AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES

CRITICAL ACCOUNTING POLICIES

The preparation of Ampal - American Israel Corporation's ("Ampal", and collectively with its subsidiaries, the "Company") consolidated financial statements is in conformity with accounting principles generally accepted in the United States ("GAAP") which requires management to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying consolidated financial statements and related footnotes. Actual results may differ from these estimates. To facilitate the understanding of Ampal's business activities, described below are certain Ampal accounting policies that are relatively more important to the portrayal of its financial condition and results of operations and that require management's subjective judgments. Ampal bases its judgments on its experience and various other assumptions that it believes to be reasonable under the circumstances. Please refer to Note 1 to Ampal's consolidated financial statements included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2008 for a summary of all of Ampal's significant accounting policies.

No significant updates have occurred since our last annual report on form 10-K.

Revenue Recognition

The Company recognizes revenue in accordance with Staff Accounting Bulletin (SAB) No. 104 - "Revenue Recognition". Revenue is recognized when (a) the significant risks and rewards of ownership of the goods have been transferred to the buyer; (b) the Company retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold; (c) the amount of revenue can be measured reliably; (d) it is probable that the economic benefits associated with the transaction will flow to the Company; and (e) the costs incurred or to be incurred in respect of the transaction can be measured reliably.

Chemical income derives from the following activities: sales of a wide range of liquid chemicals, providing maritime shipping services of chemicals by ships and providing other services which include logistics and storage services for chemicals.

Revenue for services is recognized as follows:

- Revenues arising from the provision of marine transport services proportionally over the period of the marine transport services. As to voyages uncompleted in which a loss is expected, a full provision is made in the amount of the expected loss.

- Revenues from chemical brokerage commissions are recognized when the right to receive them is created.

- 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. Revenue from amortization of tenant deposits (included in discontuinued operation) was calculated at a fixed periodic rate based on the specific terms in the occupancy agreement signed with the tenants.

- Income from other services is recognized over the period during which those services are preformed.

Recently adopted and recently Issued Accounting Pronouncements

In April 2009, the FASB issued FASB Staff Position No. 157-4, "Determining Whether a Market is not Active and a Transaction is not Distressed" ("FSP FAS 157-4"), which provides additional guidance in accordance with FASB No. 157, Fair Value Measurements, when the volume and level of activity for the asset or liability has significantly decreased. FSP FAS 157-4 shall be effective for interim and annual reporting periods ending after June 15, 2009. We are currently evaluating the future impacts and disclosures of this staff position.

In April 2009, the FASB issued FASB Staff Position No. 107-1 ("FSP FAS 107-1") and APB 28-1 ("APB 28-1"), which amends FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments and APB Opinion No. 28, Interim Financial Reporting, to require disclosures about the fair value of financial instruments for interim reporting periods. FSP FAS 107-1 and APB 28-1 will be effective for interim reporting periods ending after June 15, 2009. We are currently evaluating the future impacts and disclosures of this staff position

In June 2008, the FASB issued FASB Staff Position No. EITF 03-6-1, "Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities" ("FSP EITF 03-6-1"). The FASB decided that unvested share-based payout awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of EPS pursuant to the two-class method under SFAS 128, Earnings per Share. FSP EITF 03-6-1 became effective for the Company on January 1, 2009 and the adoption did not have an impact on our financial statements.

In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"("SFAS 157"), which provides guidance on how to measure assets and liabilities that use fair value. SFAS 157 will apply whenever another US GAAP standard requires (or permits) assets or liabilities to be measured at fair value but does not expand the use of fair value to any new circumstances. This standard also will require additional disclosures in both annual and quarterly reports. SFAS 157 is for fiscal years beginning after November 15, 2007 (January 1, 2008 for the Company). In February 2008, the FASB deferred for one additional year the effective date of SFAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The adoption of the parts of SFAS 157 that became effective in 2008 did not have a material impact on the Company's financial statements. The remaining parts of SFAS 157 did not have a material impact on our financial statements.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business Combinations" ("SFAS 141R") which replaces SFAS No. 141, "Business Combination". SFAS 141R establishes the principles and requirements for how an acquirer: (1) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree; (2) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and (3) discloses the business combination. This Statement applies to all transactions in which an entity obtains control of one or more businesses, including transactions that occur without the transfer of any type of consideration. SFAS 141R will be effective on a prospective basis for all business combinations on or after January 1, 2009, with the exception of the accounting for valuation allowances on deferred taxes and acquired tax contingencies. Early adoption is not allowed. The adoption of SFAS 141R had no material impact on the financial statements.

