10-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


FORM 10-K

ANNUAL REPORT PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934


(Mark One)

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2005

OR

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

For the transition period from _______ to _______

Commission file number 0-538

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

New York 13-0435685
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)

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

Registrant's telephone number, including area code (866) 447-8636
Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:
Class A Stock, par value $1.00 per share
4% Cumulative Convertible Preferred Stock, par value $5.00 per share
6 1/2% Cumulative Convertible Preferred Stock, par value $5.00 per share
(Titles of Classes)


        Indicate by check mark if the registrant is a well-known seasoned issuer (as defined in Rule 405 of the Securities Act).

Yes o No x

        Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes o No x

        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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K x.

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

Yes o No x

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

Yes o No x

        The aggregate market value of the registrant’s voting stock held by non – affiliates of the registrant on June 30, 2005, the last business day of the registrant’s most recently completed second fiscal quarter was $33,398,212 based upon the closing market price of such stock on that date. As of March 6, 2006, the number of shares outstanding of the registrant’s Class A Stock, its only authorized and outstanding common stock is 20,157,772.



AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES

Index to Form 10-K

Page

PART I

ITEM 1. BUSINESS
ITEM 1A. RISK FACTORS 12 
ITEM 1B. UNRESOLVED STAFF COMMENTS 15 
ITEM 2. PROPERTY 15 
ITEM 3. LEGAL PROCEEDINGS 15 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 17 

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF  
  EQUITY SECURITIES 18 
ITEM 6. SELECTED FINANCIAL DATA 19 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 19 
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 29 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 31 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 63 
ITEM 9A. CONTROLS AND PROCEDURES 63 
ITEM 9B. OTHER INFORMATION 63 

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 64 
ITEM 11. EXECUTIVE COMPENSATION 67 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS 70 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 72 
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES 73 

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES 74 

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ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005
OF AMPAL-AMERICAN ISRAEL CORPORATION

PART I

ITEM 1. BUSINESS

          As used in this report (the “Report”), the term “Ampal” or “registrant” refers to Ampal-American Israel Corporation. The term “Company” refers to Ampal and its consolidated subsidiaries. Ampal is a New York corporation founded in 1942.

          For industry segment financial information and financial information about foreign and domestic operations, see Note 13 to the Company’s consolidated financial statements included elsewhere in this Report. The companies described below under –“Telecommunication,” “High Technology” and “Capital Markets and Other Holdings” are included in the Finance segment. The companies described under “Real Estate” are included in the Real Estate segment. The companies described under “Leisure-Time” are included in the Leisure-Time segment.

          The Company primarily acquires interests in businesses located in the State of Israel or that are Israel-related. Ampal’s investment focus is principally on companies or ventures where Ampal can exercise significant influence, on its own or with investment partners, and use its management experience to enhance those investments. An important objective of Ampal is to seek investments in companies that operate in Israel initially and then expand abroad. In determining whether to acquire an interest in a specific company, Ampal considers quality of management, potential return on investment, growth potential, projected cash flow, investment size and financing, and reputable investment partners.

          The Company’s strategy is to invest opportunistically in undervalued assets with an emphasis on the following sectors: Energy, Real Estate and Project Development and Leisure Time. We believe that past experience, current opportunities and a deep understanding of the above-referenced sectors both domestically in Israel and internationally will allow the Company to bring high returns to its shareholders. The Company emphasizes investments which have long-term growth potential over investments which yield short-term returns.

          The Company provides its investee companies with ongoing support through its involvement in the investees’ strategic decisions and introduction to the financial community, investment bankers and other potential investors both in and outside of Israel.

          On December 1, 2005, the Company acquired a 2% interest in East Mediterranean Gas Company, an Egyptian joint stock company which has been given the right to export natural gas from Egypt to Israel and other locations in the East Mediterranean basin. On October 3, 2005, the Company sold its interest in MIRS Communications Ltd. which it held through Ampal Communications L.P., a limited partnership controlled by Ampal and in which Ampal holds a 75% equity interest.

          Listed below by industry segment are all of the substantial investee companies in which the Company had ownership interests as of December 31, 2005, the principal business of each and the percentage of equity owned, directly or indirectly, by Ampal. The table below also indicates whether the investee’s securities are listed on the New York Stock Exchange (“NYSE”), NASDAQ National Market (“Nasdaq”), the American Stock Exchange (“AMEX”) or the Tel Aviv Stock Exchange (“TASE”). Further information with respect to the more significant investee companies is provided after the following table. For additional information concerning the investee companies, previously provided annual reports on Forms 10-K of Ampal are incorporated by reference herein.

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Industry Segment
Principal Business
Percentage
as of
December 31,
2005(1)

 
Energy              
       
  East Mediterranean Gas Company (E.M.G)   Natural Gas Provider & Pipeline Owner    2.0  
       
Real Estate   
  Am-Hal Ltd   Chain of Senior Citizen Facilities    100.0  
  Ampal (Israel) Ltd   Holding Company and Real Estate    100.0  
  Bay Heart Limited   Shopping Mall Owner/Lessor    37.0  
  Ophir Holdings Ltd. ("Ophir Holdings")   Holding Company    42.5  
  Lysh The Coastal High-way Ltd   Commercial Real Estate    10.6 (2)
  Meimadim Investments Ltd.   Commercial Real Estate    4.2 (2)
  New Horizons (1993) Ltd   Commercial Real Estate    34.0 (2)
       
Leisure-Time   
  Coral World International Limited   Underwater Observatories and Marine Parks    50.0  
  Country Club Kfar Saba Limited   Country Club Facility    51.0  
  Hod Hasharon Sport Center (1992)  
  Limited Partnership   Country Club Facility    50.0  
       
Finance:   
       
Capital Markets and Other Holdings   
  Ampal Development (Israel) Ltd   Holding Company    100.0  
  Ampal Holdings (1991) Ltd   Holding Company    100.0  
  Carmel Container Systems Limited   Packaging Materials and Carton Production  
    Holding Company    21.8  
  Fimi Opportunity Fund, L.P   Investment Fund    2.1  
       
  High Technology         --  
  Telecommunication         --  

(1) Based upon current ownership percentage. Does not give effect to any potential dilution.

(2) As of December 31, 2005, Ophir Holdings held the following percentage interests:
Lysh The Coastal High-way Ltd.      25.0  
Meimadim Investments Ltd.    10.0  
New Horizons (1993) Ltd.    80.0  

  The Company’s percentage interest in the above-referenced companies set forth in the chart reflects the Company’s 42.5% ownership of Ophir Holdings.

Significant Developments Since the Fiscal Year Ended December 31, 2005

  None

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Energy

        EAST MEDITERRANEAN GAS COMPANY (“EMG”)

        On December 1, 2005, the Company, through Merhav Ampal Energy, Ltd., a wholly-owned subsidiary of the Company, entered into an agreement with Merhav M.N.F. Ltd. (“Merhav”) for the purchase from Merhav of a portion of its interest in EMG. Under the terms of the transaction, the Company acquired the beneficial ownership of 1,200 shares of EMG’s capital stock, representing a 2% beneficial ownership in EMG. The purchase price for the shares was $29,960,000. Additionally, the Company was granted the exclusive right to negotiate to acquire a substantial portion of Merhav’s remaining shares of EMG. The Company also has the right for a period of time to require Merhav to repurchase the EMG interest.

        EMG is an Egyptian joint stock company organized in accordance with the Egyptian Special Free Zones system which has been given the right to export natural gas from Egypt to Israel and other locations in the East Mediterranean basin and other countries. Egyptian natural gas shall reach the Israeli market via an underwater pipeline owned by EMG, which EMG expects to be completed during 2007. (See also Item 7. Related Party Transactions).

Real Estate

        In Israel, most land is owned by the Israeli government. In this Report, reference to ownership of land means either direct ownership of land or a long-term lease from the Israeli Government, which in most respects is regarded in Israel as the functional equivalent of ownership. It is the Israeli government’s policy to renew its long-term leases (which usually have a term of 49 years) upon their expiration.

        AM-HAL LTD. (“AM-HAL”)

        Am-Hal is a wholly-owned subsidiary of the Company, which develops and operates luxury retirement centers for senior citizens.

        In March 1992, the first center was opened in Rishon LeZion, a city located approximately 10 miles south of Tel-Aviv. This center, of about 120,000 square feet, includes 149 self-contained apartments, a 74-bed nursing care ward, a 21-bed assisted-living ward, a swimming pool, a health care center and other recreational facilities. The nursing care ward is leased to a non-affiliated health care provider until 2006.

        In June 2000, the second center was opened in Hod Hasharon, a city located approximately 7 miles north of Tel Aviv. This center, which is approximately 250,000 square feet, includes 235 self-contained apartments, a 33-bed nursing care ward and a 22-bed assisted-living ward.

        On April 7, 2005 Am-Hal Ltd. entered into an agreement to build a new project in Tel-Aviv. Am-Hal Ltd. holds 75% of the new project through a limited partnership (Ad 120 Ramat-Hahayal), the project, which is in its early stages, is still subject to further regulatory and financing approvals.

        AMPAL HOLDINGS (1991) LTD. (“AMPAL HOLDINGS”)

        In 2004, as part of the Company’s reorganization of certain of its wholly owned subsidiaries, Ampal Holdings purchased most of the high-tech investee companies from Ampal Industries (Israel) Ltd. In 2005, Ampal Holdings sold most of its investee companies.

        AMPAL (ISRAEL) LTD. (“AMPAL ISRAEL”)

        In 2004, as part of the Company’s reorganization of certain of its wholly owned subsidiaries, Ampal Israel purchased various investee companies from Ampal Industries (Israel) Ltd.

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        OPHIR HOLDINGS LTD. (“OPHIR HOLDINGS”)

        Ophir Holdings is a holding company that owns interests in real estate companies and is owned 42.5% by the Company. The Company and Polar Investments Ltd., which owns 57.5% of Ophir Holdings, are parties to a shareholders’ agreement regarding joint voting, directorships and rights of first refusal with respect to Ophir Holdings.

        Ophir Holdings’ owns a 25% equity interest in Lysh The Coastal High-way Ltd. (“Lysh”). Lysh has a 50% holding in Beit Herut-Lysh Development Company Ltd. (“BHL”), which is constructing a 180,000 square foot commercial project for rental near Moshav Beit Herut on land owned by the Israeli Land Authority. Ophir Holdings has also undertaken to provide guarantees in an amount equivalent to 25% of the construction costs. As of December 31, 2005, BHL had taken out bank loans of approximately $14.3 million, by drawing on a credit line extended by a financial institution in connection with the project.

        Ophir Holdings owns a 10% interest in a joint venture which had agreed to purchase 4.4 million square feet of land near Haifa for approximately $15 million, on which the parties intend to develop a commercial real estate project for rent. Ophir Holdings has obligated itself to invest up to $1.5 million in the first stage of this project and its share of development costs is estimated to be as much as $17 million.

        BAY HEART LIMITED (“BAY HEART”)

        Bay Heart was established in 1987 to develop and lease a shopping mall (the “Mall”) in the Haifa Bay area. Haifa is the third largest city in Israel. The Mall, which opened in May 1991, is a three-story facility with approximately 280,000 square feet of rentable space. The Mall is located at the intersection of two major roads and provides a large mix of retail and entertainment facilities including seven movie theaters. The total cost of the Mall was approximately $53 million, which was financed principally with debt instruments. A train station on the west side of the Mall was completed in September 2001. A transportation complex, in conjunction with a subsidiary of Egged Bus Corporation, was opened in January 2002. The Company owns 37% of Bay Heart. Bay Heart has refinanced the loan relating to the Mall, which loan has a fifteen years term. Bay Heart received an additional approval for NIS. 18.5 million for renovating the Mall which started in 2005. The Company has agreed to guarantee a portion of the new loan in an amount equal to NIS 6.8 million.

Leisure-Time

        CORAL WORLD INTERNATIONAL LIMITED (“CORAL WORLD”)

        Coral World, which is 50%-owned by the Company, owns and controls three marine parks in Eilat (Israel), Perth (Australia) and Maui (Hawaii).

        Coral World’s Eilat marine park is located next to the coral reefs and visitors to this park view marine life in its natural coral habitat through a unique underwater observatory. Coral World’s marine parks in Perth and Maui allow visitors to walk through a transparent acrylic tube on the bottom of a man-made aquarium surrounded by marine life. In addition to admission charges, Coral World derives significant revenue from its food and beverage facilities and retail outlets.

        Coral World’s parks hosted 1,034,283 visitors during 2005. Coral World has approximately 220 full-time equivalent positions as of December 31, 2005.

        Coral World has entered into a joint development project for a new marine park in Palma de Majorca which is scheduled to open at the end of 2006.

6



        COUNTRY CLUB KFAR SABA LIMITED (“KFAR SABA”)

        Kfar Saba operates a country club facility (the “Club”) in Kfar Saba, a town north of Tel Aviv. Kfar Saba holds a long-term lease to the real estate property on which the Club is situated. The Club’s facilities include swimming pools, tennis courts and a clubhouse. The Club currently is seeking to obtain building permits for an additional 30,000 square feet of commercial development on the Club grounds.

        The Club, which has a capacity of 2,000 member families, had approximately 1,735 member families for the 2005 season. The Company owns 51% of Kfar Saba.

        HOD HASHARON SPORT CENTER (1992) LIMITED PARTNERSHIP (“HOD HASHARON”)

        Hod Hasharon operates a country club facility (the “H.H. Club”) in Hod Hasharon, a town north of Tel Aviv. The H.H. Club, which opened in July 1994 and has a capacity of 1,600 member families, has operated at capacity for the past three years. In 2005, the H.H. Club repaid owner’s loans of $0.2 million to each of the partners. As of December 31, 2005, the Company holds a 50% direct interest in Hod Hasharon.

Capital Markets And Other Holdings

        AMPAL DEVELOPMENT (ISRAEL) LTD. (“AMPAL DEVELOPMENT”)

        Ampal Development, a wholly owned subsidiary of the Company, issued debentures which were publicly traded on the TASE. An aggregate of approximately $2.0 million of these debentures were outstanding as of December 31, 2004. On March 1, 2005, Ampal Development paid off all of its outstanding and remaining debentures which were publicly traded on the TASE.

        CARMEL CONTAINERS SYSTEMS LIMITED (“CARMEL”)

        Carmel is one of the leading Israeli companies in designing, manufacturing and marketing carton boards and packaging products. Carmel and its subsidiaries manufacture a varied line of products, including corrugated shipping containers, moisture-resistant packaging, consumer packaging, triple-wall packaging and wooden pallets and boxes. The Company’s equity interest in Carmel is 21.75%. As of December 31, 2005, the Company accounts for this investment pursuant to the equity method as $2.4 million (which includes impairment in an amount of $3.0 million).

EMPLOYEES

        On March 31, 2004, the Company closed its New York office located at 555 Madison Ave, New York, New York. Other than the executives officers listed in Item 11 below, Ampal has no other employees. As of December 31, 2005, Ampal (Israel) Ltd. had 13 employees, Am-Hal Ltd. (a wholly owned subsidiary of Ampal) had 170 employees and Country Club Kfar Saba Ltd. (owned 51% by the Company) had 103 employees.

        Relations between the Company and its employees are satisfactory.

CONDITIONS IN ISRAEL

        Most of the companies in which Ampal directly or indirectly invests conduct their principal operations in Israel and are directly affected by the economic, political, military, social and demographic conditions there. A state of hostility, varying as to degree and intensity, exists between Israel and the Arab countries and the Palestinian Authority (the “PA”). Israel signed a peace agreement with Egypt in 1979 and with Jordan in 1994. Since 1993, several agreements have been signed between Israel and Palestinian representatives regarding conditions in the West Bank and Gaza. While negotiations have taken place between Israel, its Arab neighbors and the PA to end the state of hostility in the region, it is not possible to predict the outcome of these negotiations and their eventual effect on Ampal and its investee companies. Political developments in Israel, notably the ability of the Hamas movement to win a majority of seats in the Palestinian parliament has increased the economic, political and military uncertainty in Israel and the Middle East. See Item 1A “Risk Factors” below for further discussion of the possible impact of this situation on the Company.

7



        All male adult citizens and permanent residents of Israel under the age of 48 are obligated, unless exempt, to perform military reserve duty annually. Additionally, all these individuals are subject to being called to active duty at any time under emergency circumstances. Some of the officers and employees of Ampal’s investee companies are currently obligated to perform annual reserve duty. While these companies have operated effectively under these requirements since they began operations, Ampal cannot assess the full impact of these requirements on their workforce or business if conditions should change. In addition, Ampal cannot predict the effect on its business in a state of emergency in which large numbers of individuals are called up for active duty.

Economic and Financial Developments

        In 2005, unemployment in Israel averaged 9.0%. The rate of unemployment in 2004 averaged 10.4% as compared to 10.7% in 2003. Management believes that the decrease resulted mainly from the improvement in the industrial and high tech sectors and the Israeli government’s employment initiatives.

        2005 was characterized by rapid growth in all components of Israeli GDP. The GDP grew by 5.2% and the business-sector product grew by 6.7%. In 2004 and 2003, GDP growth was 4.4% and 1.7%, respectively.

        The change in consumer price index in 2005 was 2.4% compared to 1.2 % in 2004.

        CERTAIN UNITED STATES AND ISRAELI REGULATORY MATTERS

SEC Exemptive Order

        In 1947, the SEC granted Ampal an exemption from the Investment Company Act of 1940, as amended (the “1940 Act”), pursuant to an Exemptive Order. The Exemptive Order was granted based upon the nature of Ampal’s operations, the purposes for which it was organized, which have not changed, and the interest of purchasers of Ampal’s securities in the economic development of Israel. There can be no assurance that the SEC will not reexamine the Exemptive Order and revoke, suspend or modify it. A revocation, suspension or material modification of the Exemptive Order could materially and adversely affect the Company unless Ampal were able to obtain other appropriate exemptive relief. In the event that Ampal becomes subject to the provisions of the 1940 Act, it could be required, among other matters, to make changes, which might be material, to its management, capital structure and methods of operation, including its dealings with principal shareholders and their related companies.

TAX INFORMATION

        Ampal (to the extent that it has income derived in Israel) and Ampal’s Israeli subsidiaries are subject to taxes imposed under the Israeli Income Tax Ordinance. Through December 31, 2003, the corporate tax rate was 36%. In July 2004, Amendment No. 140 to the Income Tax Ordinance was enacted. One of the provisions of this amendment is that the corporate tax rate is to be gradually reduced from 36% to 30%. In August 2005, a further amendment (No. 147) was published, which makes a further revision to the corporate tax rates prescribed by Amendment No. 140. As a result of the aforementioned amendments, the corporate tax rates for 2004 and thereafter are as follows: 2004 – 35%, 2005 – 34%, 2006 – 31%, 2007 – 29%, 2008 – 27%, 2009 – 26% and for 2010 and thereafter – 25%.

8



        A tax treaty between Israel and the United States became effective on January 1, 1995 (“the Treaty”). The Treaty has not substantially affected the tax position of the Company in either the United States or in Israel.

