AMPAL-AMERICAN ISRAEL CORPORATION (DEBTOR-IN-POSSESSION) 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, 2011 for a summary of all of Ampal's significant accounting policies.

As a result of the Chapter 11 case, the Company has adopted the provisions of reorganization accounting, which does not change the application of GAAP with respect to the preparation of our financial statements. However, this guidance does require that financial statements, for periods including and subsequent to a Chapter 11 filing, distinguish between transactions and events that are directly associated with the reorganization proceedings and the ongoing operations of the business.

Revenue Recognition

In certain circumstances, sales under short-term fixed-price production type contracts or sale of products are accounted for in accordance with Staff Accounting Bulletin No. 104 "Revenue Recognition in Financial Statements" ("SAB 104"), and recognized when all the following criteria are met: persuasive evidence of an arrangement exists, delivery has occurred, the seller's price to the buyer is fixed or determinable, no further obligation exists and collectability is reasonably assured.

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 from 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 country club subscribers are recognized ratably over the contractual period.

· Income from other services is recognized over the period during which those services are performed.

Bankruptcy Proceedings

Bankruptcy Proceedings

On August 29, 2012 (the "Petition Date"), Ampal filed a voluntary petition for relief (the "Filing") under Chapter 11 of Title 11 of the United States Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the Southern District of New York (the "Court"), Case No. 12-13689. Ampal continues to operate its business as a "debtor-in-possession" under the jurisdiction of the Court and in accordance with applicable provisions of the Bankruptcy Code and the orders of the Court. As a result of the Filing, an "automatic stay" was imposed, prohibiting the continuation or commencement of any actions against Ampal and its assets, wherever located.

Presently, the Company does not have sufficient cash and other resources to service its debt and finance its ongoing operations. This fact raises substantial doubts as to the Company's ability to continue as a going concern if Ampal does not reach agreement with its creditors, obtain additional financing or otherwise raise capital through the sale of assets or otherwise, or restructure its obligations under Chapter 11 of the Bankruptcy Code.

The Company's ability to continue as a going concern is contingent upon its ability to obtain the Court's approval of a reorganization plan and its ability to successfully implement such plan, among other things. As a result of the Chapter 11 case, the realization of assets and the satisfaction of liabilities are subject to uncertainty. As a debtor-in-possession under Chapter 11, Ampal may sell or otherwise dispose of or liquidate assets or settle liabilities, subject to the approval of the Court or as otherwise permitted in the ordinary course of business, for amounts other than those reflected in the accompanying consolidated financial statements. Further, the plan of reorganization could materially change the amounts and classifications of assets and liabilities reported in the historical consolidated financial statements. The accompanying consolidated financial statements do not include any adjustments related to the recoverability and classification of assets or the amounts and classification of liabilities or any other adjustments that might be necessary should we be unable to continue as a going concern or as a consequence of the Chapter 11 case. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern and do not include any adjustments that might result from the outcome of this uncertainty. There is no assurance that the Filing will allow the Company to continue as a going concern in the future.

Operation and Implication of the Chapter 11 Case

Under Section 362 of the Bankruptcy Code, the filing of a bankruptcy petition automatically stays most actions against a debtor, including most actions to collect indebtedness incurred prior to the petition date or to exercise control over property of the debtor. Accordingly, creditors are stayed from taking any actions as a result of such defaults. Substantially all pre-petition liabilities are subject to settlement under a plan of reorganization. Further, a confirmed plan of reorganization or other arrangement may materially change the amounts and classifications in a debtor's historical consolidated financial statements.

Ampal is paying, and intends to continue paying, claims arising after the Petition Date in the ordinary course of business. Ampal has retained, subject to Court approval, legal and financial professionals to advise on the Chapter 11 case and certain other professionals to provide services and advice in the ordinary course of business. From time to time, Ampal may seek Court approval to retain additional professionals.