In December 2007, the FASB issued SFAS No. 160 "Noncontrolling Interests in Consolidated Financial Statements-an amendment of ARB No. 51" ("SFAS 160"). SFAS 160 amends ARB No. 51 and establishes accounting and reporting standards that require noncontrolling interests (previously referred to as minority interest) to be reported as a component of equity, changes in a parent's ownership interest while the parent retains its controlling interest be accounted for as equity transactions, and upon a loss of control, retained ownership interest will be remeasured at fair value, with any gain or loss recognized in earnings. The presentation and disclosure requirements of SFAS 160 were applied retrospectively.Other than the change in presentation of noncontrolling interests, the adoption of SFAS 160 had no material impact on the financial statements.

In March 2008, FASB issued Statement No. 161, "Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133"("FAS 161"). FAS 161 amends and expands the disclosure requirements of FAS 133 to clarify how and why companies use derivative instruments. In addition, FAS 161 requires more disclosures regarding how companies account for derivative instruments and the impact derivatives have on a company's financial statements. Other than the required disclosures (see note 9), the adoption of SFAS 161 had no material impact on the financial statements.

In April 2008, the FASB issued FASB Staff Position (the "FSP") FAS No. 142-3 ("FSP FAS 142-3"), which amends the factors that must be considered in developing renewal or extension assumptions used to determine the useful life over which to amortize the cost of a recognized intangible asset under FAS No. 142, "Goodwill and Other Intangible Assets." FSP FAS 143-2 requires an entity to consider its own assumptions about renewal or extension of the term of the arrangement, consistent with its expected use of the asset, and is an attempt to improve consistency between the useful life of a recognized intangible asset under FAS No. 142 and the period of expected cash flows used to measure the fair value of the asset under FAS No. 141, "Business Combinations." The adoption of FSP FAS 142-3 had no material impact on the financial statements.

Results of Operations

Changes in pricing and demand for chemicals

The overall demand for chemical products, especially commodity chemicals, is highly dependent on general economic conditions. In the past few months, both the prices and demand for chemicals decreased dramatically due to the global recession. The economic indicators from the United States and Europe reveal the intensity of the recession and it is unclear when the market sentiment will change. The economic slowdown is felt in all sectors of the economy.

Three months ended March 31, 2009 compared to three months ended March 31, 2008

The Company recorded a consolidated net gain of $12.5 million for the three months ended March 31, 2009 compared to a net loss of $10.3 million for the corresponding period in 2008. The gain in 2009 is primarily attributable to the translation gain and gain from the debenture repurchase as compared to the translation loss in 2008. The gain was partially offset by an increase in interest expenses resulting from the issuance of the Series B debentures and loans for the financing of Gadot's purchase.

In the three months ended March 31, 2009, the Company included the results of operations of Gadot, Below is data from Gadot results of operations (in millions of dollars):

                                              March 31, 2009      March 31, 2008
                                           --------------------- ----------------


          Chemical income                      -     $    94.7    $      126.1

          Chemical expense                     -     $    86.8    $      119.1

          Marketing expense                    -     $     1.6    $        3.1

          Other expense (mainly
           general and administrative)         -     $     3.8    $        4.9

          Interest expense                     -     $     2.8    $        1.3

          Net gain (loss)                      -     $    (0.3 )  $       (0.6 )

In the three months ended March 31, 2009, the Company recorded $1.6 million of marketing expense, as compared to a $3.1 million marketing expense in the corresponding period in 2008. These expenses are attributable to Gadot and composed mainly of salary and commission expenses. The decrease is due to the result of a restructuring plan that took place in Gadot during the second half of 2008.

In the three months ended March 31, 2009, the Company recorded a $7.5 million of general, administrative and other expense, as compared to $7.9 million in the corresponding period in 2008.

In the three months ended March 31, 2009, the Company recorded a $9.0 million of noncontrolling interests share in gain of subsidiaries, net, as compared to $8.0 million share in loss in the corresponding period in 2008. These gains are mainly attributable to translation gains in the notes issued to the partners in Merhav Ampal Energy, LP, an Israeli limited partnership (the "Joint Venture"), resulting from the valuation of the New Israeli Shekel compared to the U.S. Dollar.

In the three months ended March 31, 2009, the Company recorded a $7.3 million interest expense, as compared to a $4.4 million interest expense for the corresponding period in 2008. The increase in interest expense relates to the increase in notes payable which the Company received to finance the purchase of Gadot, issuance of the Company's Series B debentures and the interest expense of the SWAP agreement that was signed on the second quarter in 2008.