        Ampal generated income from interest and dividends resulting from its investments in Israel. Under Israeli law, Ampal has been required to file tax returns, with the Israeli tax authorities with respect to such income. Under Israeli domestic law Ampal, as a non-resident, is generally subject to withholding tax at a rate of 25% on dividends it receives from Israeli companies (20% as of January 1, 2006). This rate may be reduced to either 15% or 12.5%, (under Israeli law and/or the provisions of the Treaty), depending on the ownership percentage in the investee company, and on the type of income generated by such investee company, from which the dividend is distributed (by contrast, dividends received by one Israeli company from another Israeli company are generally exempt from Israeli corporate tax, unless (i) they arise from income generated from sources outside of Israel, in which case they are subject to tax at a rate of 25%; or (ii) they are paid out of the profits of an “approved enterprise” to either residents or non-residents, in which case tax is withheld at a rate of 15%).

        Pursuant to an arrangement with the Israeli tax authorities, Ampal’s income from Israeli sources has been taxed based on principles generally applied in Israel to income of non-residents. Ampal has filed tax returns with the Israeli tax authorities through the tax year 2004. Based on the tax returns filed by Ampal through 2004, it has not been required to make any additional tax payments in excess of the tax withheld on dividends it has received. In addition, pursuant to Ampal’s arrangement with the Israeli tax authorities, the aggregate taxes paid by Ampal in Israel and in the United States on interest, rent and dividend income derived from Israeli sources has not exceeded the tax which would have been payable by Ampal in the United States had such interest, rent and dividend income been derived by Ampal from United States sources. There can be no assurance that this arrangement will continue to be effective in the future. This arrangement does not apply to taxation of Ampal’s Israeli subsidiaries.

        Generally, under the provisions of the Israeli Income Tax Ordinance, taxable income from Israeli sources paid to non-residents of Israel by residents of Israel is subject to withholding tax at the rate of 25%. However, such rate of withholding tax may be reduced under the Treaty, with respect to certain payments made by Israeli tax residents to US tax residents that qualify for benefits of the Treaty. For example, under the Treaty, the rate of withholding tax applicable to interest is generally reduced to 17.5%. The continued tax treatment of Ampal by the Israeli tax authorities in the manner described above is based, among other things, on Ampal continuing to be treated, for tax purposes, as a non-resident of Israel that is not doing business in Israel. As of January 1, 2006, a different withholding rate may apply.

        Under Israeli law, Israeli tax residents are taxed on capital gains generated from sources in Israel or outside of Israel, whereas non residents are taxable only with respect to gains generated from sources in Israel. Gains are generally regarded as being from Israeli sources if arising from the sale of assets either located in Israel or which represent a right to assets located in Israel (including gains arising from the sale of shares of stock in companies resident in Israel, and of rights in non-resident entities that mainly represent ownership and rights to assets located in Israel, with regard to such assets). Under the Treaty, US tax residents are subject to Israeli capital gains tax on the sale of shares in Israeli companies, if they have held 10% or more of the voting rights in such company at any time during the 12 months immediately preceding the sale.

9



        Since January 1, 1994, the portion of the gain attributable to inflationary differences prior to that date is taxable at a rate of 10%, while the portion of the gain attributable to inflationary differences between such date and the date of disposition of the asset is exempt from tax. Non-residents of Israel are exempt from the 10% tax on the inflationary gain derived from the sale of shares in companies that are considered Israeli tax residents if they elect to compute the inflationary portion of the gain based on the change in the rate of exchange between Israeli currency and the foreign currency in which the shares were purchased, rather than the change in the Israeli consumer price index(1). The remainder of the gain (“Real Capital Gain”), if any, is taxable to corporations at the rate of 25%. However, Real Capital Gains arising from the sale of capital assets that had been acquired prior to January 1, 2003 shall be apportioned on a linear basis to the periods before and after the same date, namely – the portion of the gain attributed to the period before January 1, 2003 shall be subject to tax at a rate equal to the corporate tax rate in affect at the time of the sale (in 2005 – 34%), whereas the portion of the gain attributed to the period after January 1, 2003 shall be taxed at the preferential rate of 25%. This 25% preferential tax rate may also apply to a certain portion of the profit upon the sale of Israeli shares.

        Foreign corporations are generally exempt from tax on gains from the sale of shares in publicly traded companies. Amendment No. 147 introduces a broader exemption under domestic law for non-residents regardless of their percentage holding in an Israeli company (not holding real estate rights) to include capital gains from the sale of securities (even where not traded in Israel) ,which were purchased between July 1, 2005 through December 31, 2006, provided certain conditions are met.

        The Income Tax Law (Adjustment for Inflation), 1985, which applies to companies which have business income in Israel or which claim a deduction in Israel for financing costs, has been in force since the 1985 tax year. The law provides for the preservation of equity, whereby certain corporate assets are classified broadly into Fixed (inflation resistant) and Non-Fixed (non-inflation resistant) Assets. Where shareholders’ equity, as defined therein, exceeds the depreciated cost of Fixed Assets, a tax deduction which takes into account the effect of the annual inflationary change on such excess is allowed, subject to certain limitations. Conversely, if the depreciated cost of Fixed Assets exceeds shareholders’ equity, then such excess, multiplied by the annual inflation change, is added to taxable income.

        Individuals and companies in Israel pay VAT at a rate of 16.5% (17% until August 2005) of the price of assets sold and services rendered. However, according to a Temporary Order issued by the state of Israel the VAT rate was increased from 17% to 18% for the period commencing on June 15, 2002 and ending on December 31, 2003. This period was extended by an additional two months and was terminated on February 29, 2004, when the VAT rate was reduced back to 17%. In computing its VAT liability, Ampal’s Israeli subsidiaries are entitled to claim as a deduction input VAT it has incurred with respect to goods and services acquired for the purpose of the business.

United States Federal Taxation of Ampal

        Ampal and its United States subsidiaries (in the following discussion, generally referred to collectively as “Ampal U.S.”) are subject to United States taxation on their taxable income, as computed on a consolidated basis, from domestic as well as foreign sources. The gross income of Ampal U.S. for United States tax purposes includes or may include (i) income earned directly by Ampal U.S., (ii) Ampal U.S.‘s pro rata share of certain types of income, primarily “subpart F income” earned by certain Controlled Foreign Corporations in which Ampal U.S. owns or is considered as owning 10 percent or more of the voting power; and (iii) Ampal U.S.‘s pro rata share of ordinary income and capital gains earned by certain Passive Foreign Investment Companies in which Ampal U.S. owns stock, and with respect to which Ampal has elected that such company be treated as a Qualified Electing Fund. Subpart F income includes, among other things, dividends, interest and certain rents and capital gains. Since 1993, the maximum rate applicable to domestic corporations is 35%.


(1)     Beginning January 1, 2006, the section of the Israeli Tax Ordinance under which the regulations providing such tax exemption to non-Israeli residents were promulgated, was rescinded. It is therefore unclear whether this exemption shall continue to be applicable

10



        Certain of Ampal’s non-U.S. subsidiaries have elected to be treated as partnerships for U.S. tax purposes. As a result, Ampal is generally subject to US tax on its distributive share of income earned by such subsidiaries (generally computed with reference to Ampal’s proportionate interest in such entity), as it is earned, i.e. – without regard to whether or not such income is distributed by the subsidiary. Certain of Ampal’s wholly-owned non-U.S. subsidiaries have elected to be treated as “disregarded entities” for U.S. federal tax consequences. As a result, Ampal is subject to US tax on all income earned by such subsidiaries, as it is earned.

        Ampal U.S. is generally entitled to claim as a credit against its United States income tax liability all or a portion of income taxes, or of taxes imposed in lieu of income taxes, paid to foreign countries. If Ampal U.S. receives dividends from a non-US corporation in which it owns 10% or more of the voting stock, Ampal U.S. is treated (in determining the amount of foreign income taxes paid by Ampal U.S. for purposes of the foreign tax credit) as having paid the same proportion of the foreign corporation’s post-1986 foreign income taxes as the amount of such dividends bears to the foreign corporation’s post-1986 undistributed earnings.

        In general, the total foreign tax credit that Ampal U.S. may claim is limited to the same proportion of Ampal U.S.‘s United States income taxes that its foreign source taxable income bears to its taxable income from all sources, US and non-US. This limitation is applied separately with respect to various items of income (“baskets”), which may further limit Ampal’s ability to claim foreign taxes as a credit against its U.S. tax liability. The use of foreign taxes as an offset against United States tax liability is further limited by certain rules pertaining to the sourcing of income and the allocation of deductions. As a result of the combined operation of these rules, it is possible that Ampal U.S. would exercise its right to elect to deduct the foreign taxes, in lieu of claiming such taxes as a foreign tax credit.

        Ampal U.S. may also be subject to the alternative minimum tax (“AMT”) on corporations. Generally, the tax base for the AMT on corporations is the taxpayer’s taxable income increased or decreased by certain adjustments and tax preferences for the year. The resulting amount, called alternative minimum taxable income, is then reduced by an exemption amount and subject to tax at a 20% rate. As with the regular tax computation, AMT can be offset by foreign tax credits as well as net operating losers (“NOLs”) both of which are separately calculated under AMT rules and both of which are generally limited to 90% of AMT liability as specially computed for this purpose. The 90% limitation of the foreign tax credit allowed against AMT was repealed in the Jobs Creation Act of 2004, effective for tax years beginning after December 31, 2004.

FORWARD-LOOKING STATEMENTS

        This Report (including but not limited to factors discussed in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as well as those discussed elsewhere in this Report on Form 10-K) 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 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 in the global business and economic conditions in the different sectors and markets where the Company’s portfolio companies operate. These risks and uncertainties include, but are not limited to, those described in Part I, “Item 1A. Risk Factors” and elsewhere in this report and those described from time to time in our future reports filed with the Securities and Exchange Commission.

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        Should any of those risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results or outcome may vary from those described therein 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 Report and other Reports filed with the Securities and Exchange Commission.

ITEM 1A. RISK FACTORS

        An investment in our securities involves risks and uncertainties. These risks and uncertainties could cause our actual results to differ materially from our historical results or the results contemplated by any forward-looking statements contained in this report on Form 10-K or that we make in other filings with the SEC under the Securities and Exchange Act of 1934 or in other public statements. The risks described below are not the only risks facing the 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. You should consider the following factors carefully, in addition to the other information contained in this Form 10-K, before deciding to purchase, sell or hold our securities:

Because most of the companies in which we invest conduct their principal operations in Israel, we may be adversely affected by the economic, political, social and military conditions in the Middle East.

        Most of the companies in which we directly or indirectly invest conduct their principal operations in Israel. We may, therefore, be directly affected by economic, political, social and military conditions in the Middle East, including Israel’s relationship with the Palestinian Authority and Arab countries. In addition, many of the companies in which we invest are dependent upon materials imported from outside of Israel, including East Mediterranean Gas Company, an Egyptian joint stock company in which we own a 2% stake. We also have interests in companies that export significant amounts of products from Israel. Accordingly, our operations could be materially and adversely affected by acts of terrorism or if major hostilities should occur in the Middle East or trade between Israel and its present trading partners should be curtailed, including as a result of acts of terrorism in the United States. Any such effects may impact our value and the value of our investee companies.

The SEC may re-examine, suspend or modify our exemption from the Investment Company Act of 1940, as amended.

        In 1947, the SEC granted us an exemption from the Investment Company Act of 1940, as amended (the “1940 Act”), pursuant to an exemptive order. The exemptive order was granted based upon the nature of our operations, the purposes for which we were organized, which have not changed, and the interest of purchasers of our securities in the economic development of Israel. There can be no assurance that the SEC will not re-examine the exemptive order and revoke, suspend or modify it. A revocation, suspension or material modification of the exemptive order could materially and adversely affect us unless we were able to obtain other appropriate exemptive relief. In the event that we become subject to the provisions of the 1940 Act, we could be required, among other matters, to make changes, which might be material, to our management, capital structure and methods of operation, including our dealings with principal shareholders and their related companies.

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As most of our investee companies conduct business outside of the United States, we are exposed to foreign currency and other risks.

        We are subject to the risks of doing business abroad, including, among other risks, foreign currency exchange rate risks, changes in interest rates, equity price changes of our investee companies, import restrictions, anti-dumping investigations, political or labor disturbances, expropriation and acts of war. No assurances can be given that we will be protected from future changes in foreign currency exchange rates that may impact our financial condition or performance.

        Foreign securities or illiquid securities in our portfolio involve higher risk and may subject us to higher price volatility. Investing in securities of foreign issuers involves risks not associated with U.S. investments, including settlement risks, currency fluctuations, local withholding and other taxes, different financial reporting practices and regulatory standards, high costs of trading, changes in political conditions, expropriation, investment and repatriation restrictions, and settlement and custody risks.

Changes in accounting standards and taxation requirements could affect our financial results.

        New accounting standards or pronouncements that may become applicable to the Company from time to time, or changes in the interpretation of existing standards and pronouncements, could have a significant effect on our reported results for the affected periods. We are also subject to income tax in the numerous jurisdictions in which we generate revenues. Increases in income tax rates could reduce our after-tax income from affected jurisdictions.

The loss of key executives could cause our business to suffer.

        Yosef A. Maiman, our Chairman, and other key executives have been key to the success of our business to date. The loss or retirement of such key executives services could adversely affect us.

Y.M. Noy Investments Ltd.‘s control of us could discourage attempts to acquire us.

        Y.M. Noy Investments Ltd., an Israeli company held approximately 58.29% of the voting power of our Class A Stock as of March 6, 2006. Yosef A. Maiman, the Chairman of our board of directors, owns 100% of the economic shares and one-third of the voting shares of Y.M. Noy Investments Ltd. In addition, Mr. Maiman holds an option to acquire the remaining two-thirds of the voting shares of Y.M. Noy Investments Ltd. (which are currently owned by Ohad Maiman and Noa Maiman, the son and daughter, respectively, of Mr. Maiman). By virtue of its ownership of Ampal, Y.M. Noy Investments Ltd. is able to control our affairs and to influence the election of the members of our board of directors. Y.M. Noy Investments Ltd. also has the ability to prevent or cause a change in control of Ampal.

Because we are a “controlled company,” we are exempt from complying with certain Nasdaq listing standards.

        Because Y.M. Noy Investments Ltd. own more than 50% of our voting power, we are deemed to be a “controlled company” under the rules of the Nasdaq National Market. As a result, we are 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 the 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. Accordingly, our directors who hold management positions or who are otherwise not independent have greater influence over our business and affairs.

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Our activities could be restricted as a result of agreements between our controlling shareholder and its lender.

        Based upon statements of beneficial ownership filed with the SEC by Y.M. Noy Investments ltd., Yosef A. Maiman, Ohad Maiman and Noa Maiman, the repayment of the borrowed funds used to finance Y.M. Noy Investment’s Ltd.‘s acquisition of a controlling interest in us, consisting of 11,444,112 shares of our Class A Stock, was principally financed by Bank Leumi Le-Israel B.M. According to the statements of beneficial ownership, the repayment of the borrowings are guaranteed by a personal guarantee by Mr. Maiman and secured by Y.M. Noy Investment Ltd.‘s pledge of such shares of our Class A Stock to the bank.

        The statements of beneficial ownership report that the pledge agreement with the bank includes restrictions on Y.M. Noy Investments Ltd.‘s voting rights and grants the bank certain voting rights with respect to the pledged shares, and that its credit agreement with the bank requires Y.M. Noy Investments Ltd. to maintain a controlling interest in us for so long as any amounts remain outstanding pursuant to the credit facilities. The statements of beneficial ownership also report that Y.M. Noy Investments Ltd. agreed that it will cause us to not issue any shares of our Class A Stock or options to acquire shares of our Class A Stock, except for employee stock options to our employees, consultants and directors and provided that Y.M. Noy Investments Ltd. owns at least 50.1% of Ampal. In addition, the statements of beneficial ownership reported that Y.M. Noy Investments Ltd. has agreed, unless it has received the prior consent of the bank and until the borrowings have been repaid in full, to cause us to refrain from making any decisions with regard to our winding-up, change in corporate structure, reorganization or merger. The statements of beneficial ownership also reported that Y.M. Noy Investments Ltd. has agreed, unless it has received the prior consent of the bank, not to sign any voting or other agreement regarding the shares and to oppose any change in our certificate of incorporation and by-laws and any resolution or other act which will or might result in the dilution of Y.M. Noy Investments Ltd.‘s interest in Ampal.

We do not typically pay cash dividends on our Class A Stock.

        We have not paid a dividend on our Class A Stock other than in 1995. Past decisions not to pay cash dividends on Class A Stock reflected our policy to apply retained earnings, including funds realized from the disposition of holdings, to finance our business activities and to redeem debentures. The payment of cash dividends in the future will depend upon our operating results, cash flow, working capital requirements and other factors we deem pertinent.

The market price per share of our Class A Stock on Nasdaq fluctuates and has traded in the past at less than our book value per share.

        Stock prices of companies, both domestically and abroad, are subject to fluctuations in trading price. Therefore, as with company like ours that invests in stocks of other companies, our book value and market price will fluctuate, especially in the short term. As of December 31, 2005, the market price on Nasdaq of $3.95 per share of our Class A Stock is less than our book value of $4.43 per share calculated in accordance with our consolidated financial statements. You may experience a decline in the value of your investment and you could lose money if you sell your shares at a price lower than you paid for them.

We do not publish the value of our assets.

        It is our policy not to publish the value of our assets or our views on the conditions of or prospects for our investee companies. To the extent the value of our ownership interests in our investee companies were to experience declines in the future, our performance would be adversely impacted.

Our Class A Stock may not be liquid.

        Our Class A Stock is currently traded on Nasdaq. The trading volume of our Class A Stock may be adversely affected due to the limited marketability of our Class A Stock as compared to other companies listed on Nasdaq. Accordingly, any substantial sales of our Class A Stock may result in a material reduction in price of our Class A Stock because relatively few buyers may be available to purchase our Class A Stock.

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ITEM 1B. UNRESOLVED STAFF COMMENTS

  None.

ITEM 2. PROPERTY

        Ampal’s corporate headquarters in Israel, which is owned by the Company, is located at 111 Arlozorov Street in Tel Aviv.

        Ampal currently leases an office at 555 Madison Avenue in New York City from Rodney Company N.V., Inc. The lease period is seven years commencing on October 15, 2002. The annual rent for this lease is $119,794. On March 31, 2004, the Company closed this office. The office space has been subleased.

        Country Club Kfar Saba Ltd. occupies a 7-1/4 acre lot in the town of Kfar Saba which will be leased for five consecutive ten-year periods, at the end of which the land returns to the lessor. The lease expires on July 14, 2038, and lease payments in 2005 totaled $179,619.

        Other properties of the Company are discussed elsewhere in this Report. See “Item 1. Business.”

ITEM 3. LEGAL PROCEEDINGS

        Ampal Communications L.P.

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

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

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

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

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

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

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

15



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

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

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

    2.        On May 24, 2004 and on May 31, 2004 the Defendants requested the district court to strike out the claim in limine, on the grounds that Ampal had allegedly not paid sufficient fees when filing the claim, and further requested an extension of the time for filing statements of defense until after the district court had reached a decision regarding the request to strike out the claim. Ampal and the Defendants filed various responses and on June 30, 2004, the district court requested the Attorney General to furnish an opinion regarding the Defendants’ request before issuing its own decision. On October 11, 2004 the Attorney General furnished its opinion that supported the Defendants’ request that Ampal should pay the fees calculated on the basis of the value of the requested remedies in the claim.

