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.

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 June 2009, the Financial Accounting Standards Board ("FASB") issued SFAS No. 168, The FASB Accounting Standards CodificationTM and the Hierarchy of Generally Accepted Accounting Principles-a replacement of FASB Statement No. 162 ("SFAS 168"). The statement confirmed that the FASB Accounting Standards Codification (the "Codification") will become the single official source of authoritative U.S. GAAP (other than guidance issued by the SEC), superseding existing FASB, American Institute of Certified Public Accountants, Emerging Issues Task Force ("EITF"), and related literature. Upon the effectiveness of the codification, only one level of authoritative U.S. GAAP will exist. All other literature will be considered non-authoritative. The Codification does not change U.S. GAAP; instead, it introduces a new structure that is organized in an easily accessible, user-friendly online research system. The Codification, which changes the referencing of financial standards, becomes effective for interim and annual periods ending on or after September 15, 2009. We will apply the Codification beginning in the third quarter of fiscal 2009. The adoption of SFAS 168 is not expected to have a material impact on our condensed consolidated financial statements or related footnotes.

In June 2009, the FASB issued FAS 167, Amendments to FASB Interpretation No. 46(R), which changes the approach to determining the primary beneficiary of a variable interest entity ("VIE") and requires companies to more frequently assess whether they must consolidate VIEs. This new standard is effective for us beginning on January 1, 2010. We are currently assessing the potential impacts, if any, on our consolidated financial statements.

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 and the adoption did not have a material impact on our financial statements.

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 is effective for interim reporting periods ending after June 15, 2009 and the adoption did not have a material impact on our financial statements.

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 adoption of 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 10), the adoption of SFAS 161 had no material impact on the financial statements.

In April 2008, the FASB issued FASB Staff Position 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 impact on material 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.

Six months ended June 30, 2009 compared to six months ended June 30, 2008

The Company recorded a consolidated net loss of $0.9 million for the six months ended June 30, 2009 compared to a net loss of $27.6 million for the corresponding period in 2008. The loss in 2009 is primarily attributable to the interest expenses resulting from the issuance of debentures and loans for the financing of Gadot's purchase which was partially offset by translation gain, while the loss in 2008 is primarily attributable to interest expenses and translation loss in 2008.

In the six months ended June 30, 2009 and 2008, the Company included the results of operations of Gadot. Below is data from Gadot results of operations (in millions of dollars):

                                   June 30, 2009   June 30, 2008
                                  --------------- ---------------


 Chemical income                   $      186.3    $      277.2

 Chemical expense                  $      171.8    $      259.1

 Marketing expense                 $        3.4    $        6.1

 Other expense (mainly
  general and administrative)      $        8.6    $       11.0

 Interest expense                  $        3.5    $        3.9

 Net gain                          $        0.1    $        1.4

In the six months ended June 30, 2009, the Company recorded $3.4 million of marketing expense, as compared to a $6.1 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 at Gadot during the second half of 2008.

In the six months ended June 30, 2009, the Company recorded a $16.1 million of general, administrative and other expense, as compared to $18.3 million in the corresponding period in 2008. The decrease is due to the result of a restructuring plan that took place at Gadot during the second half of 2008.

In the six months ended June 30, 2009, the Company recorded a $3.2 million of noncontrolling interests share in gain of subsidiaries, net, as compared to $12.9 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 six months ended June 30, 2009, the Company recorded a $13.4 million interest expense, as compared to a $14.9 million interest expense for the corresponding period in 2008. The interest expense relates to the notes payable which the Company received to finance the purchase of Gadot, issuance of the Company's debentures and the interest expense of the SWAP agreements.

The Company recorded a net loss of $0.3 million in Equity in losses of affiliates for the six months ended June 30, 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 six months ended June 30:

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


Revenues:

Chemicals                                      $     186,293     $     277,513
Finance                                               18,396             3,050
Leisure-time                                           1,308             1,492
                                              --------------    --------------
                                                     205,997           282,055
Equity in earnings (losses) of affiliates               (275 )             578
                                              --------------    --------------

Total                                          $     205,722     $     282,633
                                              --------------    --------------

The Chemicals income relates solely to Gadot and was derived 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 six months ended June 30, 2009, the Company recorded $205.7 million in revenue which was comprised of $186.3 million in the Chemicals segment, $18.4 million in the Finance segment, $1.3 million in the Leisure-time segment and a net loss of $0.3 million in Equity in losses of affiliates, as compared to $282.6 million for the same period in 2008, which was comprised of $277.5 million in the Chemicals segment, $3.1 million in the Finance segment, $1.5 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 also due to the significant decrease in the demand for chemical carrier shipping. This was partially offset by the change in the valuation of the New Israeli Shekel as compared to the Euro. The recession and the resulting significant decrease in the demand for chemical carrier ships were felt during the first half 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.

