the Company not receiving from MIRS its dividend in
the amount of $7.1 million which was not received due to the legal dispute with the major
partner, Motorola Communication Israel Ltd.(see Legal Proceedings)and a decrease in
accounts payable which was partially offset by an increase in net proceeds from
marketable securities.

Cash flows from investing activities

Net cash provided by investing
activities totaled approximately $11.0 million for the six months ended June 30, 2004, as
compared to approximately $3.4 million used in investing activities for the same period
in 2003. The increase in cash provided by investing activities is primarily attributable
to an increase of deposits collected and proceeds from the sales of XACCT and PowerDSine
which was partially offset by an increase in investments in Telecom Partners and other
investee companies.

Cash flows from financing activities

Net cash provided by financing
activities was approximately $1.8 million at June 30, 2004, as compared to approximately
$3.4 million used in financing activities at June 30, 2003. The increase in the cash
provided in 2004 is primarily attributable to the decrease in the amount of notes and
loans payable ($6.6 million and $20.3 million in 2004 and 2003, respectively) which were
used to pay down the debentures ($1.8 million and $19.3 million in 2004 and 2003,
respectively) and loans.

Investments

On June 30, 2004, the aggregate fair
value of trading and available-for-sale securities was approximately $61.0 million, as
compared to $64.7 million at December 31, 2003. The decrease in 2004 is attributable to
the sale of various trading securities.

During the fiscal six months ended
June 30, 2004, the Company made the following investments:

In February and June 2004, the
Company invested EUR 4.7 million (approximately US $5.8 million) in Telecom Partners, a
newly formed entity that will serve as a platform for investments in the
telecommunication industry predominantly outside of Israel. Ampals investment
consists of a EUR 4 million convertible debenture, which converts into a one-third
partnership interest in Telecom Partners, and a EUR 0.7 million loan. The debenture is
convertible at the Companys discretion. Telecom Partners currently holds
investments in PSINet Europe B.V. and Grapes Communications N.V./S.A., two European
telecom service providers.

On January 4, 2004, the Company
loaned $0.2 million to ShellCase Ltd.(ShellCase), the principal business of which
is the packaging process of semiconductor chips.

In April 2004, the Company invested
an additional $0.2 million in Fimi Opportunity Fund, L.P.(Fimi).

18

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Debt

In connection with its investment in
MIRS, the Company has two long-term loans from Bank Hapoalim Ltd. (Hapoalim)
and Bank Leumi le-Israel B.M. (Leumi) in the outstanding amount of $37.3
million and $33.4 million, respectively, as of June 30, 2004. Both loans are due on March
31, 2008 and bear interest at a rate of LIBOR plus 0.8%. Other than as described in this
paragraph, the loans are non-recourse to the Company and are secured by the Companys
shares in MIRS. The principal payments are due as follows: 10% on March 31, 2004, 15% on
March 31, 2005 and 25% on each of March 31, 2006, 2007 and 2008. Interest will be paid
annually on March 31 of each year from March 31, 2002 until and including March 31, 2008.
As a result of not receiving the dividend from MIRS in the amount of $7.1 million, (see
Cash Flow from Operating Activity) the principal and the interest of the loan
due March 31, 2004 were only partially paid. As of the date hereof, the banks have not
declared a default with respect to such unpaid amounts. These loans are subject to the
compliance by MIRS with covenants regarding its operations and financial results.

As of June 30, 2004, the company had
$2.0 million in debentures outstanding with interest rates of 7.5% These debentures,
which mature in March 2005, are secured by $2.0 million deposit held in a secured
account.

The Company financed a portion of
the development of Am-Hal, a wholly-owned subsidiary which develops and operates luxury
retirement centers for senior citizens, through bank loans from Hapoalim and others. At
June 30, 2004, and December 31, 2003 the amounts outstanding under these loans were $8.9
million and $9.2 million respectively. The loans are dollar linked, mature in up to one
year and have interest rates of LIBOR plus 1%. 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 $4.2 million in favor of clients of Am-Hal in order to
secure their deposits.

The Company also finances its
general operations and other financial commitments through bank loans from Bank Hapoalim.
The long-term loans in the amount of $32.8 million mature through 2005-2011.

The weighted average interest rates
and the balances of these short-term borrowings (including Am-Hal loans) at June 30, 2004
and December 31, 2003 were 3.43% on $31.8 million and 3.6% on $27.5 million,
respectively.

As of June 30, 2004, the Company had
issued guarantees on certain outstanding loans to its investees and subsidiaries in the
aggregate principal amount of $11.9 million. This includes:

$0.5 million guarantee to Leumi with
respect to the MIRS loan.

$6.3 million guarantee on
indebtedness incurred by Bay Heart ($3.8 million of which is recorded as a liability in
the Companys financial statements) in connection with the development of its
property. 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.

$4.2 million guarantee to Am-Hal
tenants as described above.

$0.9 million guarantee to Galha
1960 Ltd.

19

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FOREIGN CURRENCY CONTRACTS

The Companys derivative
financial instruments consist of foreign currency forward exchange contracts. These
contracts are utilized by the Company, from time to time, to manage risk exposure to
movements in foreign exchange rates. None of these contracts have been designated as
hedging instruments. These contracts are recognized as assets or liabilities on the
balance sheet at their fair value, which is the estimated amount at which they could be
settled based on market prices or dealer quotes, where available, or based on pricing
models. Changes in fair value are recognized currently in earnings. As of June 30, 2004,
the Company had a $10 million open foreign currency forward exchange contract.