        On November 10, 2004 Ampal filed its response. The Court also decided that the statements of defense should be filed 10 days after it issues its decision regarding the striking out of the claim.

    3.        On March 1, 2005, Ampal requested the district court to enter judgment against Peter Brum on the grounds that he failed to file a defense to the Company’s claim. On March 15, 2005, the district court granted Ampal’s request and entered judgment against Peter Brum. On March 17, 2005, the district court ordered Mr. Brum to acquire and purchase from Ampal the shares it holds in MIRS for a total company valuation of $ 765,998,000, which is the highest of the prices set forth in the complaint. The litigation with regard to the other defendants is ongoing. Peter Brum, Motorola and MIRS have appealed the district court’s judgment on numerous grounds. Ampal has filed responses to the appeal.

    4.        On August 30, 2005, the Company, through Ampal Communications L.P. entered into a Stock Purchase and Indemnification Agreement, dated as of August 30, 2005, by and among Motorola Israel Ltd., Ampal Communications L.P. and MIRS (the “Agreement”) to sell Motorola Israel Ltd. all of its holdings of MIRS. In connection with the closing of the transactions contemplated by this Agreement the existing lawsuit among the parties and other relating to MIRS was dismissed.

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

        Galha

        On January 1, 2002, Galha (1960) Ltd. (“Galha”) filed a suit against the Company and other parties, including directors of Paradise Industries Ltd. (“Paradise”) appointed by the Company, in the Tel Aviv District Court, in the amount of NIS 10,249,609 ($2.2 million). Galha claimed that the Company, which was a shareholder of Paradise, and another shareholder of Paradise, misused funds that were received by Paradise from an insurance company for the purpose of reconstructing an industrial building owned by Galha and used by Paradise which burnt down. Paradise is currently involved in liquidation proceedings. Ampal issued a guarantee in favor of Galha for the payment of an amount of up to NIS 4,022,085 ($873,800) if a final judgment against the Company will be given.

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        On May 26, 2003 the Company and the directors of Paradise appointed by the Company filed a third party claim against Arieh Israeli Insurance Company Ltd. in the Tel Aviv District Court claiming that, to the extent the court decides that the directors of Paradise appointed by the Company will have to pay any amounts to Galha, Arieh will pay such amounts on behalf of the directors in accordance with the Directors and Officers insurance policy that the Company had at that time with Arieh. Arieh filed a statement of defense and stated that the policy does not cover the claim. At this stage, the Company cannot estimate the impact this claim will have on it.

        Claims Against Subsidiaries and Affiliates:

        Legal claims arising in the normal course of business have been filed against subsidiaries and affiliates of the company. Based upon the opinions of legal counsel, the Company’s management believes that all provisions made are sufficient.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

  None.

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PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OFEQUITY SECURITIES

PRICE RANGE OF CLASS A STOCK

        Ampal’s Class A Stock is listed on Nasdaq under the symbol “AMPL”. The following table sets forth the high and low bid prices for the Class A Stock, by quarterly period for the fiscal years 2005 and 2004, as reported by Nasdaq and representing inter-dealer quotations which do not include retail markups, markdowns or commissions for each period, and each calendar quarter during the periods indicated. Such prices do not necessarily represent actual transactions.

High
Low
2005:            
Fourth Quarter    4.05    2.80  
Third Quarter    4.09    3.21  
Second Quarter    4.29    3.52  
First Quarter    4.38    3.61  
   
   
2004:   
Fourth Quarter    4.20    3.27  
Third Quarter    3.70    2.65  
Second Quarter    3.87    2.81  
First Quarter    4.20    2.88  

        As of March 6, 2006, there were approximately 731 record holders of Class A Stock.

VOTING RIGHTS

        Unless dividends on any outstanding preferred stock are in arrears for three successive years, as discussed below, the holders of Class A Stock are entitled to one vote per share on all matters voted upon. Notwithstanding the above, if dividends on any outstanding series of preferred stock are in arrears for three successive years, the holders of all outstanding series of preferred stock as to which dividends are in arrears shall have the exclusive right to vote for the election of directors until all cumulative dividend arrearages are paid. The shares of Class A Stock do not have cumulative voting rights in relation to the election of the Company’s directors, which means that any holder of at least 50% of the Class A Stock can elect all of the members of Board of Directors of Ampal (the “Board”).

DIVIDEND POLICY

        Ampal has not paid a dividend on its Class A Stock other than in 1995. Past decisions not to pay cash dividends on Class A Stock reflected the policy of Ampal to apply retained earnings, including funds realized from the disposition of holdings, to finance its business activities and to redeem debentures. The payment of cash dividends in the future will depend upon the Company’s operating results, cash flow, working capital requirements and other factors deemed pertinent by the Board.

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        Dividends on all classes of Ampal’s shares of preferred stock are payable as a percentage of par value. The holders of Ampal’s presently authorized and issued 4% Preferred Stock and 6 1/2% Preferred Stock (each having a $5.00 par value) are entitled to receive cumulative dividends at the rates of 4% and 6 1/2% per annum, respectively, payable out of surplus or net earnings of Ampal before any dividends are paid on the Class A Stock. If Ampal fails to pay such dividend to the preferred stockholders in any calendar year, such deficiency must be paid in full, without interest, before any dividends may be paid on the Class A Stock. If, after the payment of all cumulative dividends on the preferred stock and a non-cumulative 4% dividend on the Class A Stock, there remains any surplus, any dividends declared are to be participated in by the holders of 4% Preferred Stock and Class A Stock, pro rata. On December 18, 2005, Ampal announced that its Board had declared cash dividends on its classes of preferred stock ($0.325 per share on its 6 1/2% classes of preferred stock and $0.20 per share on its 4% Preferred Stock). The dividends were paid on December 30, 2005.

        For equity compensation plan information required Item 2.01(d) of Regulation S-K, please see Item 12 below.

ITEM 6. SELECTED FINANCIAL DATA

Fiscal year ended December 31,
FISCAL YEAR ENDED DECEMBER 31,
2005
2004
2003
2002
2001
(U.S. Dollars in thousands, except per share data)
 
Revenues     $ 30,530   $ 31,464   $ 51,814   $ 16,732   $ 29,062  
   
Net income (loss)   $ (5,958 ) $ (18,385 ) $ 8,847   $ (44,047 ) $ (6,974 )
Earnings (loss) per Class A Share(1):  
   Basic EPS   $ (0.31 ) $ (0.94 ) $ 0.42   $ (2.27 ) $ (0.38 )
    Diluted EPS   $ (0.31 ) $ (0.94 ) $ 0.40   $ (2.27 ) $ (0.38 )
Total assets   $ 210,904   $ 304,947   $ 354,367   $ 323,699   $ 383,833  
   
Notes and loans and debentures Payable    50,366    120,796    138,334    136,803    145,901  

(1) Computation is based on net income (loss) after deduction of preferred stock dividends (in thousands) of $191, $200, $213, $218 and $227 for the years ended 2005, 2004, 2003, 2002 and 2001, respectively.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

        We seek to maximize shareholder value through acquiring and investing in companies that we consider have the potential for growth. In utilizing our core competencies and financial resources, our investment portfolio primarily focuses on a broad cross-section of Israeli companies engaged in various market segments including Energy, Real Estate, Project Development and Leisure Time.

        Our investment focus is primarily on companies or ventures where we can exercise significant influence, on our own or with investment partners, and use our management experience to enhance those investments. We are also monitoring investment opportunities, both in Israel and abroad, that we believe will strengthen and diversify our portfolio and maximize the value of our capital stock. In determining whether to acquire an interest in a specific company, we consider the quality of management, return on investment, growth potential, projected cash flow, investment size and financing, and reputable investment partners. We also provide our investee companies with ongoing support through our involvement in the investee companies’ strategic decisions and introductions to the financial community, investment bankers and other potential investors both in and outside of Israel.

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        Our results of operations are directly affected by the results of operations of our investee companies. A comparison of the financial statements from year to year must be considered in light of our acquisitions and dispositions during each period.

        The results of investee companies which are greater than 50% owned by us are included in the consolidated financial statements. We account for our holdings in investee companies over which we exercise significant influence, generally 20% to 50% owned companies (“affiliates”), under the equity method. Under the equity method, we recognize our proportionate share of such companies’ income or loss based on its percentage of direct and indirect equity interests in earnings or losses of those companies. The results of operations are affected by capital transactions of the affiliates. Thus, the issuance of shares by an affiliate at a price per share above our carrying value per share for such affiliate results in our recognizing income for the period in which such issuance is made, while the issuance of shares by such affiliate at a price per share that is below our carrying value per share for such affiliate results in our recognizing a loss for the period in which such issuance is made. We account for our holdings in investee companies, other than those described above, on the cost method or in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 115, “Accounting for Certain Investments in Debt and Equity Securities”. In addition, we review investments accounted for under the cost method and those accounted for under the equity method periodically in order to determine whether to maintain the current carrying value or to write off some or all of the investment. For more information as to how we make these determinations, see “Critical Accounting Policies.”

        For those subsidiaries and affiliates whose functional currency is considered to be the New Israeli Shekel (“NIS”), assets and liabilities are translated at the rate of exchange at the end of the reporting period and revenues and expenses are translated at the average rates of exchange during the reporting period. Translation differences of those foreign companies’ financial statements are included in the cumulative translation adjustment account (reflected in accumulated other comprehensive loss) of shareholders’ equity. Should the NIS be devalued against the U.S. dollar, cumulative translation adjustments are likely to result in a reduction in shareholders’ equity. As of December 31, 2005, the accumulated effect on shareholders’ equity was a decrease of approximately $19.7 million. Upon disposition of an investment, the related cumulative translation adjustment balance will be recognized in determining gains or losses.

CRITICAL ACCOUNTING POLICIES

        The preparation of Ampal’s consolidated financial statements is in conformity with accounting principles generally accepted in the United States which requires management to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying consolidated financial statements and related footnotes. Actual results may differ from these estimates. To facilitate the understanding of Ampal’s business activities, described below are certain Ampal accounting policies that are relatively more important to the portrayal of its financial condition and results of operations and that require management’s subjective judgments. Ampal bases its judgments on its experience and various other assumptions that it believes to be reasonable under the circumstances. Please refer to Note 1 to Ampal’s consolidated financial statements included in this Annual Report for the fiscal year ended December 31, 2005 for a summary of all of Ampal’s significant accounting policies.

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        Portfolio Investments

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

        Investment in MIRS

        Our investment in MIRS, which we sold on October 3, 2005, was accounted for at cost (our equity interest was 25%). The cost method was applied due to preference features we were granted in our investment in preferred shares in MIRS. Revenues from guaranteed dividend payments from Motorola were recognized as income. We performed annual tests for impairment regarding our investment in MIRS. Our assessment of our investment in MIRS as of December 31, 2005, resulted in an impairment charge of $13.3 million (see also, Item 1 “Business”, “Results of Operations” and “Debt” below and Note 2 to the Consolidated Financial Statements).

        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.

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

        Long- lived assets

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

21



        Accounting for Income Taxes

        As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves us estimating our current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in our consolidated balance sheet. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income, and, to the extent we believe that recovery is not likely, we must establish a valuation allowance. To the extent we establish a valuation allowance or increase this allowance in a period, we must include an expense within the tax provision in the statement of operations. A valuation allowance is currently set against certain tax assets because management believes it is more likely than not that these deferred tax assets will not be realized through the generation of future taxable income. We also do not provide for taxes on undistributed earnings of our foreign subsidiaries, as it is our intention to reinvest undistributed earnings indefinitely outside the United States. In 2005, there were no undistributed earnings from foreign subsidiaries.

        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

FAS 123 (Revised 2004) Share-based Payment

        In December 2004, the Financial Accounting Standards Board (“FASB”) issued the revised Statement of Financial Accounting Standards (“FAS”) No. 123, Share-Based Payment (FAS 123R), which addresses the accounting for share-based payment transactions in which the Company obtains employee services in exchange for (a) equity instruments of the Company or (b) liabilities that are based on the fair value of the Company’s equity instruments or that may be settled by the issuance of such equity instruments. In March 2005, the SEC issued Staff Accounting Bulletin No. 107 (SAB 107) regarding the SEC’s interpretation of FAS 123R.

        FAS 123R eliminates the ability to account for employee share-based payment transactions using APB Opinion No. 25 – “Accounting for Stock Issued to Employees”, and requires instead that such transactions be accounted for using the grant-date fair value based method. This Statement will be effective as of the beginning of the first interim period after June 15, 2005 (January 1, 2006 for the Company). Early adoption of FAS 123R is encouraged. This Statement applies to all awards granted or modified after the Statement’s effective date. In addition, compensation cost for the unvested portion of previously granted awards that remain outstanding on the Statement’s effective date shall be recognized on or after the effective date, as the related services are rendered, based on the awards’ grantdate fair value as previously calculated for the pro-forma disclosure under FAS 123.

        The Company estimates that the cumulative effect of adopting FAS 123R, as of its adoption date by the Company (January 1, 2006), based on the awards outstanding as of December 31, 2005, will not be material. This estimate does not include the impact of additional awards, which may be granted, or forfeitures, which may occur subsequent to December 31, 2005 and prior to the adoption of FAS 123R.

        The Company expects that upon the adoption of FAS 123R, the Company will apply the modified prospective application transition method, as permitted by the Statement. Under such transition method, upon the adoption of FAS 123R, the Company’s financial statements for periods prior to the effective date of the Statement will not be restated.

        The Company expects, based on the awards outstanding as of December 31, 2005, that this statement will have an estimated effect of $0.8 million on it’s financial position and results of operations in 2006.

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FAS 154 - Accounting Changes and Error Corrections - a replacement of APB Opinion No. 20 and FASB Statement No. 3

        In June 2005, the Financial Accounting Standards Board issued FAS No. 154,“Accounting Changes and Error Corrections – a replacement of APB Opinion No. 20 and FASB Statement No.3". This Statement generally requires retrospective application to prior periods’ financial statements of changes in accounting principle. Previously, Opinion No. 20 required that most voluntary changes in accounting principle were recognized by including the cumulative effect of changing to the new accounting principle in net income of the period of the change. FAS 154 applies to all voluntary changes in accounting principle. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. When a pronouncement includes specific transition provisions, those provisions should be followed. This Statement shall be effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005 (2006 for the Company). We do not expect the adoption of this statement will have a material impact on our results of operations, financial position or cash flow.

RESULTS OF OPERATIONS

Fiscal year ended December 31, 2005 compared to fiscal year ended December 31, 2004:

        The Company recorded a consolidated net loss of $6.0 million for the fiscal year ended December 31, 2005, as compared to $18.4 million loss for the same period in 2004. The decrease in net loss is primarily attributable to an increase in earnings of affiliates, an increase in interest income and a decrease in loss from impairment of investments. The decrease in net loss was partially offset by a decrease in realized and unrealized gains from marketable securities and investments and an increase in translation losses in 2005, as compared to 2004.

        Income from equity of affiliates increased to $6.7 million for the fiscal year ended December 31, 2005 as compared to $4.0 million for the fiscal year ended in 2004. The increase is primarily attributable to a $6.6 million gain recorded by Ophir Holding Ltd. as a result of the sale of all its holdings in Industrial Building Corporation Ltd.

        In the fiscal year ended December 31, 2005, the Company recorded $14.0 million in losses from the impairment of its investments and loans relating primarily to MIRS ($13.3 million) and Shiron Satelite Communications (1996) Ltd. (“Shiron Ltd.”) ($0.6 million). On October 3, 2005, the Company, through Ampal Communications L.P., a limited partnership controlled by the Company, completed the previously announced sale to Motorola Israel Ltd. of all of its holdings of MIRS pursuant to the terms of a Stock Purchase and Indemnification Agreement, dated as of August 30, 2005, by and among Motorola Israel, Ampal Communications L.P. and MIRS. In connection with the sale of its holdings of MIRS, Ampal Communications L.P. received approximately US $89 million of total proceeds, composed of $67.7 million for the purchase price and an additional $ 21.3 million related to guaranteed dividend payments. In the fiscal year ended December 31, 2004, the Company recorded $38.8 million in losses from the impairment of its investments and loans which was comprised primarily of the following losses: MIRS ($30.0 million), ShellCase ($3.8 million) and Star Management ($1.6 million).

        During the fiscal year ended December 31, 2005, Ampal recorded $2.7 million of realized losses on investments, as compared to $6.0 million of realized gains in the same period in 2004. The loss recorded in 2005 was primarily attributable to the third-party investment in the high-tech portfolio (which is treated as a disposition for accounting purposes) which resulted in a $7.3 million loss ($4.6 net loss after tax). This loss was partially offset by the gain recorded from the sale of all of Ampal’s shares of Modem Art Ltd. ($3.3 million gain) and the sale of all of its shares in Epsilon investment ($1.4 million gain). The $6.0 million gain recorded in 2004 is mainly attributable to the sale of PowerDsine Ltd. and the sale of assets by PSINet Europe, one of the holdings of Ampal’s investee company, Telecom Partners (“TP”).

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        The Company recorded realized and unrealized gains from marketable securities in the amount of $3.2 million in the year 2005 as compared to $1.9 million in 2004.

        The increase in real estate income and expenses in 2005 as compared to 2004 is primarily attributable to the increase in the tenant occupancy rate in Am-Hal Ltd.

        Other income realized by the Company is principally composed of guaranteed dividend payments from Motorola equal to $7.1 million for the years ended December 31, 2005, and December 31, 2004.

        The Company recorded higher interest income in the fiscal year ended December 31, 2005, as compared to the same period in 2004, primarily as a result of a $0.7 million gain from forward contracts to purchase U.S. Dollars and increases in interest rates.

        The Company recorded an interest expense of $5.3 million in the fiscal year ended December 31, 2005, as compared to $4.9 million in the same period in 2004, primarily as a result of increases in applicable interest rates.

        The management of the Company currently believes that inflation has not had a material impact on the Company’s operations.

SELECTED QUARTERLY FINANCIAL DATA

First
Quarter

Second
Quarter

Third
Quarter

Fourth
Quarter

(U.S. Dollars in thousands, except per share data)
Unaudited
 
Fiscal Year Ended December 31, 2005                    
Revenues   $ 15,634   $ 5,827   $ 7,907   $ 1,162  
Net interest expense    (1,017 )  (1,439 )  (1,143 )  (91 )
Net (loss) income    6,728    (2,511 )  (10,630 )  455  
Basic EPS:  
   Earnings (Loss) per Class A share(1)    0.33    (0.13 )  (0.53 )  0.02  
Diluted EPS:  
   Earnings (Loss) per Class A share    0.30    (0.13 )  (0.53 )  0.02  
   
First
Quarter

Second
Quarter

Third
Quarter

Fourth
Quarter

(U.S. Dollars in thousands, except per share data)
Unaudited
   
Fiscal Year Ended December 31, 2004  
Revenues   $ 7,469   $ 8,181   $ 8,912   $ 6,902  
Net interest expense    (715 )  (1,236 )  (2,117 )  (222 )
Net (loss) income    (811 )  284    (2,545 )  (15,313 )
Basic EPS:  
Earning (Loss) per Class A share(1)    (0.04 )  0.01    (0.13 )  (0.78 )
Diluted EPS:  
Earning (Loss) per Class A share    (0.04 )  0.01    (0.13 )  (0.78 )

(1) After deduction of dividends on the 4% and 6 1/2% Cumulative Convertible Preferred Stock in 2005 and 2004 (in thousands) of $191 and $200, respectively.

