The objective of this study was to investigate the development of ego identity (EI; E. H. Erikson [1968]Identity: Youth and Crisis, Norton, New York) among Israeli Jewish and Arab adolescents. The main hypothesis was that the discordant group membership of Israeli-Arabs is detrimental to the development of EI. Subjects were Israeli-Jewish (n=1329) and Israeli-Arab (n=780) students in Grades 10-12, randomly drawn from nine schools. The Adolescent Ego Identity Scale (AEIS; Tzuriel [1984] "Sex Role Typing, Religiousness, and Ego Identity of Israeli Jewish and Arab Teenagers, Unpublished manuscript, Bar Ilan University, Ramat Gan, Israel; [1990] "Ego Identity Versus Identity Diffusion: Developmental and Educational Perspectives," Megamot:Behavior Research Quarterly, Vol. 32, pp. 484-509) was administered during regular classes time. A multivariate analysis of variance of Ethnic Group × Sex × Grade (2×2×3) performed on the six EI factors revealed that Arabs were higher than Jews on Solidity and Continuity, Commitment and Purposefulness, and Genuineness, but lower on Social Recognition, Meaningfulness-Alienation, and Physical Identity. Significant interactions of Ethnic Group × Sex on EI factors revealed that Arab girls were much higher than Arab boys on Commitment and Purposefulness, and on Solidity and Continuity, whereas in the Jewish group the sex differences were slighter or reversed. On Social Recognition, boys were higher than girls in both ethnic groups, but the gap was substantially higher among Arabs. On EI-Total Jewish boys were higher than the other subgroups, who scored almost equally. Significant interactions of Ethnic Group × Grade on two EI factors revealed a different developmental pattern for Jews and Arabs. Jews showed a gradual and slow increase from one grade to another on Solidity and Continuity with a steep decrease on Social Recognition. Arabs, in contrast showed relatively higher scores in Grades 10 and 12 than in Grade 11 on both factors. Sociocultural and situational interpretations were suggested to explain the results and suggestions for further research are discussed.