The U.S. Trustee for the Southern District of New York (the "U.S. Trustee") has appointed an official committee of unsecured creditors (the "UCC"). The UCC and its legal representatives have a right to be heard on all matters that come before the Court on all matters affecting Ampal. There can be no assurance that the UCC will support Ampal's position on matters to be presented to the Court in the future or on any plan of reorganization, once proposed. Disagreements between Ampal and the UCC could protract the Chapter 11 case, negatively affect the Company's ability to operate and delay Ampal's emergence from the Chapter 11 case.

The Company has incurred and expects to continue to incur significant costs associated with its reorganization and the Chapter 11 case. The amount of these expenses is expected to significantly affect its financial position and results of operations, but the Company cannot accurately predict the effect the Chapter 11 case will have on its business at this time.

Plan of Reorganization

For Ampal to successfully emerge from the Chapter 11 case, it must obtain the Court's approval of a plan of reorganization, which will enable Ampal to emerge from the Chapter 11 case as a reorganized company. In connection with the plan of reorganization, the Company may also obtain a new credit facility. Ampal's ability to obtain such financing is uncertain. The Company's ability to obtain such approval and financing will depend on, among other things, the timing and outcome of various ongoing matters in the Chapter 11 case. A plan of reorganization determines the rights and satisfaction of claims of various creditors and security holders, and is subject to the ultimate outcome of negotiations and Court decisions ongoing through the date on which the plan of reorganization is confirmed.

Although Ampal has not yet filed a plan of reorganization or a related disclosure statement with the Court, Ampal intends to propose a plan.

Financial Reporting in Reorganization

As a result of the Chapter 11 case, the Company has adopted the provisions of reorganization accounting, which does not change the application of GAAP with respect to the preparation of its financial statements. However, this guidance does require that financial statements, for periods including and subsequent to a Chapter 11 filing, distinguish between transactions and events that are directly associated with the reorganization proceedings and the ongoing operations of the business, as well as additional disclosures. Effective August 29, 2012, expenses, gains and losses directly associated with the reorganization proceedings are reported as reorganization items, net in the accompanying consolidated statements of operations. In addition, liabilities subject to compromise in the Chapter 11 case are distinguished from fully secured liabilities not expected to be compromised and from post-petition liabilities in the accompanying consolidated balance sheet as of September 30, 2012. Where there is uncertainty about whether a secured claim is undersecured or will be impaired under the plan, the Company has classified the entire amount of the claim as a liability subject to compromise. Such liabilities are reported at amounts expected to be allowed, even if they settle for lesser amounts. These claims remain subject to future adjustments, which may result from:
negotiations; actions of the Court; disputed claims; rejection of executory contracts and unexpired leases; the determination as to the value of any collateral securing claims; proofs of claim; or other events.

Investment in East Mediterranean Gas Company, S.A.E. ("EMG") and other cost basis investments

The Company accounts for its 16.8% equity interest (includes 8.6% held by the Joint Venture) in EMG and a number of other investments on the basis of the cost method. EMG, which is one of the Company's most significant holdings as of December 31, 2011, was acquired by Ampal and by a joint venture in which Ampal is a party in a series of transactions from Merhav (M.N.F.) Ltd. ("Merhav"), which is an entity controlled by one of the members of the Company's controlling shareholder group. As a result, the transactions were accounted for as transfers of assets between entities under common control, which resulted in Merhav transferring the investment in EMG at carrying value. Due to the nature of Merhav's operations, this entity would be treated as an investment company under U.S. GAAP, and as such, the carrying value of the investment in EMG would equal fair value. As a result, the 16.8% investment in EMG was transferred at carrying value, which equals fair value.