See note 17 to the Company Consolidated Annual Statements which describe management decision to correct the disclosure provided by the Statements of Comprehensive Income (Loss) contained in the Company’s periodic reports on Form 10-Q for the three months ending March 31, 2005, six months ending June 30, 2005 and nine months ending September 30, 2005.

Fiscal year ended December 31, 2004 compared to fiscal year ended December 31, 2003:

        The Company recorded a consolidated net loss of $18.4 million for the fiscal year ended December 31, 2004, as compared to $8.8 million gain for the same period in 2003. The decrease in net income is primarily attributable to the increase in losses from impairment of investments and decreases in realized and unrealized gain on investments in marketable securities. The decrease was partially offset by higher income from equity in and translation gains, 2004, as compared to 2003.

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        In the fiscal year ended December 31, 2004, the Company recorded $38.8 million in losses from the impairment of its investments and loans which was comprised primarily of the following losses: MIRS ($30.0 million), ShellCase ($3.8 million) and Star Management ($1.6 million). In the fiscal year ended December 31, 2003, the Company recorded $13.1 million in losses from the impairment of its investments and loans which was comprised primarily of the following losses: XACCT ($9.0 million), Carmel ($2.0 million) and Identify ($1.3 million).

        During the fiscal year ended December 31, 2004, Ampal recorded $7.9 million of realized and unrealized gains on investments, as compared to $29.8 million of realized and unrealized gains in the same period in 2003. The gains recorded in 2004 are mainly attributable to the sale of assets by PSINet Europe, one of the holdings of Ampal’s investee company, Telecom Partners (“TP”)($2.5 million), (see “Investments”) and 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 $2.9 million were recorded as unrealized gains on marketable securities under, “Accumulated Other Comprehensive Loss.” The realized and unrealized gains on investments in 2003 were primarily attributable to the gains on the sale of the Company’s investment in Granite Hacarmel Investments Ltd. (“Granite”) ($20.7 million), Blue Square Israel Ltd. (“Blue Square”) ($2.6 million), Alvarion ($1.4 million), and mutual funds and other securities ($5.1 million).

        During 2003, the Company reduced its holding interest in Granite from 20.4% to 10.5% as a result of a sale of 9.9%. Consequently, the Company’s investment in Granite, which was previously accounted for by the equity method, was accounted for as an investment in a trading marketable security. The remaining 10.5% interest in Granite was sold in February 2004.

        Equity in earnings of affiliates increased to $4.0 million for the fiscal year ended December 31, 2004 as compared to $2.5 million for the fiscal year ended in 2003. In 2003, a loss of $1.7 million was recorded during the first quarter with respect to the Company’s holdings in Granite.

        The increase in real estate income and expenses in 2004 as compared to 2003 is primarily attributable to the increase in the tenant occupancy rate in Am-Hal Ltd.

        Other income realized by the Company is principally composed of guaranteed dividend payments from Motorola equal to $7.1 million for the years ended December 31, 2004 and 2003.

        The Company recorded lower interest expense in the fiscal year ended December 31, 2004, as compared to the same period in 2003, primarily as a result of repayment of loans.

        In the fiscal year ended December 31, 2004, Ampal recorded $10.2 million of tax benefit which related mainly to the loss from the impairment in our investment in Mirs.

LIQUIDITY AND CAPITAL RESOURCES

        Cash Flows

        On December 31, 2005, cash, cash equivalents and marketable securities were $62.9 million, as compared with $68.1 million at December 31, 2004.

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        The Company has sources of cash from operations, cash from investing activities and amounts available under credit facilities, as described below. The Company believes that these sources are sufficient to fund the current requirements of operations, capital expenditures, investing activities, dividends on preferred stock and other financial commitments of the Company for the next 12 months. However, to the extent that contingencies and payment obligations described below and in other parts of this Report require the Company to make unanticipated payments, the Company would need to further utilize these sources of cash. In the event of a decline in the market price of its marketable securities, the Company may need to draw upon its other sources of cash, which may include additional borrowing, refinancing of its existing indebtedness or liquidating other assets, the value of which may also decline.

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

        Cash flows from operating activities

        Net cash provided by operating activities totaled approximately $43.2 million for the fiscal year ended December 31, 2005, as compared to approximately $13.1 million provided by the same period in 2004. The change is primarily attributable to (i) the $19.7 million net proceeds from the sale of securities ($32.6 million proceeds offset by $12.9 million invested) as compared to $23.0 million net proceeds from the sale of securities in 2004, (ii) receipt of a $21.3 million dividend from MIRS as part of the sale of MIRS to Motorola Communication Israel Ltd. and (iii) the $4.3 million in dividend payments received from affiliates as compared to $3.3 million in dividend payments received from affiliates in 2004.

        Cash flows from investing activities

        Net cash provided by investing activities totaled approximately $36.7 million for the fiscal year ended December 31, 2005, as compared to approximately $17.7 million provided by for the same period in 2004. The cash provided by investing activities is primarily attributable to the proceeds in the amount of $75.4 million from the disposition of MIRS, High-Tech Portfolio, Epsilon Group, Xpert, Modem Art and certain assets of TP. The cash receipts were offset by our approximately $30 million investment in EMG and a payment of $9.8 million by Am-Hal Ltd. (“Am-Hal”), a wholly owned subsidiary of the Company, to acquire and develop real estate for a new project in Tel-Aviv.

        Cash flows from financing activities

        Net cash used in financing activities was approximately $73.5 million for the fiscal year ended December 31, 2005, as compared to approximately $19.1 million of net cash used in financing activities for the fiscal year ended December 31, 2004.

        The increase in cash used in financing activities is primarily attributable to the repayment in full of the $73.1 million loan which was received from Bank Hapoalim Ltd and Bank Leumi Le-Israel Ltd relating to the MIRS investment, the repayment of $2.5 million of loans by Am-Hal and Ampal which used its own cash to pay down its existing notes payable and debentures in the amount of $5.3 million. Those effects were offset by Am-Hal Ltd. and its minority partner in the new project which borrowed $8.8 million to finance the new project (see cash flow from investing activities). In 2004, the Company paid down its notes payable and debentures in the amount of $18.9 million with cash on hand and by borrowing funds in the amount of $6.5 million.

        Investments

        On December 31, 2005, the aggregate fair value of trading and available-for-sale securities were approximately $38.6 million, as compared to $50.4 million at December 31, 2004. The decrease in 2005 is attributable to the sale of tradable securities in order to finance the $30 million investment in EMG.

26



a) In 2005, the Company made the following investments:

  1. On December 1, 2005, the Company acquired a 2.0% interest in EMG from Merhav for $29,960,000. EMG is an Egyptian joint stock company organized in accordance with the Egyptian Special Free Zones system which has been given the right to export natural gas from Egypt to Israel and other locations in the East Mediterranean basin and other countries. (See also Item 7. Related Party Transaction).

  2. An additional investment of $0.7 million in Fimi Opportunity Fund, L.P. (“Fimi”).

b) In 2005, the Company made the following dispositions:

  1. On October 3, 2005 the Company, through Ampal Communications L.P., completed the sale to Motorola Israel Ltd. of all of its holdings of MIRS. In connection with the sale of its holdings of MIRS, Ampal Communications L.P. received approximately US $89 million of total proceeds, composed of US $67.7 million for the purchase price and an additional US $21.3 million related to guaranteed dividend payments.

  2. During the third and fourth quarter of 2005, one of the holdings of Ampal’s investee companies, TP received proceeds in the amount of $1.1 million from the sale of all its assets in Grapes Communications N.V./S.A. and from the disposition of its holdings in PSINet Europe B.V.

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

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

  5. On July 11, 2005, the Company sold its holdings in Xpert Ltd. for $0.8 million and recorded a loss of $0.2 million.

  6. On March 8, 2005, the Company sold its holdings in Modem Art Ltd. for $4.4 million and recorded a gain of $3.3 million.

        Related Party transaction

        On December 1, 2005, the Company acquired an interest in EMG from Merhav. EMG is an Egyptian joint stock company organized in accordance with the Egyptian Special Free Zones system which has been given the right to export natural gas from Egypt to Israel and other locations in the East Mediterranean basin and other countries. Egyptian natural gas shall reach the Israeli market via an underwater pipeline owned by EMG, which EMG expects to be completed during 2007. Under the terms of the transaction, the Company acquired a 2% beneficial ownership in EMG for a purchase price of $29,960,000. Additionally, the Company was granted the exclusive right to negotiate to acquire a substantial portion of Merhav’s remaining shares of EMG. The Company also has the right for a period of time to require Merhav to repurchase the EMG interest.

        Yosef A. Maiman, the chairman of the Company’s Board of Directors and the Company’s controlling shareholder, is the sole owner of Merhav. The transaction was approved by a special committee of the Board of Directors composed of the Company’s independent directors. Houlihan Lokey Howard & Zukin Financial Advisors, Inc. acted as financial advisors to the special committee.

27



        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.

        The Company financed a portion of the $9.8 million real estate acquisition by 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 Hapoalim, 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 December 31, 2005 the Company had drawn $2.5 million from the facility. As of December 31, 2005 and December 31, 2004 the amounts outstanding under these loans were $13.5 million and $7.7 million, respectively. The loans, excluding the Phoenix loan, mature in up to one year and have interest rates range between 5.4% 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 $3.6 million in favor of tenants of Am-Hal in order to secure their deposits.

         The Company also finances its general operations and other financial commitments through bank loans with Hapoalim. The long-term loans in the amount of $31.3 million mature through 2006-2010.

        Other long term borrowings in the amount of $1.9 million are linked to the Israeli C.P.I and mature between 2006 and 2010 of which an amount of $1.4 million bears no interest. The remaining $0.5 million bears an annual interest of 5.7%.

        The weighted average interest rates on the balances of short-term borrowings at year-end are as follows: 6.0% on $15.0 million and 3.5% on $13.0 million in 2005 and 2004, respectively.

Payments due by period (in thousands)
Contractual Obligations
Total
Less than
1 year

1 - 3
years

3-5 years
More than
5 years

 
Long-Term Debt     $ 35,406   $ 10,443   $ 12,412   $ 9,521   $ 3,030  
Short-Term Debt   $ 14,960   $ 14,960                 
Capital Call Obligation(1)   $ 2,800   $ 2,800                 
Operating Lease (2) Obligation   $ 6,300   $ 300   $ 600   $ 500   $ 4,900  
Capital Lease Obligation    --    --    --    --    --  
Purchase Obligations    --    --    --    --    --  
Other Long-Term Liabilities Reflected  
on the Company's Balance Sheet  
Under GAAP    --    --    --    --    --  
Total   $ 59,466   $ 28,503   $ 13,012   $ 10,021   $ 7,930  






(1) See note 15(d)

(2) See note 15(a)

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        As of December 31, 2005, the Company had issued guarantees on certain outstanding loans to its investees and subsidiaries in the aggregate principal amount of $10.3 million. This includes:

  1. $5.8 million guarantee on indebtedness incurred by Bay Heart ($3.5 million of which is recorded as a liability in the Company’s financial statements at December 31, 2005) in connection with the development of its property. Bay Heart recorded losses in 2005 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. $3.6 million guarantee to Am- Hal tenants as described above.

  3. $0.9 million guarantee to Galha 1960 Ltd. as described in Item 3 of this Report.

        In each of 2005 and 2004, Ampal paid dividends in the amount of $0.20 and $0.325 per share on its 4% and 6 ½% Cumulative Convertible Preferred Stocks, respectively. Total dividends paid in each year amounted to approximately $0.2 million.

        Off-Balance Sheet Arrangements

        Other than the foreign currency contracts specified below, the Company has no off-balance sheet arrangements.

        Foreign Currency Contracts

        The Company’s derivative financial instruments consist of foreign currency forward exchange contracts to purchase or sell US Dollars. These contracts are utilized by the Company, from time to time, to manage risk exposure to movements in foreign exchange rates. None of these contracts have been designated as hedging instruments. These contracts are recognized as assets or liabilities on the balance sheet at their fair value, which is the estimated amount at which they could be settled based on market prices or dealer quotes, where available, or based on pricing models. Changes in fair value are recognized currently in earnings.

        As of December 31, 2005, the Company did not have any open foreign currency forward exchange contracts to purchase or sell U.S. Dollars.

ITEM 7A 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 December 31, 2005, and are sensitive to the above market risks.

        During the fiscal year ended December 31, 2005, there have been no material changes in the market risk exposures facing the Company as compared to those the Company faced in the fiscal year ended December 31, 2004.

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Interest Rate Risks

        At December 31, 2005, the Company had financial assets totaling $21.4 million and financial liabilities totaling $50.4 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 December 31, 2005, the Company had fixed rate financial assets of $0.3 million and had variable rate financial assets of $21.1 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 December 31, 2005, the Company had fixed rate debt of $5.0 million and variable rate debt of $45.4 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 2005, the Company entered into various foreign exchange forward purchase contracts to partially hedge this exposure. At December 31, 2005, 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 $1.2 million, and regarding the statements of income loss a ten percent devaluation of the foreign currency would be reflected in a net decrease in earnings and would be $2.0 million.

Equity Price Risk

        The Company’s investments at December 31, 2005, included marketable securities which are recorded at fair value of $38.6 million, including a net unrealized gain of $0.4 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 $3.9 million.

30



ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of
Ampal-American Israel Corporation:

We have audited the accompanying consolidated balance sheets of Ampal-American Israel Corporation and subsidiaries (the “Company”) as of December 31, 2005 and 2004, and the related consolidated statements of income (loss), cash flows, changes in shareholders’ equity, and comprehensive income (loss) for each of the three years in the period ended December 31, 2005. These financial statements are the responsibility of the Company’s Board of Directors and management. Our responsibility is to express an opinion on these financial statements based on our audits.

We did not audit the financial statements of certain subsidiaries, whose revenues included in consolidation constitute approximately 14.5% of total consolidated revenues for the year ended December 31, 2003. Also we did not audit the financial statements of certain affiliated companies, the company’s interest in which as reflected in the balance sheets as of December 31, 2005 and 2004 is $14,001 thousands and $13,345 thousands, respectively, and the Company’s share in excess of profits over losses in a net amount of $88 thousands, $1,931 thousands and $676 thousands for the years ended December 31, 2005, 2004 and 2003, respectively. The financial statements of those subsidiaries and affiliated companies were audited by other independent registered public accounting firms whose reports thereon have been furnished to us and our opinion expressed herein, insofar as it relates to the amounts included for those companies, is based solely on the reports of the other independent registered public accounting firms. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Boards (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the reports of other independent auditors provide a reasonable basis for our opinion.

In our opinion, based on our audits and the reports of other independent registered public accounting firms, the financial statements referred to above present fairly, in all material respects, the financial position of the Company and its subsidiaries as of December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2005, in conformity with accounting principles generally accepted in the United States of America.

Tel Aviv, Israel
March 29, 2005

  /s/ KESSELMAN & KESSELMAN CPAs ( ISR) A member of
PricewaterhouseCoopers International Limited

31



AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIESCONSOLI
DATED STATEMENTS OF INCOME (LOSS)

Fiscal Year Ended December 31,
2005
2004
2003
(U.S. Dollars in thousands, except per share data)
 
REVENUES:                
Equity in earnings of affiliates (Note 11)   $ 6,666   $ 4,031   $ 2,526  
Real estate income    9,244    9,020    8,889  
Realized gains on investments (Note 2)    --    5,964    --  
Realized and unrealized gains on marketable securities    3,203    1,929    29,813  
(Loss) gain on sale of real estate rental  
   property (Note 2 )    --    (123 )  69  
Interest income    1,567    590    508  
Other Income (note 12)    9,850    10,053    10,009  



         Total revenues    30,530    31,464    51,814  



   
EXPENSES:   
Interest expense    5,257    4,880    5,531  
Real estate expenses    8,651    8,874    8,110  
Realized losses on investments (Notes 2 )    2,735    --    --  
Loss from impairment of investments & real estate (Note 2)    13,984    38,811    13,144  
Translation (gain) loss    2,220    (194 )  3,061  
Other (mainly general and administrative)    10,957    11,806    10,747  



         Total expenses    43,804    64,177    40,593  



(Loss) Income before income taxes    (13,274 )  (32,713 )  11,221  
Provision for income taxes (tax benefits) (Note 10)    (2,849 )  (10,198 )  434  



   
(Loss) Income after income taxes (tax benefits)    (10,425 )  (22,515 )  10,787  
Minority interests, net    (4,467 )  (4,130 )  1,940  



               NET (LOSS) INCOME    $ (5,958 ) $ (18,385 ) $ 8,847  



   
Basic EPS: (Note 9)  
     (Loss) earnings per Class A share   $ (0.31 ) $ (0.94 ) $ 0.42  



     Shares used in calculation (in thousands)    19,967    19,841    19,713  



   
Diluted EPS:  
    (Loss) earnings per Class A Share   $ (0.31 ) $ (0.94 ) $ 0.40  



    Shares used in calculation (in thousands)    19,967    19,841    22,120  




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

32



AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

Assets As At
December 31,
2005

December 31,
2004

(U.S. Dollars in thousands)
 
Cash and cash equivalents     $ 24,314   $ 17,618  
   
   
Deposits, notes and loans receivable    343    3,534  
Investments (Notes 2, 3 and 11):  
Marketable securities (Note 3)    38,575    50,433  
Other investments    54,903    127,023  


    Total investments    93,478    177,456  
   
Real estate property, less accumulated depreciation of $13,907  
and $12,190    70,989    63,191  
   
   
Other assets (Note 4)    21,780    43,148  


   
   
   
         TOTAL ASSETS   $ 210,904   $ 304,947  



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

33



AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

Liabilities and Shareholders'
Equity As At

December 31,
2005

December 31,
2004

(U.S. Dollars in thousands except share
amounts per share data)

 
                               LIABILITIES            
 
Notes and loans payable (Note 5)   $ 50,366   $ 118,760  
Debentures    --    2,036  
Deposits from tenants    52,880    52,152  
Accounts payable, accrued expenses and others (Note 6)    18,669    26,002  


 Total liabilities    121,915    198,950  


Commitments and Contingencies (note 15)  
 Minority interests, net    120    5,984  


   
   
                      SHAREHOLDERS' EQUITY (Note 7)   
 
4% Cumulative Convertible Preferred Stock, $5 par value; authorized  
 189,287 shares; issued 114,198 and 124,024 shares; outstanding  
110,848 and 120,674 Shares    571    620  
   
6-1/2% Cumulative Convertible Preferred Stock, $5 par value; authorized  
988,055 shares; issued 641,423 and 662,219 shares; outstanding 518,887  
 and 539,683 shares    3,207    3,311  
   
Class A Stock $1 par value; authorized 60,000,000 shares; issued  
25,826,821 and 25,715,303 shares; outstanding 20,075,782 and 19,883,639  
 shares    25,827    25,715  
   
Additional paid-in capital    58,252    58,211  
   
Retained earnings    51,223    57,524  
   
Accumulated other comprehensive loss    (19,518 )  (14,272 )
   
Treasury stock, at cost    (30,693 )  (31,096 )


   
   
 Total shareholders' equity    88,869    100,013  


   
 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY   $ 210,904   $ 304,947  



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

34



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

Fiscal Year Ended December 31,
2005
2004
2003
(U.S. Dollars in thousands)
 