The increase in the Finance segment revenue is primarily related to the $12.0 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, as compared to $25.4 million translation loss in 2008.

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

Expenses:

Chemicals         $     188,007     $     279,850
Finance                  15,938            42,897
Leisure-time              1,040             1,506
                 --------------    --------------

Total             $     204,985     $     324,253
                 --------------    --------------

In the six months ended June 30, 2009, the Company recorded $205.0 million in expenses which was comprised of $188.0 million of expenses in the Chemicals segment, $15.9 million of expenses in the Finance segment and $1.0 million of expenses in the Leisure-time segment, as compared to $324.3 million in expenses for the same period in 2008 which was comprised of $279.9 million in the Chemicals segment, $42.9 million in the Finance segment and $1.5 million in the Leisure-time segment. The decrease in expenses in the Finance segment is primarily attributable to the $12.0 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, as compared to $25.4 million translation loss in 2008, 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 debentures.

The Company recorded a consolidated net loss of $13.4 million for the three months ended June 30, 2009 compared to a net loss of $17.4 million for the corresponding period in 2008. The loss in 2009 and 2008 is primarily attributable to the translation loss and interest expenses resulting from the issuance of the debentures and loans for the financing of Gadot's purchase.

In the three months ended June 30, 2008 and 2009, the Company included the results of operations of Gadot. Below is data from Gadot results of operations (in millions of dollars):

                                   June 30, 2009   June 30, 2008
                                  --------------- ---------------


 Chemical income                    $      91.6    $      151.6

 Chemical expense                   $      85.0    $      140.0

 Marketing expense                  $       1.7    $        3.0

 Other expense (mainly
  general and administrative)       $       4.8    $        6.2

 Interest expense                   $       0.7    $        2.4

 Net gain                           $       0.4    $        1.8

In the three months ended June 30, 2009, the Company recorded $1.7 million of marketing expense, as compared to a $3.0 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 June 30, 2009, the Company recorded a $8.6 million of general, administrative and other expense, as compared to $10.6 million in the corresponding period in 2008. 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 June 30, 2009, the Company recorded a $5.8 million of noncontrolling interests share in loss of subsidiaries, net, as compared to $4.9 million share in loss in the corresponding period in 2008. These loss are mainly attributable to translation gains in the notes issued to the partners in the Joint Venture, resulting from the valuation of the New Israeli Shekel compared to the U.S. Dollar.

In the three months ended June 30, 2009, the Company recorded a $6.1 million interest expense, as compared to a $10.5 million interest expense for the corresponding period in 2008. This decrease is a result of a lower increase in the Israeli Consumer Price Index (which the Company's debentures are linked to) in the three months and June 30, 2009 as compared to the increase in the Israeli Consumer Price Index in the three months ended June 30, 2008.

In the three months ended June 30, 2009, the Company recorded a $14.6 million translation loss, as compared to a $12.2 million translation loss for the corresponding period in 2008. The translation loss is related to a change in the valuation of the New Israeli Shekel as compared to the U.S. Dollar.

The Company recorded a $0.2 million net loss in Equity in losses of affiliates for the three months ended June 30, 2009, compared to a minor net loss in Equity in losses of affiliates for the corresponding period in 2008.

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


Revenues:

Chemicals                                      $     91,615     $      151,410
Finance                                               3,122              1,735
Leisure-time                                            591                766
                                              -------------    ---------------
                                                     95,328            153,911
Equity in earnings (losses) of affiliates              (231 )               (7 )
                                              -------------    ---------------

Total                                          $     95,097     $      153,904
                                              -------------    ---------------

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 June 30, 2009, the Company recorded $95.1 million in revenue which was comprised of $91.6 million in the Chemicals segment, $3.1 million in the Finance segment, $0.6 million in the Leisure-time segment and a net loss of $0.2 million in Equity in losses of affiliates, as compared to $153.9 million for the same period in 2008, which was comprised of $151.4 million in the Chemicals segment, $1.7 million in the Finance segment, $0.8 million in the Leisure-time segment and a minor net loss in Equity in losses 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 were felt during the second 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. 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         $      93,057     $     151,530
Finance                  22,728            24,006
Leisure-time                526               928
                 --------------    --------------

Total             $     116,311     $     176,464
                 --------------    --------------

In the three months ended June 30, 2009, the Company recorded $116.3 million in expenses which was comprised of $93.1 million of expenses in the Chemicals segment, $22.7 million of expenses in the Finance segment and $0.5 million of . . .