The Company evaluates the carrying value amount of its interest in EMG annually in connection with the preparation of its financial statements. In light of the developments in Egypt during 2011, the Company obtained updated quarterly interim valuations from an independent third-party valuation firm. These periodic independent valuations obtained by the Company to assist in its preparation of financial statements customarily indicate a range of values depending on underlying assumptions. The valuations were based on the discounted cash flow (DCF) method. Due to uncertainties, the valuation firm used a range of possible scenarios, including different assumptions regarding the profitability and discount rates of EMG.

At December 31, 2011, the valuation range determined by the independent valuation firm was between $1,584 million and $1,856 million and the amount on which the carrying amount of Ampal's investment in EMG after impairment was based on a value of $1,550 million.

Due to the purported termination of the Source GSPA and the uncertainties in Egypt, management decided to write-off the entire amount of the investment in EMG. The Company recorded in the quarter ended March 31, 2012 charges of $260.4 million in connection with its investment in EMG. The Company did not record future compensation from the arbitrations as an asset.

Recently Adopted and Recently Issued Accounting Pronouncements

Accounting Standards Update ("ASU") 2012-2

In July 2012, Financial Accounting Standard Board ("FASB") issued Accounting Standards Update No. 2012-2 ("ASU 2012-2") which amended the guidance for the testing of indefinite-lived intangible assets for impairment, similar to the goodwill amendment issued in September 2011. These amendments provide an entity the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not (more than 50%) that the fair value of an indefinite-lived intangible asset is less than its carrying amount. Such qualitative factors may include the following: macroeconomic conditions; industry and market considerations; cost factors; overall financial performance; and other relevant entity-specific events. If an entity elects to perform a qualitative assessment and determines that an impairment is more likely than not, the entity is then required to perform the existing two-step quantitative impairment test, otherwise no further analysis is required. An entity also may elect not to perform the qualitative assessment and, instead, proceed directly to the two-step quantitative impairment test. The amendments are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted.

ASU 2011-12 - update to ASU 2011-05

In December 2011, the FASB issued ASU No. 2011-12 ("ASU 2011-12") which amended the comprehensive income presentation guidance. The adjustments in ASU 2011-12 supersede changes to those paragraphs in Update No. 2011-05 ("ASU 2011-05") that pertain to how, when and where reclassification adjustments are presented. Entities should continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect before ASU 2011-05. The amendments are effective for public entities for annual and interim reporting periods beginning after December 15, 2011. The Company adopted this amendment on January 1, 2012.

ASU 2011-11

In December 2011, the FASB issued ASU No. 2011-11 ("ASU 2011-11") which amended the disclosure information requirements regarding offsetting (netting) assets and liabilities. The amendment enhances disclosures regarding financial instruments and derivative instruments that are either (1) offset in accordance with GAAP or (2) subject to an enforceable master netting arrangement. This information will enable users of an entity's financial statements to evaluate the effect or potential effect of netting arrangements on an entity's financial position, including the effect or potential effect of rights of setoff associated with certain financial instruments and derivative instruments. The amendments in ASU 2011-11 are effective for annual and interim reporting periods beginning after January 1, 2013. According to ASU 2011-11 the entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. The Company does not expect ASU 2011-11, which relates to disclosure matters only, to have an impact on the Company's consolidated financial position, results of operations or cash flows.

ASU 2011-08

In September 2011, the FASB issued ASU No. 2011-08 ("ASU 2011-08") which amended the guidance for goodwill impairment testing. The amendment provides entities testing goodwill for impairment the option of performing a qualitative assessment before calculating the fair value of the reporting unit. If, on the basis of qualitative factors, it is not more likely than not that the fair value of the reporting unit is less than the carrying amount, further testing of goodwill for impairment would not be required. The amendment also removes the carry forward option of the reporting unit fair value from one year to the next. The amendment is effective for annual and interim goodwill impairment tests performed in fiscal years beginning after December 15, 2011. Early adoption is permitted.

ASU 2011-05

In June 2011, the FASB issued ASU No. 2011-05 ("ASU 2011-05") which amended the comprehensive income presentation guidance. The amendment requires entities to report components of comprehensive income in either a continuous statement of comprehensive income or two separate but consecutive statements. The guidance is effective for interim and annual periods beginning after December 15, 2011.