Cash flows from operating activities:                
Net (loss) income   $ (5,958 ) $ (18,385 ) $ 8,847  
Adjustments to reconcile net (loss) income to net  
    cash provided by operating activities:  
Equity in earnings of affiliates    (6,666 )  (4,031 )  (2,526 )
Realized and unrealized net gains on  
investments    (468 )  (7,893 )  (29,813 )
Loss (gain) on sale of real estate rental property    --    123    (69 )
Depreciation expense    1,978    2,168    2,173  
Amortization income from tenants deposits    (1,876 )  (1,944 )  (1,577 )
Impairment of investments    13,984    38,811    13,144  
Minority interests    (4,467 )  (4,130 )  1,940  
Translation (gain) loss    2,220    (194 )  3,061  
Decrease (Increase) in other assets    14,006    537    (6,944 )
(Decrease) increase in accounts payable, accrued  
 expenses and other    6,387    (18,273 )  8,753  
Investments made in trading securities    (12,868 )  (36,811 )  (54,411 )
Proceeds from sale of trading securities    32,595    59,834    39,370  
Dividends received from affiliates    4,335    3,277    5,638  



        
Net cash provided by (used in) operating activities .    43,202    13,089    (12,414 )



        
Cash flows from investing activities:  
 Deposits, notes and loans receivable collected    2,872    14,935    1,888  
 Deposits, notes and loans receivable granted    (1,024 )  (6,696 )  (3,772 )
 Investments made in:  
 Affiliates and others    (30,621 )  (6,295 )  (1,367 )
 Proceeds from sale of investments:  
 Affiliate Company    3,041    --    19,511  
 Others    72,315    16,556    --  
 Return of capital by partnership    --    --    213  
 Capital improvements    (9,884 )  (1,075 )  (823 )
 Acquisition of minority interest    --    --    (481 )
 Proceeds from sale of real estate property, net    --    236    1,350  



        
 Net cash provided by investing activities    36,699    17,661    16,519  




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

35



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

Fiscal Year Ended December 31,
2005
2004
2003
(U.S. Dollars in thousands)
 
Cash flows from financing activities:                
Notes and loans payable received   $ 8,869   $ 6,463   $ 19,871  
Long term loan received by partnership  
minority    2,050    --    --  
Notes and loans payable repaid    (78,875 )  (23,655 )  (1,934 )
Proceeds from exercise of stock options    251    --    --  
Debentures repaid    (2,023 )  (1,753 )  (19,271 )
(Distribution) contribution to partnership by minority interests    (3,567 )  40    --  
Dividends paid on preferred stock    (191 )  (200 )  (213 )



   
Net cash used in financing activities    (73,486 )  (19,105 )  (1,547 )



Effect of exchange rate changes on cash and  
    cash equivalents    281    1,401    457  



Net increase in cash and cash equivalents    6,696    13,046    3,015  
Cash and cash equivalents at beginning of year    17,618    4,572    1,557  



   
Cash and cash equivalents at end of year   $ 24,314   $ 17,618   $ 4,572  



   
Supplemental Disclosure of Cash Flow Information  
Cash paid during the year:  
Interest    2,535    5,170    5,187  



   
Income taxes paid   $ 68   $ 3,763   $ 2,053  



   
Proceeds on trading securities received from realization of an  
investment   $ 3,316   $ 2,267    --  



   
Supplemental disclosure of non cash operating Activities:  
Dividend in kind from an affiliate   $ 7,088   $ --   $ --  




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

36



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

Fiscal Year Ended December 31,
2005
2004
2003
(U.S. Dollars in thousands, except share
amounts per share data)

 
4% PREFERRED STOCK                
Balance, beginning of year   $ 620   $ 660   $ 697  
Conversion of 9,826, 7,928 and 7,439 shares  
   into Class A Stock    (49 )  (40 )  (37 )



Balance, end of year   $ 571   $ 620   $ 660  



   
6-1/2% PREFERRED STOCK  
Balance, beginning of year   $ 3,311   $ 3,487   $ 3,532  
Conversion of 20,796, 35,161 and 9,070 shares  
    into Class A Stock    (104 )  (176 )  (45 )



Balance, end of year   $ 3,207   $ 3,311   $ 3,487  



   
CLASS A STOCK  
Balance, beginning of year   $ 25,715   $ 25,567   $ 25,503  
Issuance of shares upon conversion of  
Preferred Stock    112    148    64  



Balance, end of year   $ 25,827   $ 25,715   $ 25,567  



   
ADDITIONAL PAID-IN CAPITAL  
Balance, beginning of year   $ 58,211   $ 58,143   $ 58,125  
Conversion of Preferred Stock    41    68    18  



   
Balance, end of year   $ 58,252   $ 58,211   $ 58,143  



   
RETAINED EARNINGS  
Balance, beginning of year   $ 57,524   $ 76,109   $ 67,475  
Net (loss) income    (5,958 )  (18,385 )  8,847  
Loss from treasury stock reissued for exercised stock  
option    (152 )  --    --  
   
Dividends:  
4% Preferred Stock - $0.20 per share    (22 )  (24 )  (26 )
  6-1/2% Preferred Stock - $0.325 per share    (169 )  (176 )  (187 )



Balance, end of year   $ 51,223   $ 57,524   $ 76,109  




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

37



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

Fiscal Year Ended December 31,
2005
2004
2003
(U.S. Dollars in thousands, except share
amounts per share data)

 
TREASURY STOCK:                
   
 4% PREFERRED STOCK  
 Balance, beginning and end of year   $ (84 ) $ (84 ) $ (84 )



   
 6-1/2% PREFERRED STOCK  
 Balance, beginning and end of year   $ (1,853 ) $ (1,853 ) $ (1,853 )



   
 CLASS A STOCK  
Balance, beginning of year - 5,831,664,
 5,831,664 and 5,831,664 shares, at cost
   $ (29,159 ) $ (29,159 ) $ (29,159 )
   
 Issuance of 80,625 shares    403    --    --  



Balance, end of year - 5,751,039, 5,831, 664  
and 5,831,664 shares, at cost   $ (28,756 ) $ (29,159 ) $ (29,159 )



   
Balance, end of year   $ (30,693 ) $ (31,096 ) $ (31,096 )



   
ACCUMULATED OTHER COMPREHENSIVE  
LOSS  
 Cumulative translation adjustments:  
 Balance, beginning of year   $ (20,083 ) $ (20,596 ) $ (20,750 )
 Foreign currency translation adjustments    348    513    154  



 Balance, end of year    (19,735 )  (20,083 )  (20,596 )



   
 Unrealized gains (losses) on available for sale  
   securities:  
 Balance, beginning of year    5,811    2,749    (3,308 )
 Unrealized (losses) gains, net    (1,472 )  3,396    4,772  
 Sale of available-for-sale securities    (4,122 )  (334 )  1,285  



 Balance, end of year    217    5,811    2,749  



   
Balance, end of year   $ (19,518 ) $ (14,272 ) $ (17,847 )



   
Total Shareholders' equity   $ 88,869   $ 100,013   $ 115,023  




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

38



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

Fiscal year ended December 31,
2005
2004
2003
(U.S. Dollars in thousands)
 
Net (loss) Income     $ (5,958 ) $ (18,385 ) $ 8,847  
   
Other comprehensive (loss) income, net of tax:  
 Foreign currency translation adjustments    348    513    154  
 Unrealized gain (loss) on securities    (1,472 )  3,396    4,772  
Sale of available for sale securities    (4,122 )  --    --  



 Other comprehensive income (loss)    (5,246 )  3,909    4,926  



   
 Comprehensive (loss) income   $ (11,204 ) $ (14,476 ) $ 13,773  




Fiscal year ended December 31,
2005
2004
2003
(U.S. Dollars in thousands)
 
Related tax (expense) benefit of other comprehensive                
     (loss) income:  
 Foreign currency translation adjustments   $ (731 ) $ (71 ) $ (31 )
 Unrealized gains on securities   $ 3,012   $ (1,648 ) $ (2,688 )

* See note 1(m)

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

39



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

Note 1 Summary of Significant Accounting Policies

(a) General

  (1) Ampal is a New York corporation founded in 1942. The Company primarily acquires interests in businesses located in the State of Israel or that are Israel-related.

  (2) As used in these financial statements, the term the “Company” refers to Ampal-American Israel Corporation (“Ampal”) and its consolidated subsidiaries. As to segment information see note 13.

  (3) The consolidated financial statements are prepared in accordance with generally accepted accounting principals (GAAP) in the United States.

  (4) The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

(b) Consolidation

        The consolidated financial statements include the accounts of Ampal and its controlled and majority owned subsidiaries. Inter-company transactions and balances are eliminated in consolidation.

(c) Translation of Financial Statement in Foreign Currencies

        For those subsidiaries and affiliates whose functional currency is other than the US Dollar, assets and liabilities are translated using year-end rates of exchange. Revenues and expenses are translated at the average rates of exchange during the year. Translation differences of those foreign companies’ financial statements are reflected in the cumulative translation adjustment accounts which are included in accumulated other comprehensive income (loss).

        In subsidiaries where the primary currency is the US Dollar, accounts maintained in currencies other than the U.S. Dollar are remeasured in to U.S. Dollars using the representative foreign exchange rate at the balance sheet date. Operational accounts and nonmonetary balance sheet accounts are measured and recorded at the rate in effect at the date of the transaction. The effects of foreign currency remeasurement are reported in current operations.

(d) Foreign Exchange Forward 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 qualify for hedge accounting. 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.

        At December 31, 2005, the Company did not have any open foreign currency forward exchange contracts to purchase or sell US Dollars.

40



(e) Investments

  (i) Investments in Affiliates

        Investments in which the Company exercises significant influence, generally 20% to 50% owned companies (“affiliates”), are accounted for by the equity method, whereby the Company recognizes its proportionate share of such companies’ net income or loss and in other comprehensive income its proportional share in translation difference on net investments and in other comprehensive income (loss). The Company reduces the carrying value of its investment in an affiliate if an impairment in value of that investment is deemed to be other than temporary.

  (ii) Investments in Marketable Securities

        Marketable equity securities, other than equity securities accounted for by the equity method, are reported based upon quoted market prices of the securities. For those securities, which are classified as trading securities, realized and unrealized gains and losses are reported in the statements of income (loss). Unrealized gains and losses net of taxes from those securities, that are classified as available-for-sale, are reported as a separate component of shareholders’ equity and are included in accumulated other comprehensive income (loss) until realized. Decreases in value determined to be other than temporary on available-for-sale securities are included in the statements of income (loss).

  (iii) Cost Basis Investments

        Equity investments of less than 20% in non-publicly traded companies are carried at cost. Changes in the value of these investments are not recognized unless an impairment in value is deemed to be other than temporary.

(f) Risk Factors and Concentrations

        Financial instruments that subject the Company to credit risk consist primarily of cash, cash equivalents, bank deposits, marketable securities and notes and loans receivable. The Company invests cash equivalents and short-term investments through high-quality financial institutions. The Company’s management believes that the credit risk in respect of these balances is not material.

        The company performs on going credit evaluation of its receivables allowance for doubtful accounts.

(g) Real – Estate Property

        The assets are recorded at cost, depreciating these costs over the expected useful life of the related assets.

        Real-Estate property of a subsidiary, which existed at the time of the subsidiary’s acquisition by the company, are included at their fair value as that date.

        The Company applies the provisions of SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived assets” (“SFAS 144”). SFAS 144 requires that long-lived assets, to be held and used by an entity, be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Under SFAS 144, if the sum of the expected future cash flows (undiscounted and without interest charges) of the long-lived assets is less than the carrying amount of such assets, an impairment loss would be recognized, and the assets are written down to their estimated fair values.

41



(h) Leasehold improvements

        Fixed asserts leased by the companies under capital leases are classified as the companies’ assets and are recorded, at the inception of the lease, at the lower of the asset’s fair value or the present value of the minimum lease payments (not including the financial component). Leasehold improvements are amortized by the straight-line method over the term of the lease, which is shorter than the estimated useful life of the improvements.,

(i) Income Taxes

        The Company applies the asset and liability method of accounting for income taxes, whereby deferred taxes are recognized for the tax consequences of “temporary differences” by applying estimated future tax effects of differences between financial statements carrying amounts and the tax bases of existing assets and liabilities. Deferred tax assets are created to the extent management believes that it is more likely than not that it will be utilized, otherwise a valuation is provided for those assets that do not qualify under this term.

        Deferred income taxes are not provided on undistributed earnings of foreign subsidiaries adjusted for translation effect totaling approximately $29.5 million in 2004 and $0 in 2005, since such earnings are currently expected to be permanently reinvested outside the United States. If the earnings were not considered permanently invested, the Company would have paid approximately $10.3 million in 2004 and $0 in 2005 in deferred income taxes.

        Income taxes are provided on equity in earnings of affiliates, gains on issuance of shares by affiliates and unrealized gains on investments. Ampal’s foreign subsidiaries file separate tax returns and provide for taxes accordingly.

(j) Revenue Recognition

        Rental income is recorded over the rental period. Revenues from services provided to tenants and country-club subscribers are recognized ratably over the contractual period or as services are performed. Guaranteed dividend payments from Motorola are recorded in the statement of income (loss) over the guaranteed period (see also note 2(b)). Revenue from amortization of tenant deposits is calculated at a fixed periodic rate based on the specific terms in the occupancy agreement signed with the tenants.

(k) Cash Equivalents

        Cash equivalents are short-term, highly liquid investments that have original maturities of three months or less and that are readily convertible to cash.

(l) Earning (loss) per share (EPS)

        Basic and diluted net earning (loss) per share are presented in accordance with SFAS No. 128 “Earnings per share” (“SFAS No. 128”), and as from 2004, but with retroactive effect, with EITF 03-06 “participating securities and the two-class method under FAS 128", for all periods presented. In 2005 and 2004, all outstanding stock options and preferred shares have been excluded from the calculation of the diluted loss per share because all such securities are anti-dilutive for these periods presented. Also, participating 4% Convertible Preferred Stock were not taken into account in the computation of the basic EPS for those years since its shareholders do not have contractual obligation to share in the losses of the Company. In 2003, the basic EPS was computed using the two-class method. The implementation of EITF 03-06 to prior periods resulted in immaterial change (less than $0.01) in the basic EPS for 2003. The total number of common shares related to outstanding options and preferred shares excluded from the calculations of diluted net loss per share was 2,024,500 and 2,064,500 for the years ended December 31, 2005 and 2004, respectively. As to data used in the per share computation see Note 9 .

42



(m) Comprehensive Income

        SFAS No. 130, “Reporting Comprehensive Income”, (“SFAS No. 130”) established standards for the reporting and display of comprehensive income (loss), its components and accumulated balances in a full set of general purpose financial statements. The Company’s components of other comprehensive income (loss) are net income (losses), income (loss) from selling available for sale investments, net unrealized gains or losses on investments held as available for sale and foreign currency translation adjustments, which are presented net of income taxes. Comprehensive income in the consolidated statements of comprehensive income (loss) in the years 2004 and 2003 does not include amounts for realized gain on available for sale securities, as the amounts are not material.

(n) Employee Stock Based Compensation

        The Company accounts for all employee stock options plans under APB Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations. Accordingly, the compensation cost relating to stock options is charged on the date of grant of such options, to shareholders’ equity, under deferred compensation, and it thereafter amortized by the straight – line method and charged against income over vesting period. No compensation costs were incurred in the years ended December 31, 2005, 2004 and 2003, because the exercise price on the date of grant equals fair value of the stock.

        SFAS No. 123 “Accounting for Stock-Based Compensation” (“SFAS No. 123”) as amended by SFAS 148 established a fair value-based method of accounting for employee stock options or similar equity instruments and encourages adoption of such method for stock compensation plans. However, it also allows companies to continue to account for those plans using the accounting treatment prescribed by APB No. 25. The Company has elected to continue accounting for employee stock option plans according to APB No. 25 and accordingly discloses pro forma data assuming the Company had accounted for employee stock option grants using the fair value based method as defined in SFAS No. 123.

        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 would have been reduced as follows:

Fiscal Year Ended December 31,
2005
2004
2003
(In thousands, except per share data)
 
Basic EPS:                      
   
Net (loss) income:    As reported   $ (5,958 ) $ (18,385 ) $ 8,847  
   
Less - stock based  
compensation expense  
Determined under fair value  
method        (874 )  (569 )  (496 )



   
    Pro forma    (6,832 )  (18,954 )  8,351  



   
    As reported(1)   $ (0.31 ) $ (0.94 ) $ 0.42  
    Pro forma(1)   $ (0.35 ) $ (0.97 ) $ 0.40  

43



Fiscal Year Ended December 31,
2005
2004
2003
(In thousands, except per share data)
 
Diluted EPS:                      
   
    As reported   $ (0.3 1) $ (0.9 4) $ 0.40  
    Pro forma   $ (0.3 5) $ (0.9 7) $ 0.38  

  (1)After deduction of accrued Preferred Stock Dividend (in thousands) of $191 and $200 and $213, for the years 2005, 2004 and 2003, 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 weighted average assumptions for 2005, 2004 and 2003, respectively: (1) expected life of options of 5 years; (2) dividend yield of 0%; (3) volatility ranging from 46% to 60%; and (4) risk-free interest rate ranging from 3.3% to 4.08%.

(o) Treasury stock

        These shares are presented as a reduction of shareholders’ equity at their cost to the Company.

(p) Recently Issued AccountingPronouncements

        For 123R (Revised 2004) Share Based Payment

        In December 2004, the Financial Accounting Standards Board (“FASB”) issued the revised Statement of Financial Accounting Standards (“FAS”) No. 123, Share-Based Payment (FAS 123R), which addresses the accounting for share-based payment transactions in which the Company obtains employee services in exchange for (a) equity instruments of the Company or (b) liabilities that are based on the fair value of the Company’s equity instruments or that may be settled by the issuance of such equity instruments. In March 2005, the SEC issued Staff Accounting Bulletin No. 107 (SAB 107) regarding the SEC’s interpretation of FAS 123R.

        FAS 123R eliminates the ability to account for employee share-based payment transactions using APB Opinion No. 25 – “Accounting for Stock Issued to Employees”, and requires instead that such transactions be accounted for using the grant-date fair value based method. This Statement will be effective as of the beginning of the first interim period after June 15, 2005 (January 1, 2006 for the Company). Early adoption of FAS 123R is encouraged. This Statement applies to all awards granted or modified after the Statement’s effective date. In addition, compensation cost for the unvested portion of previously granted awards that remain outstanding on the Statement’s effective date shall be recognized on or after the effective date, as the related services are rendered, based on the awards’ grant date fair value as previously calculated for the pro-forma disclosure under FAS 123.

        The Company estimates that the cumulative effect of adopting FAS 123R, as of its adoption date by the Company (January 1, 2006), based on the awards outstanding as of December 31, 2005, will not be material. This estimate does not include the impact of additional awards, which may be granted, or forfeitures, which may occur subsequent to December 31, 2005 and prior to the adoption of FAS 123R.

        The Company expects that upon the adoption of FAS 123R, the Company will apply the modified prospective application transition method, as permitted by the Statement. Under such transition method, upon the adoption of FAS 123R, the Company’s financial statements for periods prior to the effective date of the Statement will not be restated.