The Company recorded a minor net loss in Equity in losses of affiliates for the three months ended March 31, 2009, compared to a net gain in Equity in earnings of affiliates of $0.6 million for the corresponding period in 2008.

Results of operations analyzed by segments for three months ended March 31:

                                                    2009              2008
                                              ----------------- ----------------
                                                 (U.S. Dollars in thousands)
                                              ----------------------------------


Revenues:

Chemicals                                      $      94,649     $     126,103
Finance                                               29,911             1,315
Leisure-time                                             717               726
                                              --------------    --------------
                                                     125,277           128,144
Equity in earnings (losses) of affiliates                (44 )             585
                                              --------------    --------------

Total                                          $     125,233     $     128,729
                                              --------------    --------------

The Chemicals income relates solely to Gadot and derives from the following activities: sales of a wide range of liquid chemicals, providing maritime shipping services of chemicals by ships and providing other services which include logistics and storage services for chemicals.

In the three months ended March 31, 2009, the Company recorded $125.2 million in revenue which was comprised of $94.6 million in the Chemicals segment, $29.9 million in the Finance segment, $0.7 million in the Leisure-Time segment and a minor net loss in Equity in losses of affiliates, as compared to $128.7 million for the same period in 2008, which was comprised of $126.1 million in the Chemicals segment, $1.3 million in the Finance segment, $0.7 million in the Leisure-time segment and a $0.6 million gain in Equity in earnings of affiliates. The decrease in Chemicals revenues is primarily attributable to the slowdown in the markets, especially in Europe, which lead the decrease in sold quantities and product prices and due to significant decrease in the demand for chemical carrier shipping. The recession and the resulting significant decrease in the demand for chemical carrier ships was felt during the first quarter of 2009. The decrease in demand for chemical shipping lead to a steep decline in freight rates. In addition, the decline in shipped quantities generates an uneven shipment of chemicals, which in certain voyages, results in almost no cargo being shipped on the return leg of a voyage.

This was partially offset by the change in the valuation of the New Israeli Shekel as compared to the U.S. Dollar. The increase in the Finance segment revenue is primarily related to the increase in interest income from deposits and loans receivable.

                       2009              2008
                 ----------------- ----------------
                    (U.S. Dollars in thousands)
                 ----------------------------------


Expenses:

Chemicals         $      94,921     $     128,320
Finance                   7,847            18,891
Leisure-time                514               578
                 --------------    --------------

Total             $     103,282     $     147,789
                 --------------    --------------

In the three months ended March 31, 2009, the Company recorded $103.3 million in expenses which was comprised of $94.9 million of expenses in the Chemicals segment, $7.8 million of expenses in the Finance segment and $0.5 million of expenses in the Leisure-time segment, as compared to $147.8 million in expenses for the same period in 2008 which was comprised of $128.3 million in the Chemicals segment, $18.9 million in the Finance segment and $0.6 million in the Leisure-Time segment. The decrease in expenses in the Finance segment is primarily attributable to the $26.6 million translation gain which was recorded due to the devaluation of the Company's debt denominated in New Israeli Shekel as compared to the U.S. dollar and was partially offset by to the increase in interest expense related to the notes payable which the Company received to finance the purchase of Gadot and issuance of the Company's Series B debentures.

In the three month periods ended March 31, 2009 the Company reported tax expense of $0.4 million as compared to approximately $0.8 million of tax benefit in the corresponding periods in 2008. The Company's net income for the period resulted mostly from translation gains (these gains represent temporary differences for tax purposes). We created a deferred tax asset and full valuation allowance for such gains. The tax expense which was recorded pertains to Gadot's income.

Liquidity and Capital Resources

On March 31, 2009, cash, cash equivalents and marketable securities were $118.7 million, as compared with $121.6 million at December 31, 2008. The decrease is mainly attributable to the repurchase of the Company's Series B debentures.

As of March 31, 2009, the Company had $45.6 million of marketable securities as compared to $52.9 million as of December 31, 2008. The decrease is attributable to the sale of marketable securities.

The Company may also receive cash from operations and 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 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. 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, Ampal's interest in Gadot has been pledged and cash equal to $2.7 million has been placed as a compensating balance for various loans provided to the Company.

Cash flows from operating activities

Net cash provided by operating activities totaled approximately $19.7 million for the three months ended March 31, 2009, compared to approximately $7.0 million used in operating activities for the corresponding period in 2008. The increase in cash provided by operating activities is primarily attributable to the decrease in accounts receivable and inventories. This was partially offset by decrease in accounts payable and proceeds from trading securities.