ASU 2011-04

In May 2011, the FASB issued ASU No. 2011-04 ("ASU 2011-04") for Fair Value Measurements and Disclosures (Topic 820). The amendment clarifies the existing guidance and adds new disclosure requirements. The guidance is effective for interim and annual periods beginning after December 15, 2011. The guidance did not have a material impact on the financial statements.

Results of Operations

Nine months ended September 30, 2012 compared to nine months ended September 30, 2011

The Company recorded a consolidated net loss of $221.1 million for the nine months ended September 30, 2012, compared to a net loss of $42.3 million for the corresponding period in 2011. The loss in the period ended September 30, 2012 is primarily attributable to the impairment of the investment in EMG in the amount of $260.4 million (including noncontrolling interest), as compared to a $50.5 million loss in the corresponding period in 2011.

Due to the purported termination of the Source GSPA and the uncertainties in Egypt, management decided to write-off the entire amount of the investment in EMG. The Company recorded in the nine months ended September 30, 2012 charges of $260.4 million in connection with its investment in EMG. The Company did not record future compensation from the arbitrations as an asset.

The Company's management believes, based on advice of its legal counsel, that there is a reasonable chance of recovering significant monetary compensation for damages through the above described arbitrations. Future compensation from the arbitrations, if any, was not included in the Company's financial statements.

In the nine months ended September 30, 2012, the Company recorded $6.6 million of marketing and sales expense, as compared to a $6.7 million marketing and sales expense in the corresponding period in 2011. These expenses are attributable to Gadot and composed mainly of salary and commission expenses.

In the nine months ended September 30, 2012, the Company recorded $33.8 million of general, administrative and other expense, as compared to $45.3 million in the corresponding period in 2011. The decrease resulted mainly from the decrease in payments of annual management fees and a reduction in general and administrative expenses.

In the nine months ended September 30, 2012, the Company recorded $64.4 million of net loss attributable to noncontrolling interests, as compared to $11.6 million of net loss attributable to noncontrolling interests in the corresponding period in 2011. The loss is mainly attributable to the impairment of the investment in EMG.

In the nine months ended September 30, 2012, the Company recorded a $26.5 million interest expense, as compared to a $31.4 million interest expense for the corresponding period in 2011. The interest expense relates to the financing the Company obtained in order to purchase Gadot, the Company's debentures, the Company's notes payable and the interest expense resulting from the swap agreements.

In the nine months ended September 30, 2012, the Company recorded a $11.4 million translation gain, as compared to a $12.6 million translation gain for the corresponding period in 2011. The monetary value of denominated NIS balances reported on our balance sheet changes with currency exchange rates resulting in the translation gain or loss. The translation gain is related to a change in the valuation of the New Israeli Shekel ("NIS") as compared to the U.S. Dollar, which decreased 2.3% in the nine months ended September 30, 2012, as compared to a decrease of 4.6% for the corresponding period in 2011.

The Company recorded a minor net gain of $0.7 million in Equity in gains of affiliates for the nine months ended September 30, 2012, as compared to a $0.3 million for the corresponding period in 2011.

Results of operations analyzed by segments for the nine months ended September 30:

                                                2012                 2011
                                               (U.S. Dollars in thousands)
        Revenues:

        Chemicals                          $      311,104       $      318,697
        Finance                                    14,575               21,571
        Leisure-time                                2,040                2,265
        Equity in earnings of affiliates              658                  268
        Total                              $      328,377       $      342,801

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. The overall demand for chemical products, especially commodity chemicals, is highly dependent on general economic conditions.