44



        The Company expects, based on the awards outstanding as of December 31, 2005, that this statement will have an estimated effect of $0.8 million on its financial position and results of operations in 2006.

FAS 154 - No accounting Changes and Error Corrections - a replacement of APB Opinion No. 20 and FASB Statement No. 3

        In June 2005, the Financial Accounting Standards Board issued FAS No. 154,“Accounting Changes and Error Corrections – a replacement of APB Opinion No. 20 and FASB Statement No.3". This Statement generally requires retrospective application to prior periods’ financial statements of changes in accounting principle. Previously, Opinion No. 20 required that most voluntary changes in accounting principle were recognized by including the cumulative effect of changing to the new accounting principle in net income of the period of the change. FAS 154 applies to all voluntary changes in accounting principle. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. When a pronouncement includes specific transition provisions, those provisions should be followed. This Statement shall be effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005 (Year 2006 for the Company). We do not expect the adoption of this statement will have a material impact on our results of operations, financial position or cash flow.

(q) Reclassifications

        Certain comparative figures have been reclassified to conform to the current year presentation.

Note 2 Acquisitions, Dispositions and Impairments

(a) In 2005, the Company made the following investments:

  1. On December 1, 2005 the Company acquired a 2% interest in EMG from Merhav. EMG is an Egyptian joint stock company organized in accordance with the Egyptian Special Free Zones system which has been given the right to export natural gas from Egypt to Israel and other locations in the East Mediterranean basin and other countries. Egyptian natural gas shall reach the Israeli market via an underwater pipeline owned by EMG. Under the terms of the transaction, the Company acquired a 2% beneficial ownership in EMG for a purchase price of $29,960,000. Additionally, the Company was granted the exclusive right to negotiate to acquire a substantial portion of Merhav’s remaining shares of EMG. The Company also has the right for a period of time to require Merhav to repurchase the EMG interest.

  Yosef A. Maiman, the chairman of the Company’s Board of Directors and the Company’s controlling shareholder, is the sole owner of Merhav. The transaction was approved by a special committee of the Board of Directors composed of the Company’s independent directors. Houlihan Lokey Howard & Zukin Financial Advisors, Inc. acted as financial advisors to the special committee.

  2. Additional investment of $0.7 million in Fimi Opportunity Fund, L.P. (“Fimi”).

  3. A loan to Bay Heart Ltd. of $0.9 million, a shopping mall.

45



(b) In 2005, the Company made the following dispositions:

  1. During the third and fourth quarter of 2005, one of the holdings of Ampal’s investee companies, TP received proceeds at the amount of $1.1 million from selling all its assets in Grapes Communications N.V./S.A. and its holdings in PSINet Europe B.V.

  2. On October 3, 2005 the Company, through Ampal Communications L.P., completed the sale to Motorola Israel Ltd. of all of its 25% holdings of MIRS pursuant to the Agreement. In connection with the sale of its holdings of MIRS, Ampal Communications L.P. received approximately US $89 million of total proceeds, composed of US $67.7 million for the purchase price and an additional US $21.3 million related to guaranteed dividend payments. During the third quarter of 2005, the Company recorded a $13.3 million loss from impairment relating to this investment.

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

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

  5. On July 11, 2005, the Company sold its holdings in Xpert Ltd. for $0.8 million and recorded a loss of $0.2 million.

  6. On March 8, 2005, the Company sold its holdings in Modem Art Ltd. for $4.4 million and recorded a gain of $3.3 million.

(c) In 2005, the Company recorded loss from impairment of investments and loan of $14.0 million as follows:

  1. MIRS Ltd. ($13.3 million)
  2. Shiron Ltd. ($0.6 million)
  3. Other loans ($0.1 million)

(d) In 2004, the Company made investments aggregating $6.3 million, as follows:

  1. The Company invested EUR 4.9 million (approximately US$5.8 million) in “Telecom Partners Limited Partnership”, a newly formed entity that will serve as a platform for investments in the telecommunication industry predominantly outside of Israel. Ampal holds 33.3% of TP which currently holds investments in two European telecom service providers: PSINet Europe B.V. (“PSInet”) and Grapes Communications N.V./S.A.

  2. A loan of $0.2 million to ShellCase, the principal business of which is the packaging process of semiconductor chips.

  3. An investment of $0.3 million in Fimi Opportunity Fund, L.P. (Fimi).

(e) In 2004, the Company made the following dispositions:

  1. On February 19, 2004, Ampal sold its holdings in XACCT Technology Ltd. for $3.8 million.

46



  2. During May 2004, the Company sold 49% of its holdings in PowerDSine Ltd. for approximately $7.4 million.

  3. During the third quarter of 2004, PSInet, one of the holdings of Ampal’s investee company, TP, sold all its assets to large telecommunications providers. Following the sale, a portion of the proceeds was distributed to TP, of which Ampal received $7.1 million and recorded a gain of $2.5 million in connection with this transaction. The remaining carrying value is $1.2 million.

(f) In 2004, the Company recorded loss from impairment of investments of $38.8 million as follows:

  1. MIRS Ltd. ($30 million)*
  2. Star Management of Investment ($1.6 million)
  3. Courses Investment in Technology Ltd. ($0.3 million)
  4. VisionCare Opthalmic Technologies ($0.5 million investment)
  5. ShellCase Ltd. ($3.8 million)
  6. Identify Solutons Ltd. ($0.7 million)
  7. Xpert Integrated Systems Ltd. ($1.7 million)
  8. Peptor Ltd. ($0.2 million).

  * Management determined that a reduction in the carrying value of MIRS by $30 million is appropriate at the time due to the then existing relationship with Motorola.

(g) In 2003, the Company made investments aggregating $ 1.8 million, as follows:

  1. An additional investment of $0.9 million in ShellCase Ltd. The company holds an approximate 13.84% equity interest in ShellCase Ltd.

  2. An additional investment of $0.3 million in Star Management of Investment No. II (2000) L.P., a venture capital fund which focuses on investment in communication, Internet, software and medical devices.

  3. An investment of $0.2 million in Fimi Opportunity Fund, L.P.

  4. A loan of $0.1 million to Shiron Ltd., a developer and manufacturer of two-way satellite communications products.

  5. A loan to Netformx Ltd. of $0.2 million, a developer of network design tools.

  6. A loan to Bay Heart Ltd. of $0.1 million, a shopping mall.

(h) During 2003, the Company, which previously held a 20.4% interest in Granite, sold 9.9% of its holding for $19.5 million. Consequently, the Company’s investment in Granite, which was previously accounted for by the equity method, was accounted for as an investment in trading marketable securities. (The remaining holding in Granite was sold in 2004).

47



(i) In 2003, the Company recorded loss from impairment of investments of $13.1 million as follows:

  1. XACCT Technologies Ltd. (“XACCT”) ($9.0 million investment).
  2. Carmel Container Ltd. ($2.0 million).
  3. Identify Solution Ltd. ($1.3 million investment).
  4. Cute Ltd. ($0.2 million loan).
  5. Real estate in Migdal Haemek ($0.6 million).

Note 3 Investments in Marketable Securities

        The Company classifies investments in marketable securities as trading securities or available-for-sale securities.

  (a) Trading Securities

  The cost and market values of Trading securities at December 31, 2005 and 2004 are as follows:

Cost
Unrealized
Gains

Market
Value

(U.S. Dollars in thousands)
 
2005     $ 36,316   $ 71   $ 36,387  



       
2004   $ 43,353   $ 2,012   $ 45,365  




  (b) Available-For-Sale Securities

  The cost and market values of available-for-sale securities consisting of marketable securities only at December 31, 2005 and 2004 are as follows:

Cost
Unrealized
Gains

Market
Value

(U.S. Dollars in thousands)
 
2005     $ 1,855   $ 333   $ 2,188  



       
2004   $ 2,164   $ 2,904   $ 5,068  




48



Note 4 Other Assets

        The balance of “Other Assets” as of December 31, 2005 and 2004, is composed of the following items:

As of December 31,
2005
2004
(U.S. Dollars in thousands)
 
Deferred tax assets     $ 15,681   $ 23,023  
          
Income receivables    480    14,987  
          
Account receivable-trade    1,132    1,094  
          
Deferred expenses    1,424    353  
          
Leasehold improvements    2,595    2,931  
          
                             Others    468    760  


          
    $ 21,780   $ 43,148  



Note 5 Notes and Loans Payable

        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 and 2010.

        The Company financed a portion of the $9.8 million real estate acquisition by 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 Hapoalim, 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 December 31, 2005 the Company had drawn $2.5 million from the facility. As of December 31, 2005 and December 31, 2004 the amounts outstanding under these loans were $13.5 million and $7.7 million, respectively. The loans excluding the Phoenix loan, mature in up to one year and have interest rates range between 5.4% 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 and bank accounts. The Company also issued guarantees in the amount of $3.6 million in favor of tenants of Am-Hal in order to secure their deposits

        The Company also finances its general operations and other financial commitments through bank loans with Hapoalim. The long-term loans in the amount of $31.3 million mature through 2006-2010.

        Other long term borrowings in the amount of $1.9 million are linked to the Israeli C.P.I and mature between 2006 and 2010, of which an amount of $1.4 million bears no interest. The remaining $0.5 million bears an annual interest of 5.7%.

49



        The weighted average interest rates on the balances of short-term borrowings at year-end are as follows: 6.0% on $15.0 million and 3.5% on $13.0 million in 2005 and 2004, respectively.

Payments due by period:

(US. Dollars in thousands)
Total
Less than 1
year

1-3 years
3-5 years
More
than
5 years

 
Long-Term Debt     $ 35,406   $ 10,443   $ 12,412   $ 9,521   $ 3,030  
 
Short--Term Debt   $ 14,960   $ 14,960  

Note 6 Accounts payable accrued expenses and others

(a) Composition:

As of December 31,
2005
2004
(U.S. Dollars in thousands)
 
Deferred tax liabilities     $ 3,310   $ 15,886  
 
Deferred income and accrued expenses    2,283    3,664  
 
Excess of share in losses of affiliate over the  
investment    3,456    3,342  
 
Related party    5,081    41  
 
Deferred expenses from warrants*    1,300    --  
 
Others    3,239    3,069  


 
    $ 18,669   $ 26,002  



* As part of the loan agreement between Am-Hal and Phoenix Insurance Company, the lender is granted a warrant to purchase 19.9% (on fully diluted basis) of the issued and paid capital of Am - Hal (the “warrant”). The warrant is exercisable during a period of 4 years and can be exercised for payment of $5,960,000. The number of shares under the warrant is adjusted for stock splits or bonus shares, and also adjusted for any new issuances to third parties; in such case the lender’s number of shares under the warrant will increase respectively, so as to provide the lender with 19.9% of the outstanding shares after the issuance to a third party. The exercise price for the additional shares (19.9% of the shares issued to the third party) will be equal the price paid by such third party. Also if there is a public offering in a price less then the exercise price of the warrant, the exercise price of the warrant will be adjusted to represent the price in the public offering discounted by 15%. The warrant can only be exercised for the full 19.9% – there can be no partial exercise at any time. The value of the warrant was estimated at approximately $1.3million and recorded as deferred expenses (Note 4). No amortization is recorded in the reported period, since it is immaterial.

50



(b) Accrued severance liabilities

  Israeli labor laws and agreements require payment of severance pay upon dismissal of an employee or upon termination of employment in certain other circumstances. Ampal severance pay liability in Israel, which reflects the undiscounted amount of the liability as if it was payable at each balance sheet date, is calculated based upon length of service and the latest monthly salary (one month’s salary for each year worked).

  The Company’s liability for severance pay pursuant to Israeli law is partly covered by insurance policies. The accrued severance pay liability of $ 0.8 million, net of deposits made to insurance policies of $ 0.5 million, is included in accounts payable, accrued expenses and other liabilities.

  Severance pay net increase (decrease) was approximately ($37,800), $21,000, and $134,000 in 2005, 2004, and 2003, respectively.

  The Company expects that the payments relating to future benefits to its employees upon their retirement at normal retirement age in the next 10 years will be immaterial. These payments are determined based on recent salary rates and do not include amounts that might be paid to employees that will cease working with the Company, before their normal retirement age or amount paid to employees that their normal retirement age extends beyond the year 2015.

Note 7 Shareholders’ Equity

Capital Stock

        The 4% and 6-1/2% preferred shares are convertible into five and three shares of Class A Stock, respectively. At December 31, 2005, a total of 2,375,500 shares of Class A Stock are reserved for issuance upon the conversion of the Preferred Stock and the exercise of 2,024,500 options.

        The 4% and 6-1/2% Preferred Stock are preferred as to dividends on a cumulative basis. Additional dividends out of available retained earnings, if declared, are payable on an annual non-cumulative basis as a percentage of par value as follows:

  (i) up to 4% on Class A Stock, then

  (ii) on 4% Preferred Stock and Class A Stock ratably.

        Preferred shares are non-voting, unless dividends are in arrears for three successive years. At December 31, 2005, there are no dividends in arrears.

Note 8 Stock Options

        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 December 31, 2005, 30,000 options of the 1998 Plan are fully vested and outstanding.

51



        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 December 31, 2005, 1,994,500 options under the 2000 Plan are outstanding.

        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. On April 25, 2002, the controlling shareholder of the Company, Rebar Financial Corp. sold all of its stock in the Company to Y.M. Noy Investments Ltd., accordingly, the 329,000 outstanding options granted under the Plans were immediately exercisable.

As of December 31, 2005, 2,375,500 options under both Plans are available for future grant.

Transactions under both Plans were as follows:

The options granted under the plans vest in equal installment every three months, except that a portion of the options may vest on an accelerate basis upon the achievement of certain performance criteria.

Fiscal Year Ended
December 31, 2005

Options
Weighted
Average
Exercise
Price

(In thousands, except per
share data)

 
Outstanding at beginning of year      2,064   $ 3.39  
Granted at market price    135   $ 3.69  
Forfeited/Expired    (175 ) $ 3.85  

Outstanding at end of year    2,024   $ 3.37  


   
Exercisable at end of year    1,044   $ 3.29  


   
Weighted average grant date fair value of options granted        $ 1.68  

   
Weighted average remaining contractual life         7.72  


52



Fiscal Year Ended
December 31, 2004

Options
Weighted
Average
Exercise
Price

(In thousands, except per
share data)

 
Outstanding at beginning of year      1,396   $ 3.46  
Granted at market price    886   $ 3.49  
Forfeited/Expired    (218 ) $ 4.22  

Outstanding at end of year    2,064   $ 3.39  


   
Exercisable at end of year    678   $ 3.43  


   
Weighted average grant date fair value of options granted        $ 1.89  

   
Weighted average remaining contractual life         8.40  


---------------
Fiscal Year Ended
December 31, 2003

Options
Weighted
Average
Exercise
Price

(In thousands, except per
share data)

 
Outstanding at beginning of year      2,852   $ 14.77  
Granted at market price    58   $ 3.69  
Forfeited/Expired    (1,514 ) $ 24.78  

Outstanding at end of year    1,396   $ 3.46  


   
Exercisable at end of year    500   $ 3.83  


   
Weighted average grant date fair value of options granted        $ 2.13  

   
Weighted average remaining contractual life         8.20  


53



Note 9 Earnings (Loss) Per Class A Share

A reconciliation between the basic and diluted EPS computations for net earnings is as follows:

Fiscal Year Ended December 31, 2005
(Loss)
Shares
Per Share
Amounts

(In thousands, except per share data)
 
Basic and diluted EPS(2)                
 Net (loss) attributable to Class A Stock   $ (6,149 )(1)  19,967   $ (0.3 1)




Fiscal Year Ended December 31, 2004
(Loss)
Shares
Per Share
Amounts

(In thousands, except per share data)
 
Basic and diluted EPS(2)                
 Net (loss) attributable to Class A Stock   $ (18,585 )(1)  19,841   $ (0.9 4)




Fiscal Year Ended December 31, 2003
Income
Shares
Per Share
Amounts

(In thousands, except per share data)
 
Basic EPS:                
     Net income attributable to Class A Stock   $ 8,355 (1)(3)  19,713   $ 0.42  



            
Diluted EPS:  
     Net income attributable to Class A Stock   $ 8,847    22,120   $ 0.40  




(1) After deduction of Preferred Stock dividends (in thousands) of $191, $200 and $213 in 2005, 2004 and 2003, respectively.

(2) Options to purchase 2,024,500 and 2,064,500 shares of common stock were outstanding as of December 31, 2005 and 2004, respectively, and they were not included in the computation of diluted EPS because of their anti-dilutive effect.

(3) After allocation of net income to the participating 4% Cumulative Convertible Preferred Stock.

54



Note 10 Income Taxes

Fiscal Year Ended December 31,
2005
2004
2003
(U.S. Dollars in thousands)
 
The components of current and deferred income tax                
   expense (benefit) are:  
Current:  
   Federal   $ -   $ -   $ 275  
   Foreign    -    1,472    13  
 
Deferred:  
   State and local    3    -    -  
   Federal    (2,955 )  (20,404 )  5,202  
   Foreign    103    8,734    (5,056 )



   Total   $ (2,849 ) $ (10,198 ) $ 434  



   
   
The domestic and foreign components of  
   income (loss) before income  
   taxes are:  
   
Domestic   $ (14,046 ) $ (29,286 ) $ 2,316  
Foreign    772    (3,427 )  8,905  



     Total   $ ( 13,274 ) $ ( 32,713 ) $ 11,221  



   
A reconciliation of income taxes between the  
   statutory and effective tax is as follows:  
   
Federal income tax (benefit) at 34%   $ ( 4,513 ) $ (11,123 ) $ 3,815  
Taxes on foreign loss below U.S. rate    (12,796 )  (806 )  (3,817 )
Changes in valuation allowance    14,639    2,304    281  
Other    (179 )  (573 )  155  



     Total effective tax: 22%, 31%,and 4%   $ (2,849 ) $ (10,198 ) $ 434  




As of December 31,
2005
2004
 
Deferred tax assets:            
The components of deferred tax assets and liabilities are as  
follows:  
   Net operating loss and capital loss carryforwards   $ 35,925   $ 25,439  
   Unrealized losses on investments    1,132    4,321  
   Foreign tax credits carryforwards    5,456    5,456  


Total deferred assets    42,513    35,216  
   Valuation allowance    (26,832 )  (12,193 )


Net deferred tax assets    15,681    23,023  


   
Deferred tax liabilities:  
   Tax on equity in earnings of affiliates    2,470    3,356  
    Cost basis of investment greater than tax bases    -    10,877  
    Other    840    1,653  


Total deferred tax liability    3,310    15,886  


   
Net deferred tax assets    $ 12,371   $ 7,137  



55



        As of December 31, 2005, valuation allowance is provided against tax benefits on foreign net operating loss carryforwards of $26.8 million.

        As of December 31, 2005, the Company has foreign tax credits of $5.5 million that will expire in the years 2009 through 2014.

        As of December 31, 2005, the Company has U.S. Federal net operating loss carryforwards of approximately $29.5 million that will expire in the years 2021 through 2024. The utilization of net operating loss carryforwards may be subject to substantial annual limitations if there has been a significant “change in ownership”. Such a “change in ownership”, as described in Section 382 of the Internal Revenue Code, may substantially limit the Company’s utilization of the net operating loss carryforwards.