SUBSEQUENT EVENTS

None.

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 (as such term is defined in the Private Securities Litigation Reform Act of
1995) and information relating to the Company that are based on the beliefs of management
of the Company as well as assumptions made by and information currently available to the
management of the Company. When used in this Quarterly Report, the words anticipate,
believe, estimate, expect, intend, plan, and similar expressions, as they relate to the
Company or the management of the Company, identify forward-looking statements. Such
statements reflect the current views of the Company with respect to future events or
future financial performance of the Company, the outcome of which is subject to certain
risks and other factors which could cause actual results to differ materially from those
anticipated by the forward-looking statements, including among others, the economic and
political conditions in Israel, the Middle East, including the situation in Iraq, and the
global business and economic conditions in the different sectors and markets where the
Companys portfolio companies operate.

Should any of those risks or
uncertainties materialize, or should underlying assumptions prove incorrect, actual
results or outcome may vary from those described herein as anticipated, believed,
estimated, expected, intended or planned. Subsequent written and oral forward-looking
statements attributable to the Company or persons acting on its behalf are expressly
qualified in their entirety by the cautionary statements in this paragraph and elsewhere
described in this quarterly Report and other Reports filed with the Securities and
Exchange Commission.

20

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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 June
30, 2004, and are sensitive to the above market risks.

During the six months ended June 30,
2004, 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, 2003.

Interest Rate Risks

At June 30, 2004, the Company had
financial assets totaling $8.2 million and financial liabilities totaling $139.4 million.
For fixed rate financial instruments, interest rate changes affect the fair market value
but do not impact earnings or cash flows. Conversely, for variable rate financial
instruments, interest rate changes generally do not affect the fair market value but do
impact future earnings and cash flows, assuming other factors are held constant.

At June 30, 2004, the Company had
fixed rate financial assets of $8.2 million and held no variable rate financial assets.
Holding other variables constant, a ten percent increase in interest rates would decrease
the unrealized fair value of the fixed financial assets by approximately $0.1 million.

At June 30, 2004, the Company had
fixed rate debt of $16.4 million and variable rate debt of $123 million. A ten percent
decrease in interest rates would increase the unrealized fair value of the fixed rate
debt by approximately $0.1 million.

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

Exchange Rate Sensitivity Analysis

The Companys exchange rate
exposure on its financial instruments results from its investments and ongoing operations
in Israel. During 2004, the Company entered into a foreign exchange forward purchase
contract to partially hedge this exposure. At June 30, 2004, the Company had open foreign
exchange forward purchase contract in the amount of $10 million. 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 $1.9 million, and in the statements of operations,
a ten percent devaluation of the foreign currency would decrease net earnings in the
amount of approximately $4.3 million.

Securities Price Risk

The Companys investments at
June 30, 2004, included marketable securities (trading and available-for-sale)which are
recorded at fair value of $61.0 million. Those securities have exposure to price risk.
The estimated potential loss in fair value resulting from a hypothetical ten percent
decrease in prices quoted on stock exchanges is approximately $6.1 million.

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

Disclosure Controls and Procedures

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

Internal Control Over Financial
Reporting

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

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

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

Ampal Communications L.P.

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

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

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

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

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

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

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

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

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

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

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

|Item 2. | Changes
in Securities, Use of Proceeds and Issuer Purchases of                          Equity
Securities                          None.
|------- | ----------------------------------------------------------------------------------------------------------------------------------------

|Item 3. | Defaults
upon Senior Securities                          None.
|------- | --------------------------------------------------------------

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

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

Because Y.M. Noy Investments Ltd.
owns more than 50% of the voting power in the Company, the Company is deemed to be a
controlled company under the rules of the Nasdaq National Market (Nasdaq).
As a result, the Company is exempt from the Nasdaq rules that require listed companies to
have (i) a majority of independent directors on the Board of Directors, (ii) a
compensation committee and nominating committee composed solely of independent directors,
(iii) the compensation of executive officers determined by a majority of independent
directors or a compensation committee composed solely of independent directors and (iv) a
majority of the independent directors or a nominating committee composed solely of
independent directors elect or recommend director nominees for selection by the Board of
Directors.

The Company has not yet set the date
for its 2004 annual meeting of shareholders. The deadline for shareholders to submit
proposals for inclusion in the Companys proxy statement was April 29, 2004, but
because the 2004 annual meeting will take place more than 30 days later than last years
meeting, the Company shall treat as timely any shareholder proposal submitted within a
reasonable time prior to printing the Companys proxy materials.

23

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|Item 6. | Exhibits and Reports on Form 8-K
|------- | --------------------------------

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

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

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

|31.2 |  | Certification
of Irit Eluz pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
                  32.1 Certification of Jack Bigio and Irit Eluz pursuant to 18 U.S.C.
Section 1350, as adopted                   pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (b) | Reports
on Form 8-K: None
| | --- | -------------------------

24

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AMPAL - AMERICAN
ISRAEL CORPORATION AND SUBSIDIARIES

SIGNATURES

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

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

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

| |  | BY: /S/ Giora Bar-Nir
Giora Bar-NirController(Principal Accounting Officer)
| |  | -----------------------------------------------------------------------------------------

Dated: August 12, 2004

25

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AMPAL - AMERICAN
ISRAEL CORPORATION AND SUBSIDIARIES

Exhibit Index

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

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

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

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

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

26

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