In the nine months ended September 30, 2012, the Company recorded $328.4 million in revenue which was comprised of $311.1 million in the Chemicals segment, $14.6 million in the Finance segment, $2.0 million in the Leisure-time segment and $0.7 million Equity in earnings of affiliates, as compared to $342.8 million for the same period in 2011, which was comprised of $318.7 million in the Chemicals segment, $21.6 million in the Finance segment, $2.3 million in the Leisure-time segment and $0.3 million Equity in earnings of affiliates. The decrease in Chemicals revenue is attributable to economic downturn in Europe and in Israel sales quantities decreased and the effect of the devaluation of the Euro and NIS exchange rate versus the U.S. Dollar exchange rate in the period. The demand for chemical carriers shows moderate growth during the nine months ended September 30, 2012.

                                      2012                 2011
                                     (U.S. Dollars in thousands)
                  Expenses:

                  Chemicals      $      302,826       $      313,307
                  Finance                38,672               51,623
                  Energy                260,400               50,523
                  Leisure-time            2,103                2,183
                  Total          $      604,001       $      417,636

In the nine months ended September 30, 2012, the Company recorded $604.0 million in expenses which was comprised of $302.8 million of expenses in the Chemicals segment, $38.7 million of expenses in the Finance segment, $260.4 million of expenses in the Energy segment and $2.1 million of expenses in the Leisure-time segment, as compared to $417.6 million in expenses for the same period in 2011, which was comprised of $313.3 million in the Chemicals segment, $51.6 million in the Finance segment and $2.2 million in the Leisure-time segment.

Three months ended September 30, 2012 compared to three months ended September 30, 2011

The Company recorded a consolidated net loss of $2.9 million for the three months ended September 30, 2012, compared to a net loss of $20.4 million for the corresponding period in 2011. The decrease in net loss resulted mainly from impairment of the investment in EMG in the amount of $33.6 million (including noncontrolling interest) offset by translation gain of $19.9 million in the corresponding period in 2011, as compared to translation income of $5.8 million in the three months ended September 30, 2012.

In the three months ended September 30, 2012, the Company recorded $2.1 million of marketing and sales expense, as compared to a $2.1 million marketing and sales expense in the corresponding period in 2011. These expenses are attributable to Gadot and composed mainly of salary and commission expenses.

In the three months ended September 30, 2012, the Company recorded $10.2 million of general, administrative and other expense, as compared to $14.8 million in the corresponding period in 2011. The decrease resulted mainly from the decrease in payments of annual management fees and a reduction in general and administrative expenses.

In the three months ended September 30, 2012, the Company recorded $0.4 million of net loss attributable to noncontrolling interests, as compared to $0.1 million of net loss attributable to noncontrolling interests in the corresponding period in 2011.

In the three months ended September 30, 2012, the Company recorded a $6.2 million interest expense, as compared to a $9.7 million interest expense for the corresponding period in 2011. The interest expense relates to the financing the Company obtained in order to purchase Gadot, the Company's debentures, the Company's notes payable and the interest expense resulting from the swap agreements.

In the three months ended September 30, 2012, the Company recorded a $5.8 million translation gain, as compared to a $19.9 million translation gain for the corresponding period in 2011. The monetary value of denominated NIS balances reported on our balance sheet changes with currency exchange rates resulting in the translation gain or loss. The translation loss is related to a change in the valuation of the NIS as compared to the U.S. Dollar, which increased 0.3% in the three months ended September 30, 2012, as compared to a decrease of 8.7% for the corresponding period in 2011.

The Company recorded a minor net gain of $0.3 million in Equity in gains of affiliates for the three months ended September 30, 2012, as compared to $0.1 million in the corresponding period in 2011.

Results of operations analyzed by segments for the three months ended September 30:

                                                2012                 2011
                                               (U.S. Dollars in thousands)
        Revenues:

        Chemicals                          $      100,149       $      114,167
        Finance                                     6,858               25,486
        Leisure-time                                  528                  716
        Equity in earnings of affiliates              332                   89
        Total                              $      107,867       $      140,458

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