Note 11 Investments in Affiliates

        The companies accounted for by the equity method and the Company’s share of equity in those investees are:

As of December 31,
2005
2004
%
%
 
Bay Heart Limited      37    37  
Carmel Containers Systems Limited    21 .8  21 .8
Coral World International Limited    50    50  
CUTe Ltd.    --    20  
Epsilon Investment House Ltd.    --    20  
Hod Hasharon Sport Center (1992) Limited  
   Partnership    50    50  
Ophir Holdings    42 .5  42 .5
Ophirtech Ltd.    --    42 .5
Renaissance Investment Company Ltd.    --    20  
Trinet Investment in High-Tech Ltd.    37 .5  37 .5
Trinet Venture Capital Ltd.    50    50  

        Combined summarized financial information for the above companies is as follows:

Fiscal Year Ended December 31,
2005
2004
2003
(U.S. Dollars in thousands)
 
Revenues     $ 140,197   $ 129,091   $ 119,323  
Gross profit    30,918    22,200    22,201  
Net income    15,803    8,184    9,858  

As of December 31,
2005
2004
(U.S. Dollars in thousands)
 
Property and equipment     $ 65,931   $ 80,927  
Other assets    134,700    173,579  


  Total assets   $ 200,631   $ 254,506  


   
Total liabilities, including bank borrowings   $ 143,217   $ 162,430  



56



Note 12 Other Income.

        Other revenues for each of the years ended December 31, 2005, and 2004 include accrual of guaranteed dividend payments from Motorola relating to the investment in MIRS of $ 7.1 million and $2.2 million from member subscription in the Country Club for 2005 (2004 – $2.2 million).

Note 13 Operating Segments Information

        SFAS 131 “Disclosure about Segments of an Enterprise and Related Information” establishes annual and interim reporting standards for an enterprise’s operating segments and related disclosures about its products, services, geographic areas and major customers. Segment information presented below results primarily from operations in Israel.

Fiscal Year Ended December 31,
2005
2004
2003
(U.S. Dollars in thousands)
 
Revenues:                
Finance   $ 12,475   $ 16,379   $ 38,368  
Real estate income    9,244    8,897    8,958  
Leisure-time    2,208    2,233    2,037  
Intercompany adjustments    (63 )  (76 )  (75 )



     23,864    27,433    49,288  
Equity in earning of affiliates    6,666    4,031    2,526  



Total   $ 30,530   $ 31,464   $ 51,814  



            
Equity in Earnings (losses) of Affiliates:   
Finance   $ 106   $ 1,523   $ 358  
Real estate rental    5,448    590    2,813  
Leisure-time    1,112    1,122    967  
Others    --    796    (1,612 )



             Total   $ 6,666   $ 4,031   $ 2,526  



            
Interest Income:   
  Finance   $ 1,586   $ 613   $ 538  
  Intercompany adjustments    (19 )  (23 )  (30 )



           Total   $ 1,567   $ 590   $ 508  



            
  Interest Expense:   
  Finance   $ 4,278   $ 4,246   $ 4,875  
  Real estate rental    836    540    605  
  Leisure-time    162    117    82  
  Intercompany adjustments    (19 )  (23 )  (31 )



           Total   $ 5,257   $ 4,880   $ 5,531  



            
  Pretax Operating (Loss) Income:   
  Finance   $ (20,472 ) $ (36,192 ) $ 9,765  
  Real estate rental    287    (963 )  (1,299 )
  Leisure-time    245    411    229  



     (19,940 )  (36,744 )  8,695  
  Equity in earning of affiliates    6,666    4,031    2,526  



           Total   $ (13,274 ) $ (32,713 ) $ 11,221  



            
  Income (Benefit) Tax Expense:   
  Finance   $ (2,970 ) $ (10,558 ) $ 422  
  Real estate rental    63    334    --  
  Leisure-time    58    26    12  



           Total   $ (2,849 ) $ (10,198 ) $ 434  



            
  Net Income:   
  Finance   $ (17,396 ) $ (24,111 ) $ 9,701  
  Real estate rental    5,672    (707 )  1,514  
  Leisure-time    1,299    1,507    1,184  
  Others    --    796    (1,612 )



     (10,425 )  (22,515 )  10,787  
  Minority interest, net    (4,467 )  (4,130 )  1,940



          Total   $ (5,958 ) $ (18,385 ) $ 8,847  



            
  Total Assets for year end:   
  Finance   $ 118,458   $ 225,577   $ 274,948  
  Real estate rental    76,117    64,128    67,577  
  Leisure-time    17,568    17,426    16,100  
  Intercompany adjustments    (1,239 )  (2,184 )  (4,258 )



           Total   $ 210,904   $ 304,947   $ 354,367  



            
  Investments in Affiliates for year end:   
  Finance   $ 8,360   $ 3,389   $ 3,499  
  Real estate rental    (3,456 )  10,987    8,662  
  Leisure-time    15,066    14,479    13,395  



  Total   $ 19,970   $ 28,855   $ 25,556  



            
  Capital Expenditures:  
  Finance   $ --   $ 5   $ 246  
  Real estate rental    9,794    774    425  
  Leisure-time    90    296    152  



       Total   $ 9,884   $ 1,075   $ 823  



            
  Depreciation, Amortization and Impairment:   
  Finance   $ 14,039   $ 38,984   $ 13,723  
  Real estate rental    (160 )  (111 )  (117 )
  Leisure-time    207    162    134  



       Total   $ 14,086   $ 39,035   $ 13,740  




57



        Corporate office expense is principally applicable to the financing operation and has been charged to that segment above. Revenues and pretax operating (loss) income above exclude equity in (losses) earnings of affiliates.

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

58



Note 14 Disclosures about Fair Value of Financial Instruments

        The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:

(a) Cash and Cash Equivalents

        For cash and cash equivalents, the carrying amount is a reasonable estimate of fair value (see Note 1(k)).

(b) Deposits, Notes and Loans Receivable

        The fair value of these deposits, notes and loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.

(c) Investments

        For financial instruments with maturities between 91 days and 1 year, and all marketable securities, the carrying amount is a reasonable estimate of fair value.

(d) Financial Instruments

        The fair value of the financial instruments included in other assets, accounts payable, and accrued expenses presented at a fair value.

(e) Commitments

        Due to the relatively short term of commitments discussed in Note 15, the contract value is considered to be at fair value.

(f) Financial Assets and Financial Liabilities

        The fair value of notes and loans payable, deposits payable and debentures outstanding is estimated by discounting the future cash flows using the current rates offered by lenders for similar borrowings with similar credit ratings and for the same remaining maturities.

As of December 31,
2005
2004
Carrying
Amount

Fair
Value

Carrying
Amount

Fair
Value

(U.S. Dollars in thousands)
 
Financial assets:                    
   
Cash and cash equivalents   $ 24,314   $ 24,314   $ 17,618   $ 17,618  
Deposits, notes and loans receivable    343    343    3,534    3,525  
Investments    38,575    38,575    50,433    50,433  




    $ 63,232   $ 63,232   $ 71,585   $ 71,576  




   
Financial liabilities:  
   
Notes and loans payable   $ 50,366   $ 50,362   $ 118,760   $ 117,743  
Debentures outstanding    -    -    2,036    2,036  




    $ 50,366   $ 50,362   $ 120,796   $ 119,779  





59



Note 15 Commitments and Contingencies

  (a) The combined minimum annual lease payments on Ampal’s corporate office and its subsidiary Country Club Kfar Saba Ltd. in 2005 were $ 0.3 million. The lease of the corporate offices expires in 2009 and the Kfar Saba lease expires in 2038. In the years 2006-2010, the combined annual lease payments on those premises will be in an aggregate amount of $ 1.4 million, and thereafter, an amount totaling $4.9 million.

  (b) AM-Hal provided a lien to Bank Hapoalim on AM-Hal properties in Rishon – Le Zion and Hod Hasharon to guarantee a loan of $10.4 million.

  (c) The Company has issued guarantees on bank loans to its investees and subsidiaries totaling $10.3 million as follows:

  (1) The Company provided a $3.6 million guarantee to AM–Hal tenants.

  (2) The Company provided a $5.8 million guarantee on indebtedness incurred by Bay Heart.

  (3) The Company provided a $0.9 million guarantee to Galha (1960) Ltd, for the payment of the Company’s subsidiary of a final judgment, if entered against the Company’s subsidiary. (See below)

  (d) The Company made a commitment to invest $2.8 million in Star II (2000 L.P.).

  (e) 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

60



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

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

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

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

  2. On May 24, 2004 and on May 31, 2004 the Defendants requested the district court to strike out the claim in limine, on the grounds that Ampal had allegedly not paid sufficient fees when filing the claim, and further requested an extension of the time for filing statements of defense until after the district court had reached a decision regarding the request to strike out the claim. Ampal and the Defendants filed various responses and on June 30, 2004, the district court requested the Attorney General to furnish an opinion regarding the Defendants’ request before issuing its own decision. On October 11, 2004 the Attorney General furnished its opinion that supported the Defendants’ request that Ampal should pay the fees calculated on the basis of the value of the requested remedies in the claim.

  On November 10, 2004 Ampal filed its response. The Court also decided that the statements of defense should be filed 10 days after it issues its decision regarding the striking out of the claim.

  3. On March 1, 2005, Ampal requested the district court to enter judgment against Peter Brum on the grounds that he failed to file a defense to the Company’s claim. On March 15, 2005, the district court granted Ampal’s request and entered judgment against Peter Brum. On March 17, 2005, the district court ordered Mr. Brum to acquire and purchase from Ampal the shares it holds in MIRS for a total company valuation of $ 765,998,000, which is the highest of the prices set forth in the complaint. The litigation with regard to the other defendants is ongoing. Peter Brum, Motorola and MIRS have appealed the district court’s judgment on numerous grounds. Ampal has filed responses to the appeal.

  4. On August 30, 2005, the Company, through Ampal Communications L.P. entered into a Stock Purchase and Indemnification Agreement, dated as of August 30, 2005, by and among Motorola Israel Ltd., Ampal Communications L.P. and MIRS (the “Agreement”) to sell Motorola Israel Ltd. all of its holdings of MIRS. In connection with the closing of the transactions contemplated by this Agreement the existing lawsuit among the parties and other relating to MIRS was dismissed.

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

61



  Galha

  On January 1, 2002, Galha (1960) Ltd. (“Galha”) filed a suit against the Company and other parties, including directors of Paradise Industries Ltd. (“Paradise”) appointed by the Company, in the Tel Aviv District Court, in the amount of NIS 10,249,609 ($2.2 million). Galha claimed that the Company, which was a shareholder of Paradise, and another shareholder of Paradise, misused funds that were received by Paradise from an insurance company for the purpose of reconstructing an industrial building owned by Galha and used by Paradise which burnt down. Paradise is currently involved in liquidation proceedings. Ampal issued a guarantee in favor of Galha for the payment of an amount of up to NIS 4,022,085 ($873,800) if a final judgment against the Company will be given.

  On May 26, 2003 the Company and the directors of Paradise appointed by the Company filed a third party claim against Arieh Israeli Insurance Company Ltd., in the Tel Aviv District Court, claiming that, to the extent the court decides that the directors of Paradise appointed by the Company will have to pay any amounts to Galha, Arieh will pay such amounts on behalf of the directors in accordance with the Directors and Officers insurance policy that the Company had at that time with Arieh. Arieh filed a statement of defense and stated that the policy does not cover the claim. At this stage, the Company cannot estimate the impact this claim will have on it.

Note 16 Subsequent Events

  None

Note 17 Quarterly Financial Information (Unaudited)

The table below provides the results of comprehensive income (loss) including the sale of available for sale securities. In the previously filed quarterly reports, the item “Sale of available for sale securities” was not included in the Statement of Comprehensive Income (Loss). The table below reflects the corrected comprehensive income (loss) figures.

Consolidated Statements of Comprehensive Income (loss) is presented for the following periods in 2005:

Three Months ended
March 31, 2005

Six Months Ended
June 30, 2005

Nine Months Ended
September 30, 2005

(U.S. Dollars in thousands)
Previously
reported

Restated
Previously
reported

Restated
Previously
reported

Restated
Net income (loss)     $ 6,728   $ 6,728   $ 4,217   $ 4,217   $ (6,413 ) $ (6,413 )






Other comprehensive (loss) income, net of tax:  
Foreign currency translation adjustment    (179 )  (179 )  (1,383 )  (1,383 )  408    408  
Unrealized gain (loss) on securities    (733 )  (733 )  (780 )  (780 )  (573 )  (573 )
Sale of available for sale securities    -    (4,166 )  -    (4,166 )  -    (4,166 )






Other comprehensive (loss) income    (912 )  (5,078 )  (2,163 )  (6,329 )  (165 )  (4,331 )






   
Comprehensive income (loss)   $ 5,816   $ 1,650   $ 2,054   $ (2,112 ) $ (6,578 ) $ (10,744 )







62



ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

  None.

ITEM 9A. 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 Company’s fourth fiscal quarter that have materially affected, or are reasonably likely to materially affect the Company’s internal control over financial reporting.

ITEM 9B. OTHER INFORMATION

  None

63



PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

MANAGEMENT

        The following table sets forth certain information regarding Ampal’s directors and executive officers as of March 6, 2006:

Name
Position
 
Yosef A. Maiman Chairman of the Board of Directors and Director
Jack Bigio (1) President, Chief Executive Officer and Director
Leo Malamud(1) Director
Dr. Joseph Yerushalmi(1) Director
Yehuda Karni(1) (2) (3)(4) Director
Eitan Haber(2) (3)(4) Director
Menahem Morag(2) (3)(4) Director
Irit Eluz CFO, Senior Vice President - Finance and Treasurer
Yoram Firon Vice President-Investments and Corporate Affairs and Secretary
Amit Mantsur Vice President-Investments
Giora Bar-Nir Vice President - Accounting and Controller


        The numbers listed below, which follow the names of some of the foregoing directors, designate committee membership:

  (1) Member of the Executive Committee of the Board which meets as necessary between regularly scheduled Board meetings and, consistent with certain statutory limitations, exercises all the authority of the Board.

  (2) Member of the Audit Committee of the Board which reviews functions of the outside auditors, auditors’ fees and related matters. Mr. Karni is the Chairman of the Audit Committee of the Board.

  (3) Member of the Stock Option and Compensation Committee of the Board.

  (4) Member of the Special Committee of the Board.

        In 2005, the Board met seven times and acted 4 times by written consent; the Executive Committee met two times and did not act by written consent; the Audit Committee met five times and did not act by written consent. The Stock Option and Compensation Committee met one time and did not act by written consent. The Special Committee met two times and did not act by written consent. All directors attended more than 75% of the aggregate of (1) the total number of Board meetings held during the period in 2005 for which such individual was a director and (2) the total number of meetings held by all committees of the Board on which such individual served in 2005 (during the period of such service). Each director of the Board is elected for a one year term and serves until his or her successor is duly elected and qualified.

        The following sets forth the ages of all of the above-mentioned directors and executive officers, all positions and offices with Ampal or its subsidiaries held by each director and officer and principal occupations during the last five years.

64



        YOSEF A. MAIMAN, 60, has been the Chairman of the Board of Ampal since April 25, 2002. Mr. Maiman has been President and Chief Executive Officer of Merhav M.N.F. Ltd. (“Merhav”), one of the largest international project development companies based in Israel, since its founding in 1975. Mr. Maiman is also the Chairman of the Board of Directors of Channel Ten, a commercial television station in Israel, a director of Eltek, Ltd. (“Eltek”), a developer and manufacturer of printed circuit boards, a member of the Board of Directors of the Middle East Task Force of the New York Council on Foreign Relations and Honorary Consul to Israel from Peru. Mr. Maiman is also member of the Board of Trustees of the Tel Aviv University, Chairman of the Israeli Board of the Jaffee Center for Strategic Studies at Tel Aviv University, a member of the Board of Governors of Ben Gurion University, and the Chairman of the Board of Trustees of the International Policy Institute for Counter Terrorism.

        JACK BIGIO, 40 has been the President and Chief Executive Officer of Ampal since April 25, 2002, and a director of Ampal since March 6, 2002. From 1996 until April 2002, Mr. Bigio served as Senior Vice President – Operations and Finance of Merhav. Mr. Bigio is also a director of Eltek, a member of the Board of Israel-America Chamber of Commerce & Industry and a member of Young Presidents’ Organization.

        LEO MALAMUD, 54, has been a director of Ampal since March 6, 2002. Since 1995, Mr. Malamud is Senior Vice President of Merhav. Mr. Malamud is also a director of Eltek.

        Dr. JOSEPH YERUSHALMI, 68, has been Senior Vice President – Head of Energy and Infrastructure Projects of Merhav since 1995. He has been a director of Ampal since August 16, 2002.

        YEHUDA KARNI, 77, was a senior partner in the law firm of Firon Karni Sarov & Firon, from 1961 until his retirement in 2000. He has been a director of Ampal since August 16, 2002.

        EITAN HABER, 66, was the Head of Bureau for the former Prime Minister of Israel, Yitzhak Rabin, from July 1992 until November 1995. Since 1996, Mr. Haber has been the President and Chief Executive Officer of Geopol Ltd., which represents the Korean conglomerate Samsung Aircraft and Industries in Israel and the Middle East; Kavim Ltd., a production and project development company; Mr. Haber is a member in the Board of Directors of Africa Israel Ltd. Mr. Haber is also a member of various non-profit organizations. He has been a director of Ampal since August 16, 2002.

        MENAHEM MORAG, 55, has been a director of Ampal since January 27, 2004. From 1996 to 1999 Mr. Morag was the Head of Finance and Budget at the Israeli Prime Minister’s office in Tel Aviv. From 1999 to 2001, Mr. Morag was the Controller and Ombudsman at the Israeli Prime Minister’s office in Tel Aviv. From 2001 to 2003, Mr. Morag was the Head of Human Resources Department at the Israeli Prime Minister’s office in Tel Aviv. Since, 2003, Mr. Morag has been the Head of the Council of the Pensioners Association of the Israeli Prime Minister’s office in Tel Aviv, director in Palram Industries since 2004 and since 2005 he is the CEO of Keren-Shemesh Foundation for the Encouragement of Young Entrepreneurs.

        IRIT ELUZ, 39, has been the Chief Financial Officer and Senior Vice President – Finance and Treasurer since October 2004. From May 2002 through October 2004 Ms. Eluz was Chief Financial Officer and Vice President – Finance and Treasurer. From January 2000 through April 2002, Ms. Eluz was the Associate Chief Financial Officer of Merhav. From June 1995 through December 1999, Ms. Eluz was the Chief Financial Officer of Kamor Group.

        YORAM FIRON, 37, has been Secretary and Vice President – Investments and Corporate Affairs since May 2002. During the preceding five years, Mr. Firon was a Vice President of Merhav and a partner in the law firm of Firon Karni Sarov & Firon.

        AMIT MANTSUR, 36, has been Vice President – Investments since March 2003. From September 2000 through December 2002, Mr. Mantsur served at Alrov Group as Strategy & Business Development Manager. From February 1997 through September 2000, Mr. Mantsur was a projects manager at the Financial Advisory Services of KPMG Somekh Chaikin.

65



        GIORA BAR-NIR, 49, has been Vice-President – Accounting and Controller Since October 2004. From March 2002 through October 2004 Mr. Bar-Nir has been the Controller. During the preceding five years, Mr. Bar-Nir was the Controller of the Israeli subsidiaries of Ampal.