Cash flows from investing activities

Net cash provided by investing activities totaled approximately $1.2 million for the three months ended March 31, 2009, compared to approximately $15.2 million used in by investing activities for the corresponding period in 2008. The increase in cash provided in investing activities is primarily attributable to deposits collected, proceeds from the sale of available for sale securities and decrease in capital improvements in 2009. This was partially offset by the purchase of available for sale securities in 2009.

Cash flows from financing activities

Net cash used in financing activities was approximately $16.2 million for the three months ended March 31, 2009, compared to approximately $7.8 million of net cash provided by financing activities for the corresponding period in 2008. The increase in cash used is primarily attributable to the loans repaid and repurchase of Company's Series B debentures.

Investments

In the three months ended March 31, 2009, the Company made additional investments in the form of a $0.6 million loan to Bay Heart Ltd. ("Bay Heart").

Debt

Notes issued to institutional investors in Israel, the convertible note issued to Merhav M.N.F Ltd. ("Merhav") and other loans payable pursuant to bank borrowings are either in U.S. Dollars, linked to the Consumer Price Index in Israel or in unlinked New Israeli Shekels, with interest rates varying depending upon their linkage provision and mature between 2009-2019.

The Company finances its general operations and other financial commitments through bank loans from Bank Hapoalim, Union Bank of Israel Ltd. ("UBI") and Israel Discount Bank Ltd ("IDB"). As of March 31, 2009, the outstanding indebtedness under these bank loans totaled $352.7 million and the loans mature through 2009-2019.

On March 27, 2008, Midroog Ltd., an affiliate of Moody's Investors Service rated the Series B debentures as A2 and also raised the rating of Ampal's Series A debentures to A2. On September 15, 2008, Midroog reduced the rating on the Series A and Series B debentures to A3.

Ampal funded the Gadot transaction with a combination of available cash and the proceeds of the credit facility, dated November 29, 2007 (the "Credit Facility"), between Merhav Ampal Energy Ltd. ("MAE") and IDB, for approximately $60.7 million, which amount was increased, on the same terms and conditions, on June 3, 2008 by approximately $11.3 million in order to fund the second stage of the transaction and on September 23, 2008 by approximately $15.4 million in order to fund the third stage of the transaction. The Credit Facility is divided into two equal loans of approximately $43.7 million. The first loan is a revolving loan that has no principal payments and may be repaid in full or in part on December 31 of each year until 2019, when a single balloon payment will become due. The second loan also matures in 2019, has no principal payments for the first one and a half years, and shall thereafter be paid in equal installments over the remaining ten years of the term. Interest on both loans accrues at a floating rate equal to LIBOR plus a percentage spread and is payable on a current basis. Ampal has guaranteed all the obligations of MAE under the Credit Facility and Ampal's interest in Gadot has also been pledged to IDB as a security for the Credit Facility. Yosef Maiman has agreed with IDB to maintain ownership of a certain amount of the Company's Class A Common Stock. The Credit Facility contains customary affirmative and negative covenants for credit facilities of this type.

As of March 31, 2009, the Company has a $8.3 million loan with UBI that bears interest at the rate of LIBOR plus 2% to be repaid in six annual installments commencing on April 2, 2008 and various other loans with UBI in the aggregate amount of $7.0 million bearing interest at rates between 3.75% and 4.8% to be repaid during 2009.

As of March 31, 2009, the Company has a $18.0 million loan with Bank Hapoalim as part of a $27 million dollar loan facility. The funds borrowed under the loan facility are due in nine annual installments commencing on December 31, 2007 and bear interest at an annual rate of LIBOR plus 2%. The related loan agreement contains financial and other covenants including an acceleration of payment upon the occurrence of certain changes in the ownership of the Company's Class A Stock. As of March 31, 2009, the Company is in compliance with its debt covenants.

As of March 31, 2009, the Company has a $87.5 million loan from institutional investors who own 50% of Merhav Ampal Energy Holdings, LP. The loan is not linked to the Consumer Price Index in Israel, bears no interest and is repayable upon agreement by both parties, but with a minimum term of one year.

The Company has a short term loan from Bank Hapoalim in the aggregate amount of $3.5 million bearing interest of 7.1%, to be repaid by December 31, 2009 and a revolving short term loan in the amount of $4.5 million bearing interest of 3.8 % .

On November 20, 2006, the Company entered into a trust agreement with Hermetic Trust (1975) Ltd. pursuant to which the Company issued Series A debentures to . . .