AUDIT COMMITTEE

        The Company has an Audit Committee of the Board consisting of Messrs. Karni, Haber and Morag, each of whom is an independent director as defined under the rules of the National Association of Securities Dealers, Inc. and the rules promulgated by the Securities and Exchange Commission. The Board has determined that Mr. Morag is an “audit committee financial expert” for purposes of the rules promulgated by the Securities and Exchange Commission.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

        Section 16(a) of the Securities Exchange Act of 1934, as amended, requires Ampal’s executive officers and directors, and persons who own more than 10% of a registered class of Ampal’s equity securities, to file with the Securities and Exchange Commission initial statements of beneficial ownership (Form 3), and statements of changes in beneficial ownership (Forms 4 and 5), of Class A Stock of Ampal. To the Company’s knowledge, based solely on its review of the copies of such forms received by it, all filing requirements applicable to its executive officers, directors and greater than 10-percent stockholders were complied with.

CODE OF ETHICS

        The Company has adopted a code of ethics (as defined in the rules promulgated under the Securities Exchange Act of 1934) that applies to the Company’s principal executive officer, principal financial officer, principal accounting officer, or person performing similar functions. A copy of the Company’s code of ethics is available on the Company’s website at www.ampal.com (the “Company’s Website”).

CODE OF CONDUCT

        The Company has adopted a code of conduct that applies to all of the Company’s employees, directors and officers. A copy of the code of conduct is available on the Company’s Website.

66



ITEM 11. EXECUTIVE COMPENSATION

Summary Compensation Table

        The table below presents information regarding remuneration paid for services to Ampal and its subsidiaries by the executive officers named below during the three fiscal years ended December 31, 2005, 2004 and 2003.

Name and Principal
Position

Year
Salaries
Bonus
Other
Annual
Compensation(9)

Long-Term
Compensation
Number of
Securities
Underlying
Options (10)

All
Other
Compensation
(U.S. Dollars)(11)

( U . S .  D o l l a r s )
 
Yosef A. Maiman (1)(12)     2005      581,613    310,208    299    -    7,282  
Chairman of the Board   2004    606,409    364,604    6,091    -    2,143  
    2003    506,849    155,953    25,570    -    2,002  
   
Jack Bigio (2)(12)   2005    443,176    208,484    40,257    -    111,235  
President and CEO   2004    420,064    252,564    54,943    280,000    102,131  
    2003    257,547    106,189    71,777    -    88,389  
   
Irit Eluz (3)(12)   2005    242,757    423,599    25,525    -    57,374  
CFO - SVP Finance &   2004    219,980    132,332    32,732    280,000    49,349  
Treasurer   2003    183,959    55,698    39,631    -    42,000  
   
Yoram Firon (4)(12)   2005    185,345    107,767    25,771    -    45,346  
Secretary, Vice   2004    159,500    48,674    26,491    190,000    35,086  
President and   2003    133,138    14,063    30,261    -    29,756  
Corporate Affairs  
   
Amit Mantsur(5)   2005    129,915    43,308    13,187    -    32,911  
Vice President -   2004    120,706    51,068    11,491    15,000    31,130  
    Investments   2003    108,853    -    12,097    58,000    28,335  
   
Shlomo Shalev (6)(7)(8)   2005    180,385    96,688    18,930    -    300,601  
Senior Vice President   2004    188,105    61,145    24,617    30,000    46,803  
investment   2003    167,093    34,254    33,048    -    41,712  

(1) Mr. Maiman has been employed by Ampal since April 25, 2002 as Chairman of the Board.
(2) Mr. Bigio has been employed by Ampal since April 25, 2002 as President and CEO.
(3) Ms. Eluz has been employed by Ampal since April 25, 2002.
(4) Mr Firon has been employed by Ampal since April 25, 2002.
(5) Mr. Mantsur has been employed by Ampal since February 2, 2003.
(6) Mr. Shalev served as Senior Vice President Investment from May 21, 2002 until November 30, 2005.
(7) Mr. Shalev retired on November 30, 2005, the amounts include final account settlement.
(8) Mr. Shalev exercised 73,125 options on December 7, 2005.
(9) Consists of amounts reimbursed for the payment of taxes.
(10) Represents the number of shares of Class A Stock underlying options granted to the named executive officers.
(11) Comprised of Ampal (Israel’s) contribution pursuant to : (1) Ampal (Israel’s) Pension Plan and (ii) Ampal (Israel’s) education fund and (iii) use of car and (iv) use of mobile (v) final account settlement.
(12) Eligible to receive an additional payment of up to six months salary (i) in the event of a change of control of the Company and (ii) such executive officer’s employment is terminated within six months from the date of the change of control of the Company.

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Fiscal Year-End Option Values

Number of Securities Underlying
Unexercised Options at Fiscal Year
End 2005

Unrealized Value of
In-the-Money Options
(U.S. Dollars)

Exercisable
Unexercisable
Exercisable
Unexercisable
 
Yosef A. Maiman      203,125    46,875   $ 633,750   $ 146,250  
Jack Bigio    191,875    238,125   $ 625,250   $ 822,750  
Irit Eluz    133,781    224,719   $ 443,998   $ 780,923  
Yoram Firon    103,156    155,344   $ 339,898   $ 538,823  
Amit Mantsur    43,625    29,375   $ 160,264   $ 106,256  

Option Grants In Last Fiscal Year

No stock options were granted to purchase our Class A Stock to our named executive officers during fiscal year ended December 31, 2005.

Other Benefits

        Ampal previously maintained a money purchase pension plan (“Pension Plan”) for all full-time employees of Ampal except non-resident aliens outside the United States. Pursuant to the cessation of the Company’s U.S. operations, the Ampal-American Israel Corporation Money Purchase Pension Plan and the Ampal-American Israel Corporation Savings Plan were terminated effective December 31, 2004.

Compensation of Directors

        Directors of Ampal (other than Mr. Maiman and Mr. Bigio) received $1,500 per Board meeting attended. The Chairman of the Board receives $2,000. Directors of Ampal also receive the same amount for attendance at meetings of committees of the Board, provided that such committee meetings are on separate days and on a day other than the day of a regularly scheduled Board meeting.

        On October 28, 2004, the Board formed a Special Committee of the Board composed of Mr. Yehuda Karni, Mr. Eitan Haber and Mr. Menahem Morag, each of whom is an independent director.

        The Board appointed the Special Committee of independent directors to consider alternatives available to the Company to maximize shareholder value. The Special Committee was formed in response to a suggestion from Mr. Yosef A. Maiman, Chairman of the Board and controlling stockholder, that he is reviewing his alternatives with regard to his investment in the Company.

        In connection with the formation of this Special Committee, the Company entered into an Indemnification and Compensation Agreement with each of Messrs. Karni, Haber and Morag. In consideration for serving as a member of the Special Committee, each director shall receive from the Company a fee of $35,000 payable in seven equal monthly installments beginning on October 28, 2004. Each director shall also be entitled to receive from the Company a fee of $1,500 per each meeting of the Special Committee he attends. In addition, the Company has agreed to indemnify and hold harmless each Director with respect to his service on, and any matter or transaction considered by, the Special Committee to the fullest extent authorized or permitted by law. A copy of the form of this Indemnification and Compensation Agreement is attached as Exhibit 10j to this annual report on Form 10-K.

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        The following table sets forth certain information regarding stock options granted to purchase our Class A Stock to our directors during the three fiscal years ended December 2005, 2004 and 2003.

2005
2004
2003
 
Jack Bigio (1)      -    280,000    -  
Eitan Haber (2)    45,000    -    -  
Yehuda Karni (2)    45,000    -    -  
Menahem Morag (3)    45,000    15,000    -  

(1) Since March 6, 2002.
(2) Since August 16, 2002 .
(3) Since March 24, 2004.

Stock Option Plan

        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 a majority of the Company’s shareholders at the June 19, 1998 annual meeting of shareholders. The 1998 Plan remains in effect for a period of ten years. As of December 31, 2005, 30,000 options of the 1998 Plan are 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 at a 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 2000 Plan remains in effect for a period of ten years. As of December 31, 2005, 1,994,500 options of the 2000 Plan are outstanding.

        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 and 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. On April 25, 2002, the controlling shareholder of the Company, Rebar Financial Corp., sold all of its stock in the Company to Y.M. Noy Investments Ltd. Accordingly, all options granted but unvested under the Plans were immediately exercisable.

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        The Company accounts for all plans under APB Opinion No. 25, under which no compensation costs were incurred in the years ended December 31, 2003, 2004 and 2005. If compensation cost for the options under the above Plans had been determined in accordance with SFAS No. 123, the Company’s net income (loss) would have been ($6,832) million, ($18,954) million and $8,351 million, for the years 2005, 2004 and 2003, respectively.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

        The current members of the Stock Option and Compensation Committee are Mr. Yehuda Karni, Mr. Eitan Haber and Mr. Menahem Morag, none of whom is an officer or employee or former officer or employee of the Company.  During 2005, no executive officer of the Company served on the Stock Option and Compensation Committee, or the Board of Directors of another entity whose executive officer(s) served on the Company’s Stock Option and Compensation Committee of the Board of Directors.  

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Equity Compensation Plan Information(1)
Plan category
Number of securities
to be issued
upon exercise of
outstanding options,
warrants and rights

Weighted-average
exercise price of
outstanding options,
warrants and rights

Number of securities
remaining available
for future issuance
under equity
compensation plans
(excluding securities
reflected in column (a))

(a) (b) (c)
 
Equity compensation                
    plans approved by  
    security holders    2,024,500    3.37    2,375,500 (2)
   
Equity compensation  
    plans not approved  
    by security holders    N/A    N/A    N/A  
   
         Total    2,024,500    3.37    2,375,500  

  (1) All information provided as of December 31, 2005.

  (2) The number of securities remaining available for future issuance under 1998 Plan is 370,000. The number of securities remaining available for future issuance under 2000 Plan is 2,005,500.

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PRINCIPAL SHAREHOLDERS OF AMPAL

        The following table sets forth information as of March 6, 2006, as to the holders known to Ampal who beneficially own more than 5% of the Class A Stock, the only outstanding series of voting securities of Ampal. For purposes of computation of the percentage ownership of Class A Stock held by such stockholders set forth in the table, conversion of any 4% Cumulative Convertible Preferred Stock (the “4% Preferred Stock”) and 6 1/2% Cumulative Convertible Preferred Stock (the “6 1/2% Preferred Stock”) owned by such beneficial owner has been assumed, without increasing the number of shares of Class A Stock outstanding by amounts arising from possible conversions of convertible securities held by shareholders other than such beneficial owner. As of March 6, 2006, there were 20,157,772 (not including treasury shares) shares of Class A Stock of Ampal outstanding. In addition, as of March 6, 2006, there were 501,227 non-voting shares of 6 1/2% Preferred Stock outstanding (each convertible into 3 shares of Class A Stock) and 110,296 non-voting shares of 4% Preferred Stock outstanding (each convertible into 5 shares of Class A Stock).

Security Ownership of Certain Beneficial Owners

Name and Address
of Beneficial Owner

Title of Class
Number of Shares
and Nature
of Beneficial Ownership

Percent
of Outstanding
Shares of
Class A Stock

 
Y.M. Noy Investments Ltd., of 33                  
Havazelet Hasharon St., Herzliya,  
Israel   Class A Stock    11,750,132 (1)  58.29 %
   
Yosef A. Maiman  
Y.M. Noy Investments Ltd., of 33  
Havazelet Hasharon St., Herzliya,
Israel
   Class A Stock    11,968,882 (1)(2)  58.74 %
   
Ohad Maiman  
Y.M. Noy Investments Ltd., of 33  
Havazelet Hasharon St., Herzliya,
Israel
   Class A Stock    11,750,132 (1)  58.29 %
   
Noa Maiman  
Y.M. Noy Investments Ltd., of 33  
Havazelet Hasharon St., Herzliya,
Israel
   Class A Stock    11,750,132 (1)  58.29 %

  (1) Consists of 11,750,132 shares of Class A Stock held directly by Y.M. Noy Investments Ltd. Yosef A. Maiman owns 100% of the economic shares and one-third of the voting shares of Y.M. Noy Investments Ltd.. In addition, Mr. Maiman holds an option to acquire the remaining two-thirds of the voting shares of Y.M. Noy Investments Ltd. (which are currently owned by Ohad Maiman and Noa Maiman, the son and daughter, respectively, of Mr. Maiman).

  (2) Includes 218,750 shares of Class A Stock underlying options which are currently exercisable by Mr. Maiman.

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Security Ownership of Management

        The following table sets forth information as of March 6, 2006 as to each class of equity securities of Ampal or any of its subsidiaries beneficially owned by each director and named executive officer of Ampal listed in the Summary Compensation Table and by all directors and named executive officers of Ampal as a group. All ownership is direct unless otherwise noted. The table does not include directors or named executive officers who do not own any such shares:

Name
Number of Shares and Nature
of Beneficial Ownership
of Class A Stock

Percent of Outstanding
Shares of
Class A Stock

 
Yosef Maiman      11,968,882 (1)(2)  58.74 %
Jack Bigio    236,250 (2)  1.16 %
Irit Eluz    173,688 (2)  *  
Yoram Firon    131,187 (2)  *  
Amit Mantsur    48,187 (2)     
Leo Malamud    131,250 (2)  *  
Dr. Joseph Yerushalmi    87,500 (2)  *  
Eitan Haber    18,750 (2)  *  
Yehuda Karni    18,750 (2)  *  
Menahem Morag    13,126 (2)  *  
All Directors and Executive Officers  
  as a Group    12,827,570 (2)  60.44 %

  * Represents less than 1% of the class of securities.

  (1) Attributable to 11,750,132 shares of Class A Stock held directly by Y.M. Noy Investments Ltd. See “Security Ownership of Certain Beneficial Owners.”In addition, this represents 218,750 shares underlying options for Yosef Maiman which are presently exercisable.

  (2) Represents shares underlying options which are presently exercisable or exercisable in 60 days.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

        The Audit Committee of Ampal has the duty and responsibility of approving all transactions between Ampal, on the one hand, and any officer, director, or affiliate thereof, on the other hand, or in which any officer, director or affiliate has a material interest. Under the rules promulgated by Nasdaq, the Audit Committee must review and approve all transactions between Ampal on the one hand and any officer, director or principal shareholder of Ampal on the other hand. The Audit Committee considers and evaluates potential related party transactions from time to time, including co-investment opportunities and other types of transactions. The Audit Committee has the authority to engage independent legal, financial and other advisors.

        On December 1, 2005, 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 EMG.

        Under the terms of the transaction, the Company acquired the beneficial ownership of 1,200 shares of EMG’s capital stock, representing a 2% beneficial ownership in EMG. The purchase price for the shares was $29,960,000. Additionally, the Company was granted the exclusive right to negotiate to acquire a substantial portion of Merhav’s remaining shares of EMG. The Company also has the right for a period of time to require Merhav to repurchase the EMG interest.

        Yosef A. Maiman, the Chairman of the Board and the Company’s controlling shareholder, is the sole owner of Merhav. Because of the foregoing relationship, the Special Committee, which is identical in composition to the Audit Committee, negotiated and approved the transaction. Houlihan Lokey Howard & Zukin Financial Advisors, Inc. acted as financial advisors to the Special Committee.

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ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

        AUDIT FEES. The fees of Kesselman & Kesselman (“Kesselman”) fees for professional services rendered for the audit of the Company’s annual financial statements for the fiscal years ended December 31, 2005 and December 31, 2004 and reviewing the financial statements included in the Company’s quarterly reports on Form 10-Q were $266,000 and $267,000, respectively.

        TAX FEES. Kesselman’s tax fees for the fiscal years ended December 31, 2005 and December 31, 2004, were $209,000 and $100,000, respectively.

        ALL OTHER FEES – Kesselman’s fees for other services for the fiscal years ended December 31, 2005 and December 31, 2004, were $236,000 and $42,800, respectively.

        All of the services provided by our principal accounting firm described above under the captions “Audit Fees”, “Tax Fees” and “All Other Fees” were approved by our Audit Committee. The Audit Committee has determined that the rendering of professional services described above by Kesselman is compatible with maintaining the auditor’s independence.

Audit Committee Pre-Approval Policies

        The Company’s Audit Committee Charter provides that the Audit Committee shall approve in advance all audit services and all non-audit services provided by the independent auditors based on policies and procedures developed by the Audit Committee from time to time. The Audit Committee will not approve any non-audit services prohibited by applicable SEC regulations or any services in connection with a transaction initially recommended by the independent auditor, the purpose of which may be tax avoidance and the tax treatment of which may not be supported by the Internal Revenue Code and related regulations.

        Our Audit Committee requires that our independent auditor, in conjunction with our Chief Financial Officer, be responsible for seeking pre-approval for providing services to us and that any request for pre-approval must inform the Audit Committee about each service to be provided and must provide detail as to the particular service to be provided.

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PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

(a) The following documents are filed as a part of this report:

Page
Reference

(1) Financial Statements and Supplementary Data  
               
    Ampal-American Israel Corporation and Subsidiaries
               
          Report of Independent Registered Public Accounting Firm 31
               
         Consolidated Statements of Income for the years ended December 31, 2005, 2004 and 2003 32
               
         Consolidated Balance Sheets as of December 31, 2005 and 2004 33-34
               
         Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2004 and 2003. 35-36
               
         Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31,
            2005, 2004 and 2003 37-38
               
         Consolidated Statements of Comprehensive Income for the years ended December 31, 2005, 2004
            and 2003 39
               
         Notes to Consolidated Financial Statements 40-62
               
    Supplementary Data:
               
          Selected quarterly financial data for the years ended December 31, 2005 and 2004 24

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(2) Financial Statement Schedules

(i) Schedule of Representative Rates of Exchange between the U.S. Dollar and New Israeli Shekel for three years ended December 31, 2005

Representative Rates of Exchange
Between the U.S. Dollar and the New Israeli Shekel
For the Three Years Ended December 31, 2005

The following table shows the amount of New Israeli Shekels equivalent to one U.S. Dollar on the dates indicated:

2005
2004
2003
 
March 31      4.361    4.528    4.687  
June 30    4.574    4.497    4.312  
September 30    4.598    4.482    4.441  
December 31    4.603    4.308    4.379  

(ii) Consolidated financial statements filed pursuant to Rule 3-09 of Regulation S-X

Granite Hacarmel Investments Limited and Subsidiaries

       Report of Certified Public Accountants         
       Consolidated Balance Sheets as at December 31, 2003 and 2002       
       Consolidated Statements of Income for the years ended December 31, 2003, 2002 and 2001  
       Consolidated Statements of Shareholders' Equity for the years ended December 31, 2003, 2002 and  
         2001       
       Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002 and 2001       
       Notes to Consolidated Financial Statements  
              
Ophir Holdings Ltd.  
              
       Report of Certified Public Accountants  
              
       Consolidated Balance Sheets as at December 31, 2005 and 2004       
       Consolidated Statements of Income for the years ended December 31, 2005, 2004 and 2003       
       Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 2005, 2004  
         and 2003       
       Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2004 and 2003       
       Notes to Financial Statements       
              
Ophirtech Ltd.  
              
       Report of Certified Public Accountants  
       Consolidated Balance Sheets as at December 31, 2005 and 2004       
       Consolidated Statements of Income for the years ended December 31, 2005, 2004 and 2003